Modern trust governance.

• Author: Krogstad, Craig J.
• Position: A Dynamic Duo: South Dakota's Trust Laws & Business Entity Statutes

This article provides a short overview of the South Dakota trust landscape and various developments that have made trust governance easier in the last few years. This article provides specifics about directed trust and special purpose entities, which are codified for use in South Dakota as an alternative for naming an individual as a distribution trust advisor, investment trust advisor, or trust protector.

1. INTRODUCTION: WEALTH TRANSFER

   Beginning in the year 2007, the United States embarked upon the largest transition of wealth in its history. (1) Over the next fifty years, it is predicted that 93.6 million estates will transfer an estimated $59 trillion in assets to be divided among heirs, charitable organizations, estate taxes, and estate administrative expenses. (2) Of that $59 trillion, approximately $36 trillion in assets are expected to pass directly or indirectly to the next generation. (3)

   In the 2015 U.S. Trust Insights to Wealth and Worth--an annual survey of high net worth and ultra-high net worth individuals--approximately 64% of survey participants indicated that they had disclosed little to no information to their children regarding their wealth. (4) Even more alarming, less than 20% of survey participants in the baby-boomer generation believed their children were mature enough to handle family wealth by age twenty-nine. (5) Given this combination of increased wealth transfer and a general distrust of younger generations' ability to manage this wealth, it is likely that trust use will increase to bridge the transfer gap.

2. EVOLUTION OF TRUSTS AND THEIR ADMINISTRATION

   1. THE RISE OF THE PERPETUAL TRUST

      The use of trusts to protect property has existed for centuries. In more recent times, however, the creation and administration of trusts has changed dramatically. Starting in the early 1950s, states began eroding the once formidable common law rule against perpetuities, which had prevented property from being held in trust for periods extending beyond the lives in being at the time the interest was created plus twenty-one years. (6) The primary reasoning underlying the rule against perpetuities was public policy favoring the free alienability of property for the living and diminished control from the grave. The recent movement towards allowing property to remain in trust for long periods of time, including perpetually in some states like South Dakota, has been driven largely by a desire to keep property out of the federal and state transfer tax systems. Accordingly, trustors and beneficiaries desiring a balance among the competing interests of removing property from the transfer tax system and the free alienability of property have turned to modern trust laws to achieve their goals.

   2. MODIFICATIONS, REFORMATIONS, AND DECANTING

      Irrevocable does not mean what it used to in the modern world of trusts and estates. Beneficiaries, trustors, or trustees often desire to change an irrevocable trust to improve a trust's administrative provisions, change the governing law of a trust, clarify ambiguous trust terms, or achieve tax goals. The Uniform Trust Code, which has been adopted by over thirty states, as well as South Dakota law have provided beneficiaries the desired flexibility to change an irrevocable trust. (7)

      Generally, a trust may be modified under the Uniform Trust Code with the consent of all beneficiaries and court approval, with only consent of the trustor and all beneficiaries, or with court approval alone. In addition, South Dakota allows a trust to be modified without court approval if all the beneficiaries consent. (8) Moreover, beneficiaries of trusts must be involved in the process of modification.

      In addition to the modification processes outlined in the Uniform Trust Code, South Dakota law, common law, and state statutory law authorize a trustee with discretionary principal distribution authority to transfer trust assets into a new trust rather than transferring assets directly to beneficiaries. (9) The process of transferring assets into a subsequent trust is commonly referred to as decanting. In South Dakota, decanting can be done without beneficiary consent or knowledge. (10)

      Trust modification or decanting is often useful to align interests of trustors, beneficiaries, and trustees. Trustors often request that trustees hold concentrated positions in illiquid business interests. Professional trustees, however, still have a duty to diversify and manage the trust for the benefit of its beneficiaries. As a result, those duties may be inconsistent with a trustor's desire to retain...