What is a Distribution Trust Advisor?

South Dakota allows the work of the traditional discretionary trustee to be divided into three distinct roles: the Distribution Trust Advisor, Investment Trust Advisor and Administrative trustee. Our last article provided an overview of this structure, while this article expands upon the role of the Distribution Trust Advisor.

Flexibility and control are a recurring theme with BTC Trust Company of South Dakota. Traditional trusts have generally removed family advisors’ input on distribution decisions. The family may have made their intent known in the trust document, but complaints about the execution by trustees have been common.

Trust distribution related complaints include:

• Too restrictive
• No connection to family
• Does not understand the beneficiaries
• Too detached from the individual family members’ wealth plans
• Unnecessary distributions
• Distribution information shared with other beneficiaries
• Inability to adjust to changing circumstances
• Difficult to contact
• Too slow

At BTC Trust Company of South Dakota, we believe that clients should control their wealth. A properly drafted Distribution Trust Advisor provision addresses these common complaints and provides the flexibility to deal with changes as they arise.

A Distribution Trust Advisor is a person or group of individuals who directs the trustee to distribute funds or other trust assets to beneficiaries.

Any person can serve as the Distribution Trust Advisor. The flexible directed trust provisions under South Dakota law allow clients to name a trusted advisor, family member, attorney, CPA, or even themselves in certain circumstances. The Distribution Trust Advisor does not need to be a single person; it can be a group of individuals who collectively have the relevant experience to assist with the significant issues facing wealthy families. This ability to choose allows families to eliminate a non-responsive, distant, detached trustee who may not have the experience with the individual family situations.

There are certain beneficiary situations that have benefited by even including a family mental health professional as part of a Distribution Trust Advisor committee. Adding mental health professionals to the committee has been a popular topic recently and is one we foresee increasing in popularity.

In the past, in South Dakota, as well as under current law in many other states, individuals have been concerned about the risk they are assuming when agreeing to serve in a what has traditionally been a fiduciary role. South Dakota statutes address these concerns by providing several key provisions to protect the Distribution Trust Advisor:

1. Willful misconduct or gross negligence is the standard of care. The Distribution Trust Advisor can be named an “excluded fiduciary” under South Dakota law and not held to the fiduciary standard prevalent in many other states.
2. The Distribution Trust Advisor can be an LLC created for the specific purpose of fulfilling these roles, providing an additional level of protection. These “Special Purpose Entity LLCs” provide similar entity-level protection as the entities chosen for the management of business activity. (An upcoming article will further describe the utility of this unique statutory creation.)
3. Errors and Omissions insurance is available for the Special Purpose Entity (SPE) LLC, providing further protection from litigious beneficiaries.
4. The committee approach to distributions within the SPE LLC structure provides additional formality and an effective vehicle for documentation and support for the decision making process involved in any distribution related decision.

The directed trust structure can be used to specifically address the issues that have been troublesome for trust beneficiaries in the past. This is not limited to newly created documents. This approach can be used as part of a modification or decanting of a trust from a less accommodating state.

A quick review with the BTC Trust Company of South Dakota trust team can begin the process of modernizing trust documents to reflect the changing needs of wealthy families.

Next steps:

1. Contact me to learn more about the benefits of South Dakota trusts.
2. Read our other Wealth Solutions articles.
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