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Using Directed Trusts to Protect Unique Assets

Using Directed Trusts to Protect Unique Assets

Directed trusts, especially those drafted in South Dakota, offer many asset protection benefits. Directed trusts are known for their benefits in protecting the wealth of individuals and families, but they can also be used to hold unique assets, such as businesses, land, collectibles and other valuables.

This article answers the most common questions about using directed trusts to hold unique assets, including which unique assets can be held, the benefits of using directed trusts to hold unique assets and why directed trusts are often an overlooked option.

How do directed trusts work?

Directed trusts separate out the three traditional trust roles: Administration, Distribution and Investment. This flexible approach allows the grantor to keep their closest and most trusted advisors in place.

  • When using a South Dakota directed trust, administration is accomplished by a trustee located in South Dakota, such as BTC Trust Company of South Dakota.
  • Distribution decisions are made by a person or group of people whose sole responsibility is to determine whether a given distribution to a beneficiary is appropriate.
  • Investment decisions regarding trust assets are made by an individual investment advisor or committee with sole authority.
  • There is limited liability protection for those serving in advisory roles.

Which unique assets can be held within a directed trust?

Directed trusts can be very diverse and can include any type of asset with value. Unique assets can be held either directly by a South Dakota trust or an underlying holding company.

Examples include:

  • Closely held interests in a startup company
  • Illiquid and hard-to-value assets
  • Residential property
  • A family business, including commercial buildings
  • Oil, gas and mineral rights
  • Valuable art
  • Collectibles, such as coins or antiquities
  • Vehicles, including cars and yachts
  • Patents
  • Promissory notes
  • Investment portfolios at a variety of different brokerage firms
  • Farmland, crops and livestock

Additionally, transitioning unique assets to a directed trust does not require an expensive appraisal. A directed trustee is provided with the total value of any asset they are responsible for holding.

Why are directed trusts a good option for unique asset holdings?

Another reason directed trusts are a good option is they allow the grantor to maintain a level of oversight and control of those investments. This can be extremely beneficial for a family-run business because continued oversight helps protect a family’s legacy for future generations.

Directed trusts are beneficial for holding unique assets because they receive similar protection as directed trusts that hold cash or investment portfolios. The majority of wealth is held in assets other than cash and marketable securities. Accordingly, trust structures should be flexible enough to easily hold all types of assets. As an individual’s or family’s wealth grows, the more unique assets they tend to hold. This creates an even greater need for protection of and for planning for unique assets.

Directed trusts drafted in South Dakota can be used to hold unique assets so an individual or family can plan and protect all their wealth, not just their cash and investments, which often makes up a smaller fraction of their wealth.

What are the benefits of holding unique assets in a directed trust in South Dakota?

With directed trusts in South Dakota, unique assets can be combined with traditional assets to fully fund trusts, simplify administration and ensure the estate tax exemption is maximized. In states with more traditional trust laws, trust companies tend to be more traditional too, often preferring to have only cash and investments within trusts. This is largely because they carry all the risk of the decision to hold the various type of assets. For this reason, traditional trust companies have either avoided unique assets altogether, or have created additional compliance and fees to deal with the risk. When trustees are unable or unwilling to accept unique assets, it can lead to unnecessarily complex estate plans in which unique assets are segregated from other assets. The result can be multiple trusts that are difficult to administer or failure to fully fund trusts, thereby missing out on the maximum estate tax exemption.

Why are directed trusts not often thought of as an option to hold unique assets?

While directed trusts can be very helpful in holding unique assets, directed trusts in general are not recognized in many states. Additionally, some states that do recognize directed trusts are more limited in how you may use them, and they do not provide strong asset protection benefits. Therefore, some local trust companies do not provide this option to hold unique assets.

South Dakota trusts continue to increase in popularity because of all the benefits they provide, including:

  • Maximum unique and personal asset protection
  • Robust privacy features
  • Limited exposure to threat of litigation

Contact me to learn more about directed trusts.

Bankers Trust Company and its affiliates and their representatives do not provide tax or legal advice. You should consult with your tax and legal advisors regarding your unique situation and needs before deciding on an estate plan that would work best for you and your family.

Non-Deposit Investment Services are not insured by the FDIC or any government agency and are not guaranteed. They are not deposits and may lose value.

Matt Abel

Matt Abel

President (605) 221-3094 Email Matt

Matt joined BTC Trust Company of South Dakota in 2021 and was promoted to President in 2022. He earned his bachelor’s degree in government and international affairs from  Augustana College and his Juris Doctorate and master’s degree in public administration from the University of South Dakota. He was named by Best Lawyers in America as a One to Watch - Trusts and Estates in 2020 and 2021.

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