Most individuals want to maintain control even though they have placed assets in a trust. They are called a Private Trust. Making a trust private is one way to keep control; a directed trust is another.

When an individual, known as a grantor, is creating a trust, they have two options. Directed trusts under South Dakota trust law make private trusts simple to implement. The trust can be revocable, or the trust can be irrevocable. A revocable trust is also known as a living trust because it is a trust that the grantor is still living.  The grantor has the power to name themselves as trustee for the benefit of their own life. When they pass, they can transfer their interest in the trust to descendants.  The grantor retains control and can revoke the trust during their lifetime and at their death. This tool is commonly used to avoid probate. If the trust is irrevocable, then the grantor loses control, and trust cannot be changed. The control of the trust then passes to the trustee. However, if a trust's Directed, the grantor can direct the duties of the trustee. 

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Directed Trusts

There are four functions of trusteeship:  custodial, administrative, investment, and distribution. 

  • The custodial function involves the holding and safeguarding of the trust property.
  • The administrative function involves the accounting and the recordkeeping of the trust assets.
  • The investment function involves investing the assets
  • According to the terms of the trust, the distribution function involves making disbursements of income or principal to the beneficiaries. 

Traditionally, A trustee is responsible for all four of these functions. However,  directed trusts allow the grantor to separate these functions and control the trustee's duties. South Dakota is ranked #1 for their directed trust statutes. To receive these South Dakota benefits, the assets must have custody in South Dakota.  The advantage of a directed trust is that a family with a long-term relationship with the financial advisor can direct the investment function to that advisor from the trustee.  A grantor can direct another individual, with a directed trust, to manage the distributions and instruct the trustee. 

Direct trusts are one of the benefits of South Dakota trust law.  The trustee is still obligated to perform their trustee duties; however, these duties can be shared. Her example is investment duties. With a directed trust, a grantor that resides in another state can use their advisor in that state and have a trustee in South Dakota. A directed trust also gives a corporate trustee less risk because the grantor has outsourced the duties. However, the trustee is still in charge of safeguarding the assets. The Four functions of trusteeship are custodial, administrative, investment, and distribution. Directed trusts give grantors and beneficiaries flexibility. A trustee may only have to perform two or three of their four functions with a directed trust.

Private Trusts

South Dakota does not require trust documents to be filed publicly, and or changes to a trust do not need to be filed with a South Dakota court. Privacy is a priority in South Dakota. Comparative states like Delaware do not provide favorable privacy laws; the seal is only for 3-years.

Unfortunately, some beneficiaries depend on their trust far more than they should.  Grantors often use the privacy laws of South Dakota to support beneficiaries instead of enabling them. The ability to keep trust assets quiet until the beneficiary is mature enough to handle it is useful. In turn, the beneficiary develops the skills to make it independently, and the trust is used as a support mechanism.  It can also set them up for success when they inherit the assets due to the previous skills gained from managing their financial affairs.  A private trust also protects the assets and beneficiaries from potential lawsuits, identity theft, and possible negative relationships. These negative relationships may develop if another individual finds out that the beneficiary has access to a large pot of money and tries to take advantage. 

In conclusion, Directed trusts and privacy laws can go hand-in-hand. Both give a trust creator the ability to have more control over their trust assets, even after relinquishing control to a trustee or post-death.