Another modern trust structure that operates to supplement a directed trust and as an alternative to the PFTC is an unregulated South Dakota Special Purpose Entity (SPE). Generally, SPEs are LLCs and must be used in combination with the directed trust structure with SDTC as a qualified directed administrative trustee. SPEs are used for many of the key reasons PFTCs are used, such as governance, trustee succession issues, situs, and liability protection.
It is very difficult, if not impossible, to acquire individual liability insurance coverage for investment and distribution committee members and/or trust protectors of a directed trust or any personal trustees or fiduciaries for that matter. However, some insurance companies will provide D&O and E&O coverage to an SPE established specifically for these purposes, thus protecting the trust protector and the investment and distribution committee members.
As with a PFTC, a South Dakota SPE, as a result of its corporate existence, will have the ability to continue without regard to any single individual fiduciary’s death, disability or resignation. The SPE typically has bylaws allowing for additional members to be added or removed so that the SPE can continue with the trust. These entities also have to be properly structured so as to avoid estate tax inclusion issues. These entities are not PFTCs, although they provide some PFTC benefits. They have very limited defined duties. One SPE can generally serve for all of a family’s trusts, so that a separate SPE is not needed for each family trust. SPEs cannot generally hold themselves out to the public as PFTCs or serve more than one family. However the PFTC is recognized by statute in South Dakota and registered with the South Dakota Division of Banking. The SPE typically has board of manager meetings to make investment, distribution, and other decisions for the family trusts. The operating agreements may indicate that the board of managers meetings will take place in a jurisdiction other than the family’s resident jurisdiction, for example, Florida, during vacation. Consequently, the combination of the South Dakota directed trust, SPE, and SDTC as directed administrative trustee provides a very cost-effective alternative to the PFTC for families, while also providing an answer to many of their key desires regarding their trust planning.