THE HARDEST PART OF ESTATE PLANNING IS PINNING DOWN THE RIGHT BALANCE BETWEEN TAX SAVINGS, ASSET PROTECTION, AND ABILITY TO CONTROL AND BENEFIT FROM YOUR TRUST ASSETS.
On the one hand, you may place your assets in a revocable living trust, which allows you to maintain complete control over your assets and to benefit from them. But revocable trusts offer no real tax benefit, and although assets are protected from the beneficiaries’ creditors, they’re not protected from your own creditors while you remain alive. On the other hand, you may place assets in an irrevocable trust to build creditor protection during your life and pull the assets out of your gross estate (tax benefit). But in doing so you risk losing the ability to control and benefit from the assets.
South Dakota trust laws allow you to take advantage of the tax savings and creditor protection offered by an irrevocable trust while still allowing you a high degree of control and benefit from the irrevocable trust assets. This is done through the State’s directed trust model and through domestic asset protection trusts. Both of these approaches to striking the ideal balance between control and benefit are bolstered through the use of trust protectors and family advisors, and all of these may be used together.
Trust Protectors
Recall the directed trust model: the grantor appoints members of the investment and distribution committees, each member acting in a fiduciary capacity, who direct the investment and distribution actions of the administrative trustee. The administrative trustee is obligated to carry out the directions of those committees. The South Dakota Trust Protector Statute (SDCL § 55-1B-6) provides 18 different powers to trust protectors, as long as those powers are granted in the trust instrument. Most notably, these powers include the ability to modify the trust instrument to deal with both factual and legal changes in circumstance; to increase or decrease any of the beneficiaries’ interests; to remove and appoint a trustee, trust advisor, investment or distribution committee member, or any other fiduciary provided for in the trust instrument; to terminate the trust; veto or direct trust distributions; and to appoint a successor trust protector.
With so much power and discretion, a trust protector should be someone the grantor trusts to know and carry out the grantor’s wishes. If the trust protector determines any of the other fiduciaries (committee members, trustee, etc.) is acting contrary to the grantor’s wishes, the trust protector can remove and replace the fiduciary in the trust protector’s sole discretion, the only limitation being that it act in the best interests of the trust (i.e. the beneficiaries). Whether this creates a fiduciary duty on the trust protector depends on the trust instrument and what action the trust protector engaged in. Trust protectors are deemed to act in a non-fiduciary capacity unless performing the functions of an investment or distribution advisor.
Family Advisors
A family advisor is sometimes referred to as a “trust protector light” because it is permitted to perform certain functions that a trust protector is also permitted to engage in, but does not hold fiduciary status. The family advisor’s permitted powers are set out in SDCL § 55-1B-12, which lists 4 specific powers that may be included in a trust instrument: (1) power to remove and appoint a trustee or other fiduciary provided for in the trust instrument; (2) power to appoint a successor trust protector or family advisor; (3) power to advise the trustee and participate in and consult on trustee and investment/distribution committee meetings; and (4) power to provide direction regarding notification of qualified beneficiaries.
The family advisor role is meant to allow a trusted planning professional, such as a CPA, attorney, or financial advisor, to be involved with important aspects of trust administration without being held to a fiduciary standard. It encourages continuity of direction through generations by protecting the existing planning professional from liability. While the family advisor may be permitted to remove and replace fiduciaries, its main purpose is to provide advice to them.
When used in conjunction with a trust protector, a family advisor can remove and replace the trust protector if it feels the trust protector is no longer carrying out the grantor’s wishes or acting in the best interests of the beneficiaries. What’s more, the family advisor can take these types of actions without opening him-or-herself up to liability to the beneficiaries.
These two statutory measures allow grantors a great deal of control over assets placed in an irrevocable trust, as long as (1) they provide for these roles and powers in the trust document, and (2) they grant these powers to someone they trust will carry out the grantors’ wishes. For assistance with protecting your assets from creditors and using South Dakota trust law to bolster your comprehensive estate plan, contact a Sioux Falls estate planning attorney.