South Dakota has long been recognized as one of the most trust-friendly states in the U.S., offering progressive laws that provide flexibility, asset protection, and tax advantages for individuals and families seeking wealth preservation. Among its most notable trust structures is the Directed Trust, a type of trust that allows different fiduciaries to handle specific responsibilities. This unique structure offers enhanced control and efficiency in managing trust assets while minimizing liability for trustees. Here, we explore the legal framework of South Dakota Directed Trusts, detailing the statutes, roles, and key benefits.

What is a Directed Trust?

A Directed Trust is a trust in which the administrative trustee takes direction from an appointed advisor or committee on specific matters, such as investment management or distribution decisions. Unlike traditional trusts, where a single trustee holds all decision-making power, directed trusts divide responsibilities among different fiduciaries.

South Dakota’s directed trust laws are considered some of the most comprehensive in the country, primarily due to the state’s modern trust statutes that allow for a high degree of flexibility and control while limiting fiduciary liability.

Statutory Basis for Directed Trusts in South Dakota

The legal foundation for Directed Trusts in South Dakota is codified in South Dakota Codified Laws (SDCL) Chapter 55, which governs trusts and fiduciary relationships. The state’s laws explicitly allow for the separation of trustee duties, empowering different parties to oversee various trust functions.

Key statutes include:

• SDCL §55-1B-1 et seq. – Establishes the framework for directed trusts, specifying the roles and authority of trust advisors, distribution committees, and investment managers.

• SDCL §55-1B-2 – Defines the responsibilities and limitations of a directed trustee, emphasizing their obligation to follow the directions of the designated advisor without incurring personal liability for those decisions.

• SDCL §55-1B-6 – Provides liability protection for directed trustees, clarifying that they are not responsible for the decisions of trust advisors, investment managers, or distribution committees.

• SDCL §55-1A-1 – Allows the appointment of a trust protector, who has oversight over the trust and can modify its terms if necessary.

South Dakota’s statutes ensure that trustees, advisors, and beneficiaries all have a clear legal framework to operate within, reducing disputes and ensuring smooth trust administration.

Key Roles in a South Dakota Directed Trust

A directed trust in South Dakota operates through a bifurcated structure, in which different fiduciaries handle distinct responsibilities. The primary roles include:

1. Administrative Trustee

• Handles compliance, tax filings, and record-keeping.

• Does not make investment or distribution decisions but ensures trust administration follows state law.

• Typically a South Dakota trust company to comply with South Dakota situs requirements.

2. Investment Advisor or Investment Committee

• Manages trust assets and investments.

• Directs the trustee on how assets should be allocated, bought, or sold.

• Reduces liability for the administrative trustee, ensuring investment decisions align with the settlor’s intentions.

3. Distribution Advisor or Distribution Committee

• Oversees and directs how and when distributions are made to beneficiaries.

• Helps customize the trust to meet the specific needs of beneficiaries while maintaining tax and asset protection benefits.

4. Trust Protector (Optional but Common in South Dakota Trusts)

• Has the power to amend trust provisions, remove fiduciaries, and even move the trust to another jurisdiction if necessary.

• Acts as an additional layer of oversight to ensure the trust operates according to the settlor’s long-term vision.

Benefits of South Dakota Directed Trusts

South Dakota’s directed trust statutes offer several key benefits:

1. Reduced Fiduciary Liability

South Dakota law clearly limits the liability of directed trustees, protecting them from responsibility for decisions made by investment or distribution advisors.

2. Enhanced Asset Protection

By separating roles, directed trusts enhance creditor protection while allowing sophisticated investment strategies and controlled distributions.

3. Tax Efficiency

South Dakota does not impose state income tax on trusts, making it an attractive jurisdiction for high-net-worth individuals looking to minimize tax liabilities.

4. Customization and Flexibility

With the ability to appoint specific fiduciaries for different responsibilities, settlors can tailor their trusts to align with their financial goals and family dynamics.

5. Perpetual Trust Laws

South Dakota allows trusts to continue indefinitely under its dynasty trust provisions, making it an ideal state for long-term wealth preservation.

How to Establish a Directed Trust in South Dakota

Setting up a South Dakota Directed Trust requires:

1. Selecting the right fiduciaries – Choose an administrative trustee, investment advisor, distribution advisor, and optionally, a trust protector.

2. Drafting the trust agreement – Work with an experienced estate planning attorney to draft a document compliant with South Dakota law.

3. Appointing a South Dakota-based trustee – Ensure the trust is legally domiciled in South Dakota to take advantage of its favorable trust laws.

4. Funding the trust – Transfer assets into the trust and coordinate investment management and distribution strategies.

South Dakota’s legal framework for Directed Trusts offers unparalleled flexibility, liability protection, and tax advantages, making it one of the most sought-after jurisdictions for trust administration. With clearly defined fiduciary roles and robust statutory protections, a South Dakota Directed Trust is an excellent tool for high-net-worth families, business owners, and estate planners looking for long-term wealth management solutions.

For individuals considering a South Dakota Directed Trust, consulting with an experienced trust attorney or a South Dakota trust company can ensure a well-structured and legally sound trust arrangement tailored to your financial and estate planning goals.