Special Purpose Entities are also gaining in popularity; however, only a few states currently allow for these types of entities. South Dakota is one of only two state that recognizes these entities by statute, which has established South Dakota one of the more popular states for Special Purpose Entities. The Special Purpose Entity can be a useful tool for family governance by enabling family members to serve in various capacities in the Special Purpose Entity LLC and thereby involved family members without directly involving them in the trust or undermining trust tax positions.
Special Purpose Entities are South Dakota LLCs or some other form of corporation that houses the trust protector, as well as, the investment and distribution committees or advisors. It is not a trust company. The sole purpose of the Special Purpose Entity is to direct the administrative trustee as to the trust investments, distributions and trust protector functions.
The Special Purpose Entity alternative must generally be used in combination with the “directed trust” structure previously discussed. The Special Purpose Entities places a liability umbrella over the heads of the individuals filling the roles of Trust Protector, Investment Committee and/or Distribution Committee. These individuals are, in turn, employed by the Special Purpose Entity, which is a South Dakota LLC.
It is very difficult, if not improbable, to acquire liability insurance coverage for individuals serving co-trustees as investment and/or distribution committee members and/or trust protector. Most are subject to a gross negligence standard; however, some insurance companies will provide coverage on a case by case basis to a Special Purpose Entity established specifically for these purposes, thus further protecting the trust protector and committee members. Such an entity would also provide legal continuity of its corporate existence by continuing without regard to any single individual’s death, disability or resignation.
The entity typically has specific by-laws and allows for additional members to be added or removed so that the entity can continue along with the trust. These entities have to be properly structured as to avoid estate tax inclusion issues.
These entities are exempt from regulated Private Trust Company status and have limited defined duties. In addition, they must work in conjunction with a qualified South Dakota “directed” administrative trustee (i.e., SDTC®).