A directed trust also promotes administrative efficiency through the use of an investment management LLC. South Dakota as a directed trust jurisdiction has excellent supporting LLC statutes that allow for a sole member LLC. As a result, the trust can be the sole owner of the LLC.
The South Dakota LLC statutes also provide for advantageous asset protection with charging order protection as the sole and exclusive remedy. Note that a charging order only gives a creditor a distribution right of an LLC interest and doesn’t give a creditor any voting rights. It’s simply a right to a distribution, if one is ever made; however, it doesn’t give the creditor a right to force a distribution.
A grantor can sometimes be the manager of the LLC without incurring estate tax or state income tax issues. However, it’s best for a grantor not to serve as the manager of the investment management LLC, particularly with asset protection trusts. A better alternative is to appoint a family member or family advisor as the manager of the investment management LLC owned by the trust as the sole member. The investment committee of a directed trust would generally direct the administrative trustee to hold the investment LLC, which in turn provides the investment management for the trust. The investment accounts are titled to the LLC, which in turn is titled and owned by the trust as the sole member. Consequently, these investment management LLCs are excellent for administrative efficiency purposes by streamlining the investment management for the trust, reducing trustee fees, as well as providing a beneficial second layer of asset protection for the trust assets.
Please Note: One popular method for handling the investment management of a trust is with the use of a limited liability company (LLC), and South Dakota has a very powerful LLC statute. A LLC that’s owned by the trust may handle the investment management of a trust, and a member of the client’s family or a family advisor can be named as the manager of the LLC. The trustee/trust would, generally, be the sole member (that is, owner of the LLC). The LLC manager would account to the trustee as to the underlying investment management taking place within the LLC on behalf of the trust. The investment committee of a directed trust would, likely, direct the administrative trustee in a directed trust state (South Dakota) to hold the LLC that will be responsible for the investment management.
“The advantages of a South Dakota Investment LLC include: administrative efficiency, streamlined investment management, added asset protection and reduced trustee fees.”