A dynamic duo: South Dakota's trust laws & business entity statutes.

Author:Goetzinger, Patrick G.
 
FREE EXCERPT

There are several reasons for the robust growth of South Dakota's trust industry. Not to be overlooked as a catalyst for that growth are South Dakota's much heralded business entity statutes. Pairing a South Dakota limited liability company or limited partnership with a South Dakota trust provides families with a dynamic duo that achieves a multitude of planning objectives. This article will survey South Dakota's entity choices and generally discuss opportunities to pair South Dakota entities and trusts.

  1. INTRODUCTION

    When a South Dakota trust is combined with a South Dakota limited liability company or limited partnership, a dynamic duo is unleashed. A dynamic duo is defined as "a powerful pair of people or things each with special abilities." (1) The most relatable dynamic duo screams back to childhood and Batman and Robin of DC comic's fame. As the years--and experiences--pile up, we become familiar with dynamic duos in music, movies, comics, food pairings, and wine pairings. Upon encountering a dynamic duo, the special abilities of each partner in the duo and what makes them great together are self-evident. To meet the needs of families who require powerful planning options to achieve their goals and objectives, their advisors seek a jurisdiction that satisfies client demands. South Dakota offers families and their advisors the dynamic duo of its trust laws and business entity statutes, each with their own special abilities. Other articles in this symposium edition will discuss the special attributes of South Dakota's trust laws. This article will survey South Dakota's limited liability company and limited partnership statutes and generally discuss planning opportunities to pair a South Dakota entity with a South Dakota trust.

    The growth of South Dakota's trust industry is remarkable, but not accidental. As of July 2016, South Dakota possessed eighty-four state chartered, non-depository, trust services only private and public trust companies with a total of $226 billion in assets under management. (2) The steady growth of the trust industry began in 1997 when Governor Bill Janklow created the Governor's Task Force on Trust Administration Review and Reform ("TTF"). (3) This partnership between representatives from the trust industry and state government working together to enhance South Dakota's trust laws in a balanced and prudent fashion has proven effective. No other state has such a partnership.

    The TTF confines its legislative recommendations to trust law. However, working closely with members of the TTF, the State Bar of South Dakota Business Law Committee tends to South Dakota's business laws to hone their special abilities as the other half of the dynamic duo. (4) In support of the effectiveness of South Dakota's dynamic duo, take note of the annual article published by Trusts & Estates Magazine, which compares and ranks the states that actively compete for clients to utilize the laws of their state to accomplish planning goals. (5) Since the inception of the annual rankings by the authors of Trusts & Estates Magazine, South Dakota has finished in the top tier every year. (6) In fact, in 2007, prior to grouping the states by tiers, South Dakota was ranked as the number one trust jurisdiction by Trusts & Estates Magazine. (7)

    One key component to the rankings is the comparison of asset protection features of each state's limited liability company and limited partnership statutes. (8) Annually, South Dakota's entities have enjoyed the label of a "Best" jurisdiction for asset protection purposes. (9)

    This article will discuss the South Dakota limited liability company ("LLC") and limited partnership ("LP") acts. The statutory provisions for South Dakota's LLCs are found at South Dakota Codified Laws ("S.D.C.L.") Chapter 47-34A. (10) The statutory provisions for South Dakota's LPs are found at S.D.C.L. Chapter 48-7. (11) Both entity choices feature a substantial asset protection shield, flexibility in structuring the governance of the entity to achieve centralization of management, and transfer restrictions to protect the assets owned by the entity from the risks posed by a member's or partner's creditors, predators, in-laws, and outlaws.

    An important distinction needs to be observed regarding how a LLC or LP is used in alliance with a South Dakota trust. The discussion in this article focuses on protecting the assets owned by the entity from the hazards of life and those who prey on, or obtain judgments against, members, partners, or beneficiaries of entities and trusts. This article is not a discussion of using the LLC or LP to shield the member or partner from the risk of liability for the business activities conducted by the LLC or LP. There is no doubt about the efficacy of the LLC or LP as a shield for the member's and partner's against unlimited exposure to liability for the activities of a business operated by a limited liability entity, or as a shield against the liability of other members or partners. (12) However, pairing a LLC or LP with a South Dakota trust provides a dual shield to protect assets. The first shield wraps the closely held business interest, portfolio of marketable securities, or real property, in a LLC or LP. The next shield is created when the units issued by the entity are transferred to a South Dakota trust. (13) The dual shield provided by a South Dakota trust and limited liability entity creates a dynamic duo that stands as guardian and sentinel, vigilantly protecting the family's assets from attack by nefarious characters seeking to take advantage of a member, partner, or beneficiary.

  2. ANALYSIS

    1. THE LEAD NOTE IN THE ASSET PROTECTION DISCUSSION: THE CHARGING ORDER REMEDY

      The lead note in the asset protection discussion is the strength of South Dakota's statutory language that describes a judgment creditor's very limited rights under a charging order against a member of a LLC (14) or a partner in a LP. (15) A charging order constitutes a lien on the partner's or member's distributional interest in the entity. (16) In other words, the charging order limits a judgment creditor's remedy against a partner or member to a lien on the partner's or member's distributions from a LLC or LP and prohibits the creditor from seizing or selling assets owned by the entity. The charging order creates a significant roadblock to the disruption of the entity's business by a creditor-plagued member or partner. (17)

      In connection with a LLC, S.D.C.L. section 47-34A-504 now states:

      (a) On application by a judgment creditor of a member of a limited liability company or of a member's transferee, and following notice to the limited liability company of such application, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment.

      (b) A charging order constitutes a lien on the judgment debtor's distributional interest.

      (c) A distributional interest in a limited liability company which is charged may be redeemed:

      (1) By the judgment debtor;

      (2) With property other than the company's property, by one or more of the other members; or

      (3) With the company's property, but only if permitted by the operating agreement.

      (d) This chapter does not affect a member's right under exemption laws with respect to the member's distributional interest in a limited liability company.

      (e) This section provides the exclusive remedy that a judgment creditor of a member's distributional interest or a member's assignee may use to satisfy a judgment out of the judgment debtor's interest in a limited liability company. No other remedy, including foreclosure on the member's distributional interest or a court order for directions, accounts, and inquiries that the debtor member might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor's interest in the limited liability company.

      (f) No creditor of a member or a member's assignee has any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the company.

      (g) This section applies to single member limited liability companies in addition to limited liability companies with more than one member. (18)

      Concerning a LP, S.D.C.L. section 48-7-703 now states:

      On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partnership interest. This chapter does not deprive any partner of the benefit of any exemption laws applicable to the partner's partnership interest. This section provides the exclusive remedy that a judgment creditor of a general or limited partner or of the general or limited partner's assignee may use to satisfy a judgment out of the judgment debtor's interest in the partnership. No other remedy, including foreclosure on the general or limited partner's partnership interest or a court order for directions, accounts, and inquiries that the debtor, general or limited partner might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor's interest in the limited partnership. No creditor of a partner or a partner's assignee has any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the partnership. (19) Earlier versions of S.D.C.L. sections 47-34A-504 and 48-7-703 were unaltered from uniform acts authored by the National Conference of Commissioners on Uniform State Laws ("NCCUSL"). (20) While the statutes describing the limited rights of a judgment creditor under the respective uniform acts appeared to be clear and unambiguous, wily judgment creditors could exploit the statutes for what they did not state. The threat posed by a court finding...

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