South Dakota Special Purpose Entity

Giving families control, choice, and privacy under the trust statutes of South Dakota. 

How does a South Dakota Special Purpose Entity make your life easier? Simpler?

"If you want to change the future, you must change what you're doing in the present."

- Mark Twain

A South Dakota Special Purpose entity offers a turn-key solution where families create a South Dakota LLC that directs the trustee under South Dakota-directed trust on investment and distributions.

Families want more control, choice, and privacy with less complexity and costs for funded trusts across their generations.

Better than a stand-alone single-directed trust.

Best for multiple trusts within one family.   

Choice, Control, and Privacy for Families

A Special Purpose Entity (SPE) under South Dakota trust law gives families the opportunity to create lasting legacies with fairness and simplicity

  • Investment decisions for liquid and illiquid assets made by the family
  • Distribution decisions for multiple generations made by the family
  • SPE controlled by a board of family members 
  • Board of family members decides who's, what's, how's of Investment and Distribution Committees 
  • Privacy of SPE offers family peace of mind
  • Trust Protector can remove & appoint a trustee in South  Dakota

 

Boring & Super Important Details of a Special Purpose Entity under South Dakota trust law

These details are very important

A simple solution creating harmony between their wealth and family dynamics.

  • A Special Purpose Entity is recognized under the South Dakota statutes
  • Generally created as a Limited Liability Company (LLC)
  • Not a trustee
  • Required to work with a trust company licensed under South Dakota trust law
  • May work with all trusts of all family members
  • Family governance may be incorporated into SPE
  • Cost-effective
  • Offers liability protection of a legal entity
  • SPE acting in a fiduciary capacity
  • Trusts must name the SPE by name
  • Allows for succession plans for multi-generation assets

 

Why & How did South Dakota come up with the Special Purpose Entity idea?

  • South Dakota has something called the Governor's Trust Task Force. The mandate of people working in and around the South Dakota trustee industry (including the regulators) is to keep South Dakota trust laws current and correct.  
  • The industry heard from clients they wanted a simple and powerful tool to provide liability protection for family members involved with trust issues (i.e., investments and distributions). 
  • This theme of control and choice also involved family members wanting to have the removal and appointment power of corporate trustees.  
  • The South Dakota Division of Banking wanted any potential entity solution to register with them. This can provide additional income tax, asset protection, and purpose trust situs facts for families under South Dakota trust law. 
  • The trust companies in South Dakota wanted this type of solution to take advantage of the directed trust laws.
  • The lawyers wanted this entity solution to take advantage of South Dakota limited liability company and c-corp laws for a host of tax, asset protection, and privacy options. 
  • So, the members of the South Dakota Governor's Trust Task Force came up with the Special Purpose Entity. It was presented to the SD legislature. The normal back and forth of the great American legislative process and in 2017 South Dakota approved the Special Purpose Entity.
  • This is what happens with a state is focused on offering current and correct trust laws, listening, and collaboratively working together as a team.  

A fictional user case for a Special Purpose Entity

Sometimes a story about how an estate planning idea works is better than a legal brief

The Wright family from Kansas had created ultra-high net worth wealth (around $175 million) with a bit of luck and consistent multi-decade hard work. John started the distribution business about the time he married Anne. Like any good entrepreneur, Anne had ideas to expand the distribution business into warehouse facilities and a manufacturing offering. So, together John and Anne created a company covering an entire vertical of an industry. Plus they had three kids.

And then it got complicated. When the lawyers got involved. 

Actually no. That's not quite right. It started with a financial advisor asking this question, "Anne, John, what is the philosophy of your money and family?" This simple question started a long series of conversations and more questions to define what their legacy plans were. If any. John and Anne thought of giving everything to charity and $4 million to each child. Simple legacy plans. In the end, they ended up with a multi-generational estate plan. The kids and future generations had guardrails around distributions. 

Life continued on for another decade or so.

As the children grew up, they were exposed to the family business. The family lived modestly. They are mid-westerners. As Anne once quipped, how many cars or shoes does someone really need? The kids started sweeping and doing low-level work at the company for years. They never got an office job. The children all went to college. I can't remember where. Post college the kids took jobs in various industries, not at their parent's company, from accounting, marketing, and engineering. 

John and Anne had about $35 million in liquid assets (e.g., marketable securities). They began to consider selling the company. Then suddenly, one child after another started working at the company leveraging their expertise and experience garnered at their previous employers. 

Anne asked John, "Now what do we do?"

They called their financial advisor again. Asked if he had any ideas. 

He asked another open-ended question, "Does the company have a long shelf life?" Yes, they responded. 

This changed everything. The advisor organized a series of collaborative meetings between the estate planning attorney and Wright's CPA. No, not on Zoom. In-person. It's the best option where available. The outcome of those meetings yielded something simple and powerful. 

The Wright's decision, with their children, focused on multi-generational ownership of the company and an estate planning structure focused on trust distributions that were supporting not enabling. It helped the company was using the EOS method adeptly described in the book Traction. The Wright's also wanted to leverage their mid-western American values. 

The estate plan created a series of trusts (i.e., SLATs, GRATs, CRTs) but with a twist. Those trusts were created under the trust laws of South Dakota. Those trust documents specifically referred to a limited liability company (LLC) directing the trustee, a corporate trustee under the trust laws of South Dakota, to execute decisions on investments and distributions. The LLC, a South Dakota corporate entity, manager-managed, had family members on the LLC board. The trustee was directed to execute all decisions per the guidance of the LLC. A true administrative corporate trustee relationship. 

The upside - the family had guidance on how, who, when, and why other family members participated in the various investment and distribution committees inside the LLC. The goal was to create future generations that treated the trust something not as a birth right, but something which they could earn the benefits through the fruits of their labor. 

The Special Purpose Entity gave a clear goal and reason on how a dynastic trust with asset protection using South Dakota's directed trust laws could enhance the philosophy of the family's wealth and being far into the future. 

Remember:

  • You need all your advisors working & talking together -- collaboratively
  • A families values will last way beyond three generations
  • Asking simple open-ended questions yield the best results. 

A South Dakota Special Purpose Entity - kinda like ordering a cup of coffee

Learning how to take back control and give future generations choices and privacy doesn't have to be like climbing Mt. Everest.