Modern trust laws, available only in progressive trust law jurisdictions such as South Dakota, have revolutionized trust formation and administration in the United States, delivering tremendous direction, control, and flexibility to settlors, beneficiaries, and their advisors.
While many still think of trusts as static, rigid, and inflexible, the reality is very different today. Top-tier jurisdictions have spent decades developing industry-leading trust statutes that have fundamentally changed how trusts are structured, administered, and adapted over time. In fact, when comparing trust jurisdictions across the United States, one of the most important differentiators is the availability and strength of these modern trust law tools.
Together, these laws have transformed and even revolutionized trust planning, creating opportunities for trusts to adapt to changing laws, family circumstances, and planning objectives. Each of the tools outlined below plays a distinct role in sophisticated trust planning, allowing trusts to evolve alongside the families they are designed to serve.
Directed Trusts
Directed Trusts, only available in a handful of states across the country, including South Dakota, continue to change the trust world through unbundling asset management and trust administration functions, putting control back into the hands of settlors, beneficiaries, and their advisors.
Through bifurcating liability, the Directed Trust model creates a legal framework allowing trustees and beneficiaries to work with asset managers and independent trust companies of their choosing. This structure allows different parties to serve in specialized roles, creating a more flexible and collaborative framework for trust administration and providing families and advisors with more control over investment management, distributions, and other important trust functions.
Trust Protector
The Trust Protector concept is often used in conjunction with a Directed Trust, and allows the settlor, beneficiaries, and their advisors to modify and control many important aspects of the trust and provide direction to the trustee with respect to investment management, jurisdiction, and trust distributions.
Acting as a “super trustee,” the Trust Protector enhances the control aspects of the Directed Trust by providing for direction or restraint of trustee powers. In practice, this creates a level of oversight and flexibility that traditional trust structures did not allow.
Decanting
Decanting, appropriately referred to as a “do over,” is essentially distributing assets from an irrevocable trust to a new trust with different, and presumably more desirable and flexible terms, leaving the unwanted terms in the original trust and not binding on the assets.
Many states do not have a decanting statute and not all decanting statutes are created equally. It is important to evaluate the differences among the statutes when selecting proper situs for a trust, as the strength of a jurisdiction’s decanting statute can have a significant impact on long-term flexibility.
Family Advisor
South Dakota was the first state in the nation to enact legislation creating the Family Advisor. The Family Advisor is another modern trust law tool that delivers additional control and flexibility to settlors, beneficiaries, and their advisors, particularly when used in conjunction with a Directed Trust.
Similar to a Trust Protector, but acting in a non-fiduciary capacity, the Family Advisor has the power to modify, control, and participate in many important aspects of trust administration. Often referred to as a “Trust Protector Light” because of its non-fiduciary status and limited powers, the Family Advisor can be an excellent option for settlors of trusts and beneficiaries who want family advisors, such as attorneys, CPAs, or investment advisors, to provide input on important trust matters without elevating the position to that of a fiduciary and the additional liability that role may carry.
Modification and Reformation
Modification and reformation are additional tools that progressive trust jurisdictions make available to advisors and their clients, allowing them to substantially alter the terms of an existing irrevocable trust, often without the need for court approval.
It is important to note that modification and reformation both result in keeping the original trust, whereas decanting results in the transfer of assets from an existing trust to a newly created trust. All of these tools have the potential to significantly change an irrevocable trust and provide flexibility when trust terms no longer align with a family’s circumstances or planning objectives.
Additional Modern Trust Laws
While the modern trust laws discussed above primarily focus on providing greater direction, control, and flexibility in trust administration, progressive trust jurisdictions such as South Dakota have developed additional modern trust laws that strengthen asset protection, privacy, and long-term planning opportunities. Together, these modern trust laws provide families and their advisors with a broader range of planning options than ever before.
Domestic Asset Protection Trusts (DAPTs)
Domestic Asset Protection Trusts (DAPTs), available exclusively in a handful of jurisdictions, including South Dakota, are designed to help protect assets from future third-party liability, including lawsuits and certain creditor claims, while permitting settlors (the person establishing the trust) to retain some control over the trust assets and receive discretionary benefits from the trust during their lifetime.
Because not all DAPT statutes are created equally, the jurisdiction selected can have a significant impact on the strength of the protection available. South Dakota has one of the oldest and most progressive self-settled domestic asset protection statutes in the United States, including a two-year fraudulent transfer “look-back” period that is among the shortest in the country.
Purpose Trusts
Purpose Trusts expand the traditional role of trusts beyond beneficiary-based planning. Unlike traditional trusts, which are established for the benefit of one or more beneficiaries, Purpose Trusts allow assets to be held and administered for a specific purpose.
In progressive trust law jurisdictions such as South Dakota, Purpose Trusts create opportunities to preserve family assets, support philanthropic initiatives, protect unique property, and accomplish other long-term planning objectives that may extend for generations.
Privacy and Quiet Trust Laws
Privacy and Quiet Trust Laws have become an increasingly important consideration for many families when selecting a trust jurisdiction. South Dakota has enacted comprehensive privacy statutes that help preserve confidentiality while providing families with greater control over the administration of a trust.
South Dakota is widely considered to have the strongest trust privacy and Quiet Trust statutes in the United States, providing families with enhanced privacy protections while offering greater control over how and when trust information is shared.
Collectively, these modern trust laws have transformed the trust industry by providing families and their advisors with greater planning opportunities, flexibility, and control than ever before. To learn more about any of the modern trust laws discussed, we encourage you to explore the additional resources available throughout our website and call (605) 224-9189 or contact us online with any questions.
