SDTC POWERFUL TRUST PLANNING OPPORTUNITIES IN 2017 TRUST PLANNING South Dakota Trust Company llc DIRECTED TRUST: SDTRUSTCO.

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1 POWERFUL TRUST PLANNING OPPORTUNITIES IN 2017 Many powerful trends are taking place in While much is still unknown in regard to what actions the new Trump administration and GOP-led congress will take towards the estate tax (and what may occur thereafter with the estate tax under future administrations), planners have many opportunities to provide clients structures for both the short and long term. Additionally, planners will need to continue to factor in the recent development by the Federal Reserve to raise interest rates. Lastly, international families continue to establish trusts in the United States at a record pace, both with and without family members and/or assets in the United States. All of these trends provide advisors and planners powerful opportunities in 2017, many of which are outlined below: Directed Trust Special Purpose Entities Modernizing Existing Dynasty or GST Trusts Establishing New Dynasty or GST Trusts Promissory Note Sale Domestic Asset Protection Trusts Private Placement Life Insurance Community Property Trust (i.e., Special Spousal Trust) International Family Planning Private Family Trust Company DIRECTED TRUST: Directed trusts have fast become one of the most powerful and popular tools in structuring modern trusts, offering far more flexibility, control and protection when compared to the delegated trust statutes that most states provide, and this trend is set to continue into With a directed trust, a family is offered the tools to tailor the trust to their needs with asset allocation, diversification, investment management, and distributions, all while significantly increasing liability protection. South Dakota is one of the few select states that has a directed trust statute; in fact, South Dakota has one of the oldest and highest rated directed trust statutes in the United States. South Dakota Trust Company LLC All Rights Reserved 1

2 Specifically, a directed trust allows individuals, who establish a trust with an administrative trustee in the directed trust state, to appoint a trust advisor or investment committee, who in turn can select an outside investment advisor(s) and/or manager(s) to manage the trust s investments. Multiple advisors may be chosen based upon different asset classes/diversification. This allows a family to utilize and deploy a broad and sophisticated Harvard or Yale Endowment-type asset allocation, which they might not otherwise be able to do with most states delegated trust statutes, as a result of laws, risks, time and costs. Moreover, it allows the directed trust to hold both financial and non-financial assets (i.e. business interests, real estate, LLCs, FLPs, timberland, direct private equity etc.). Generally, many individuals choose to name their family, friends, or others they trust as co-trustees, thus subjecting them to a high personal liability standard. With a directed trust, these individuals may serve as investment/distribution committee members as fiduciaries resulting in significantly less exposure to personal fiduciary liability (i.e. generally a gross negligence/willful misconduct standard). Lastly, directed trusts generally result in lower fees for trust administration since the monitoring and reporting responsibilities of the administrative trustee are lessened (these functions are usually performed by the investment committee) when compared with other types of trust administration such as delegated trusts. For more information, please see our Directed Trusts, Trust Protectors and Special Purpose Entities, Special Purpose Entities and South Dakota Premium Tax Planning publications. SPECIAL PURPOSE ENTITIES (SPE): South Dakota has one of the oldest and highest rated directed trust statutes in the country Special Purpose Entities (SPEs) are also gaining enormous popularity; however, only a few states currently allow for these types of entities. South Dakota had the first statute to recognize these entities and is one of only two states that recognize these entities by statute, which has established South Dakota as one of the more popular states for Special Purpose Entities. Special Purpose Entities in South Dakota are South Dakota LLCs or some other form of corporation that houses the trust protector, as well as the investment and distribution committees, or South Dakota Trust Company LLC All Rights Reserved 2

3 advisors of a directed trust. The sole purpose of the Special Purpose Entity is to direct the administrative trustee as to the trust investments, distributions and trust protector functions. Please see the example below: Special Purpose Entity (South Dakota LLC) Trust Protector Investment Committee Distribution Committee Directs A South Dakota trust company Not a Trust Company D&O, E&O Insurance Unique South Dakota Statute More ties to South Dakota Situs Administrative Trustee The Special Purpose Entity alternative must generally be used in combination with the "directed trust" structure previously discussed. The Special Purpose Entities place 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, agents or employees of the Special Purpose Entity, which is a South Dakota LLC thus further tying them to South Dakota situs. Additionally, SPE Board of Managers meetings are generally held outside of a family s resident state. Further, it is very difficult, if not improbable, to acquire liability insurance coverage for individuals serving on the investment or distribution committee, or as trust protector of a directed trust. However, they are generally subject to a relatively low liability standard (i.e., gross negligence/willful misconduct) with most directed trusts. Some insurance companies, however, will provide D&O and E&O insurance coverage on a case by case basis to a Special Purpose Entity, thus further protecting the trust protector as well as the investment and distribution 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. Consequently, SPEs are great vehicles to perpetuate family governance. An SPE can serve all of the trusts for a particular family and thus a separate SPE is not needed for each family trust. Again, SPEs are not Private Family Trust Companies and cannot hold themselves out as such. South Dakota Trust Company LLC All Rights Reserved 3

4 The SPE typically has specific by-laws and allows for additional members to be added or removed so that the SPE can continue along with the trust. However, please note these entities have to be properly structured to avoid estate tax inclusion issues. In conclusion, these entities have limited defined duties regarding the investment management and distributions of the trust, as well as trust protector functions and they must work in conjunction with a qualified South Dakota directed administrative trustee (i.e., ). For more information, please see our Special Purpose Entity publication. MODERNIZE AN EXISTING DYNASTY OR GST TRUST: Consider making changes and additions to an existing Dynasty or GST Trust as a result of the increased gift and GST tax exemptions. By changing the situs of an existing Dynasty or GST Trust to South Dakota, estate planners can potentially save state income taxes and provide opportunity to reform/modify or decant the trust. Reformation/Modification is very inexpensive (averages $2,500) and quick (timing averages 2 hours to 2 weeks) in South Dakota. This would allow the trust to acquire the favorable laws of South Dakota, such as directed trusts, trust protectors, special purpose entities, privacy and asset protection, that may not be present in the existing Dynasty or GST Trust. Decanting would allow for a distribution from an existing trust sitused in a jurisdiction without all of the favorable trust laws to a newly drafted South Dakota trust. South Dakota has one of the top rated decanting statues in the country. Once an existing trust is reformed/modified or decanted, the client could then take advantage of their increased exemptions by adding to such a trust. Please note that the existing trust duration (i.e. RAP) cannot be extended. Two Key Reasons to Reform/Modify or Decant: Old Distribution Standards (i.e. 33% at age 25, 33% at age 30, and 33% at age 35): Older trust distribution standards requiring principal distributions at various ages may no longer be desired. These old standards can generally be modified to a purely discretionary standard. The modern directed South Dakota trusts have family members controlling most of the distributions from the trust for health, education, maintenance, and support. Consequently, amending the trust to a purely discretionary standard versus required principal distributions at various ages may be desired. For instance, with the older distribution standards, once South Dakota Trust Company LLC All Rights Reserved 4

5 distributed, the principal is no longer asset protected and is subject to estate, GST, and income taxes. However, South Dakota has a very unique statute stating that a discretionary interest in a trust is not a property right, thus providing the ultimate asset protection. Thus, reforming/modifying a trust to a purely discretionary standard with a South Dakota trust could provide powerful asset protection and estate planning. Investment Flexibility: Many states like New York, California, Massachusetts, Connecticut, etc., are not directed trust states, like South Dakota, but are delegated trust states. Consequently, whether a family or an institutional trustee is involved, due diligence and ongoing monitoring of the trust assets are required in these delegated trust states. Many family member trustees are not in compliance and risk individual liability in the event of a future lawsuit by a beneficiary as a result of improper diversification, asset allocation, a bad investment or bad performance. Consequently, many people like to change trust situs and reform/modify or decant an existing delegated trust to a directed trust so that these issues do not exist. Additionally, a heavy concentration in one asset or asset class and/or a broad sophisticated Harvard or Yale endowment type asset allocation are generally not an issue with a directed trust, but can pose major issues for a delegated trust. Some other popular reasons to reform/modify or decant an existing trust: Change the governing law applicable to the trust Add flexibility regarding appointment of trustees and other fiduciaries Improve the trust s governance structure Modernize an outdated trust agreement Improve tax provisions Save state income taxes For more information, please see our Reformation/Modification & Decanting publication. ESTABLISHING A NEW DYNASTY OR GST TRUST: Consider funding a newly drafted South Dakota Dynasty Trust to take full advantage of all of the top rated, powerful South Dakota trust, tax and asset protection laws. Further, with the increased estate, gift and GST exemptions, there are many creative strategies associated with funding new South Dakota Dynasty Trusts, including adding the difference of the 2016 exemption amount of $5.45 million and the 2017 exemption amount of $5.49 million. Placing $5.49 million (even $1 million) into a new Dynasty Trust today can result in a substantial family bank promoting family values in perpetuity. For more information, please see our Dynasty Trust publication. South Dakota Trust Company LLC All Rights Reserved 5

6 PROMISSORY NOTE SALE: Consider planning with a promissory note sale to an income tax defective South Dakota Dynasty Trust to take advantage of the current low interest rate environment. This strategy shifts future appreciation on the note assets that are sold to a South Dakota Dynasty Trust for the benefit of the client s descendants without any gift or GST costs. It is often seen in conjunction with direct private equity, closely-held stocks, pre-ipo stocks and publicly traded interests. These assets and the growth of these assets can then pass to future generations free of estate and GST taxes in perpetuity. Generally, the principal payments on the promissory note would be deferred by using an interest-only promissory note with a single balloon payment at the end of the note term. Often, only non-voting, closelyheld shares or partnership units are sold to the Dynasty Trust while the voting shares and the management, control and income related to the assets generally remain in the hands of the parents or grandparents. The grantor could also sell non-discountable assets to the trust (i.e., investments). Placing $5 million (even $1 million) into a new Dynasty Trust today can result in a substantial family bank promoting family values in perpetuity If spouses take full advantage of their gift tax and generation skipping transfer tax exemptions, a Dynasty Trust can be funded with up to $10.98 million (i.e., $5.49 million per spouse). That amount would justify the eventual sale of up to $98.82 million (i.e., nine times the $10.98 million funding amount) in post-discounted assets to the Dynasty Trust without any gift or GST taxes and potentially, without any estate and income taxes. In addition, the future appreciation on the assets contained in the Dynasty Trust is transferred to the grantor s living and future descendants. South Dakota Trust Company LLC All Rights Reserved 6

7 Promissory Note Sale Example: Client/ Grantor Gift $5,490,000 Loan/Note $49,410,000 Post Discount* Tax Free Interest on Note (9 Yrs) $963,495 annually** $49,410,000 Note Repaid (9 Yrs) South Dakota Family Dynasty Trust Beneficiaries: -Children -Future Descendants Trust Value 9 Yrs $40,063,304 *** (assuming 3% growth) *Promissory Note Sale/Loan: Assuming discounted assets and/or a 30% discount, the pre-discount value of the assets lent/sold to the trust would be approximately $70,585,714. This based upon the premise that one can lend into the trust nine times the original funding amount (i.e., 9 x $5,490,000 = $49,410,000 post discount). **Interest: Based upon an assumed midterm Applicable Federal Rate (Jan. 2017) of 1.95%, an annual interest payment of $963,495 would be paid to the grantor for 9 years. This interest is generally federal and state tax free. Interest is generally paid from cash flow and if not sufficient then in kind to private equity investor. ***Net Value of Dynasty Trust Assets: After the nine year term is over, the $5.49m, the growth on the $5.49m as well as the $49.41m note or notes all remain in the trust for grantor and/or grantor s family as beneficiaries. The grantor can then enter into another note or combination of notes of about $360.56m (9 x $40.63m). Powerful! For more information, please see our Promissory Note Sale and Private Equity publications. Life Insurance: Further, the promissory note strategy can be utilized towards the purchase of large amounts of life insurance without need for crummy beneficiaries. Under this scenario, the difference (i.e., the arbitrage) between the promissory note asset cash flow and the IRS required interest payments to the grantor based upon the selected note term inures to the benefit of the trust gift and GST tax-free. This South Dakota Trust Company LLC All Rights Reserved 7

8 difference can be used to pay a life insurance premiums without using any of the trust principal. In the example above, this strategy could produce an insurance policy with a death benefit of $65,938,821, which can be purchased without any gift, estate or GST tax. For more information, please see our Promissory Note Sale publications. Real Estate: Existing residential real estate can also be transferred into trusts as a powerful alternative to the Qualified Personal Residence Trust (QPRT). A promissory note sale of a primary or vacation home to a defective grantor trust by the grantor, coupled with a fair market value rent of the home by the grantor, will generally produce better transfer tax results than a QPRT for most families. Consequently, this is a popular Dynasty Trust strategy allowing the home to stay in the family in perpetuity, if desired. Contrast the QPRT which is not a generation skipping transfer tax trust. Additionally, the grantor may get the home back outside of the trust at some point in the future with the promissory note sale strategy, if desired, which is not the case with a QPRT. Alternatively, many Dynasty Trusts are purchasing newly acquired residential real estate with trust funds as a trust asset for children and grandchildren to live tax free and asset protected. LLCs are generally utilized to facilitate the administration and operation of the real estate. These types of real estate strategies with trusts are both enormously popular. For more information, please see our Trust Planning: Residential Real Estate & Vacation Homes publication. South Dakota Trust Company LLC All Rights Reserved 8

9 ASSET PROTECTION: As a result of the litigious society in which we live, many families are looking to improve their asset protection planning. Trusts generally provide excellent asset protection. A self-settled trust is one of the more frequently used types of domestic asset protection trusts (DAPT). It is generally a discretionary irrevocable trust where the grantor or settlor is a permissible beneficiary. Not all states allow for selfsettled trusts. South Dakota is one of the more popular self-settled trust states in the U.S. If properly structured, creditors cannot reach the assets in a self-settled trust to satisfy the settlor s legal obligations. A self-settled trust can be drafted to either keep trust assets within the settlor s estate or remove them, which allows a wealthy individual the ability to establish a self-settled trust even South Dakota DAPTs are quite popular, and can provide four unparalleled levels of asset protection though that individual s gift and generation skipping tax exemptions have been fully utilized. The DAPT is generally structured as a self-settled tax neutral trust included in the estate combined with the dynasty trust as a third party trust excluded from the estate. Alternatively, the dynasty trust may also be established as a self-settled trust excluded from the estate. Establishing a tax neutral DAPT in a state like South Dakota to supplement the dynasty trust is not only advantageous (i.e. provides four levels of asset protection), but also easy and inexpensive ($1,500 set-up and $4,000 flat annual trustee fee). Offshore asset protection has lost momentum as a result of increased scrutiny and reporting requirements by the United States government (i.e., mainly FATCA & FBAR). Consequently, South Dakota DAPTs are quite popular, and can provide significant advantages for asset protection. Generally, the settlor would place 10% to 40% of their financial assets into a DAPT to protect those assets from a possible future lawsuit. The settlor is a permissible discretionary beneficiary of the DAPT, but does not generally use the trust for everyday living expenses, as this may weaken the asset protection as well as result in other possible issues. The four levels of asset protection that South Dakota (SD) DAPTs provide make SD one of the more popular and beneficial jurisdictions for DAPTs. Please note these four levels of protection apply to both the tax neutral DAPT as well as the DAPT dynasty trust and are listed below: South Dakota Trust Company LLC All Rights Reserved 9

10 Level 1 Trust (i.e. self-settled statute) SOUTH DAKOTA 2 year fraudulent conveyance standard Most states 4 years Prove transfer hinder, delay or defraud Specific creditor Clear & convincing burden of proof DOMESTIC ASSET PROTECTION TRUST Level 2 SD LLC Charging Order Protection as Sole and Exclusive Remedy Also sole member LLC statute Plus Other Unique Advantages: Automatic Privacy: Varies by state Trend is public (SD automatic total seal in perpetuity; Delaware seal for 3 years, other states case by case) Attorney fees: Reimburse trustee if trust is sued and trust prevails (Delaware and South Dakota) Beneficiary quiet: Keeping a trust quiet from beneficiaries (SD, DE, AK), even after grantor s death or disability, and not limited to a time period i.e. perpetual (only in SD) South Dakota pre-1983 RAP statute (Murphy case): Adds strength to DAPT dynasty trust vs. possible issues with non-murphy case states Level 3 Discretionary Interest Protection Not a property or enforceable right 4 levels of protection unique to South Dakota Level 4 Spendthrift Provision PRIVATE PLACEMENT LIFE INSURANCE (PPLI): The current high state income tax environment coupled with South Dakota s low premium tax have popularized Private Placement Life Insurance (PPLI), with the trend likely to continue in 2017, particularly with the way PPLI is now cost effectively priced. Additionally, many clients prefer not to deal with FBAR and FATCA reporting which is required by offshore policies. Consequently, they turn to domestic PPLI policies in South Dakota, due to South Dakota s low premium tax and other advantages. South Dakota s insurance premium tax at 8 basis points (8/100th of 1%) makes it the lowest in the nation for LLCs and one of the lowest for trusts (the national average is 200 basis points or 2%). South Dakota Trust Company LLC All Rights Reserved 10

11 Further, South Dakota has excellent and favorable insurance laws to go along with its nation low insurance premium tax. For example, South Dakota allows for in-kind distributions from both cash value distributions as well as death benefit payments; this helps with hedge fund lock-ups, etc. Also, South Dakota is the only state that allows for in-kind premiums and has an excellent insurable interest statute. And South Dakota s favorable insurable interest statutes also extends to LLCs. Hence, many of these advantages make South Dakota the jurisdiction of choice for PPLI. Generally, advisors utilize Private Placement Life Insurance for both newly formed trusts and entities, as well as with existing trusts. Alaska Arizona California Connecticut Delaware Florida Georgia Hawaii Illinois Massachusetts Minnesota Nevada New Hampshire New Jersey New York North Dakota Ohio Pennsylvania South Dakota Washington Wyoming 8 bpts. 200 bpts. 235 bpts. 175 bpts. 0 bpts. for Trusts; 200 bpts. for LLCs 175 bpts. 225 bpts. 275 bpts. 50 bpts. 200 bpts. 200 bpts. 350 bpts. 125 bpts. 210 bpts. 200 bpts. 200 bpts. 140 bpts. 200 bpts. 8 bpts. 200 bpts. 75 bpts. WAYS TO TAKE ADVANTAGE OF SOUTH DAKOTA S LOWEST PREMIUM TAX: 1. Establish South Dakota trust with South Dakota trustee (i.e., ) Purchase policy [or] 2. Establish a South Dakota LLC with SD LLC agent (i.e., ) Purchase policy WHAT IF EXISTING TRUST WITH SITUS OUTSIDE OF SOUTH DAKOTA?: 1. Set up a South Dakota LLC with South Dakota LLC agent (i.e., ) to purchase the policy [and] 2. Allocate SD LLC units to trust with situs outside of South Dakota PPLI is generally a universal life insurance policy; however, unlike regular life insurance, it is often designed to maximize savings and minimize the death benefit. Further, PPLI policies are now designed to be very cost efficient. Additionally, PPLI cash values generally may be directed by client s chosen investment advisor, and cash values accumulate income and capital gain tax free. And the investment advisor may be South Dakota Trust Company LLC All Rights Reserved 11

12 substituted for another advisor in the future. Furthermore, PPLI cash values are available tax free, using withdrawals of cost basis (total premiums paid) and very low cost loans. At the insured s death, the death benefit is payable tax free. Therefore all investment gains, dividends and interest are compounded without income tax. Assuming any reasonable lifetime investment return, the costs of the PPLI will be much less than the taxes that otherwise would have been paid. The PPLI cash values are as liquid as the underlying investments. Additionally, the cash values are generally in a separate account and are not subject to the general creditors of the life insurance company. Consequently, South Dakota s low state premium taxes, combined with its favorable insurance laws, have resulted in a dramatic increase in the administration of large domestic Private Placement Life Insurance policies via insurance trusts and LLCs in South Dakota. PPLI has become a very powerful planning strategy for COMMUNITY PROPERTY TRUST: South Dakota allows clients from across the country to establish a South Dakota Special Spousal Trust i.e. Community Property Trust ( SST ). South Dakota is one of only three states to allow individuals to opt-in to community property laws via trust. The SST is a powerful planning vehicle as it allows spouses to elect assets held by the SST to be treated as community property under IRC Section 1014(b)(6); thereby allowing for a 100% step-up in basis at the death of the first spouse. This is in contrast to non-community property states (i.e. joint property) where at the death of the first spouse, the surviving spouse does not receive a full step-up in cost basis. Instead, with joint property, the surviving spouse only receives a partial increase in cost basis. Consequently, only one-half of the joint property included in the gross estate pursuant to IRC Section 2040 would receive an IRC Section 2014 cost basis adjustment. There is no basis adjustment of the other half. For example, assume a husband and wife owned securities in a joint property state. Their basis in the securities is $5,000,000. At the time of husband s death, the fair market value of the securities was $10,000,000. Even if no estate tax return is required to be filed, wife s basis in the securities would be $7,500,000 (one-half at the original basis of $5,000,000, divided by 2 and one-half at the fair market value of $10,000,000 divided by 2). If the surviving spouse then sold the securities at fair market value ($10,000,000), they would expose $2,500,000 gain to capital gains tax. If, however, the husband and wife placed the securities into a South Dakota SST, then at the death of the first spouse, the asset would receive a step-up in basis to the current fair market value for the entire asset ($10,000,000). The then surviving spouse could sell the appreciated asset for the fair market value ($10,000,000) with no tax consequences (i.e. avoiding the capital gains that would of resulted without the full step-up in basis). South Dakota Trust Company LLC All Rights Reserved 12

13 Consequently, marketable securities with a low cost basis are generally an ideal asset for an SST. Though other asset types may be placed into the SST, including real estate. However, please note that for out of state real estate, it is recommended that the property is owned by an LLC, so that the real estate may be deemed personal property. This is important to assure that South Dakota law governs and not the state where the real estate is located. The South Dakota Special Spousal Trust provides clients a powerful planning strategy for 2017, particularly for spouses with low cost basis investment assets, all while integrating South Dakota s top rated tax, asset protection and privacy laws. For more information on South Dakota s unique Special Spousal Trust, please see our publication entitled South Dakota s Special Spousal Trust/Community Property Trust Income Tax Planning Opportunity. INTERNATIONAL PLANNING: International families are establishing trusts in the United States at a record pace. For example, many international families are now establishing foreign grantor and non-grantor trusts with U.S. trustees to provide the ultimate protection for their assets. These foreign grantor trusts typically hold offshore assets in offshore entities (i.e., British Virgin Island companies). Additionally, if there are no U.S. assets, there is no U.S. taxation, but they still retain all the benefits of a U.S. trustee including the fact that the U.S. is not a blacklisted trust jurisdiction and is a stable trust situs for international families. Some of the more specific and common reasons why international families are looking for U.S. trust situs and a U.S. trustee include: Improved U.S. trust and tax laws Blacklisting of offshore jurisdictions by resident country Political stability/protection of real estate from resident country Secrecy wall falling apart globally Ownership in residential and/or commercial property in the U.S. Purchasing U.S. life insurance Family members in the U.S. Marriage by a U.S. citizen to a non-u.s. resident Foreign resident coming to the U.S. to work or live Some of the popular domestic trust planning options for international families are: South Dakota Foreign Grantor Trust with a South Dakota trust company as the U.S. Trustee South Dakota Trust Company LLC All Rights Reserved 13

14 South Dakota Non-Resident Alien (NRA) Domestic Dynasty Trust South Dakota Stand-By Domestic Dynasty Trust Change of Situs, Foreign Trust to a South Dakota Trust South Dakota Pre-Immigration Domestic Trust Qualified Domestic Trust (QDOT) South Dakota Private Family Trust Company For more information, please see our South Dakota as a Situs for International & Cross Border Families publication. PRIVATE FAMILY TRUST COMPANY: The popularity of Private Family Trust Company s (PFTC) has greatly increased since the late 1990 s, and that trend continues into South Dakota s PFTC laws are considered one of the nation s best for regulated trust companies, while Wyoming is considered one of the nation s best for unregulated trust companies. Generally, the PFTC is a LLC that qualifies under state laws to be a trust company. It is owned and operated by the family and provides fiduciary and wealth management services to that family. Traditionally, families have chosen as their trustees: family members, advisors and/or commercial trustees with whom they have had personal, professional or business relationships with over the years. PFTCs allow them to still involve these family members, advisors and institutions in similar functions while serving the PFTC. The PFTC is also a way for family members to dramatically reduce their personal liability versus serving as trustees in an individual capacity. Typically the PFTC is located in a state with favorable trust, asset protection, tax and PFTC laws (i.e., South Dakota). These PFTCs generally enter into service agreements with the single family office (SFO) generally in another state. Alternatively, the SFO could also become a subsidiary of the PFTC or combined. In addition to the ease of creating and maintaining a South Dakota PFTC, there are several other compelling reasons to establish a regulated South Dakota PFTC; some of which are listed below: Exemption from SEC registration, since the PFTC is audited by banking division within the PFTC state Ability to establish SEC exempt business trusts and common trusts funds as an alternative to collective investment vehicles/partnerships, which are generally required to register with the SEC and limited to 99 investors Liability protection (family acts as trustee with a LLC/PFTC entity owned by family with directors and officers insurance protection versus family members serving individually as trustees with personal liability) South Dakota Trust Company LLC All Rights Reserved 14

15 Planning opportunities for deducting trust investment fees in light of the Knight case and Treas Reg (d) (final regulations issued 5/9/14; previously IRS Notice ) The final IRS rules requires that investment fees be separated out from the overall trustee fee and subject to the 2% Adjusted Gross Income limitation. PFTC s provide a resolution of successor trustee issues Convenience and accessibility Efficient controls overhead and provides economies of scale Improved family governance with LLC/PFTC structure Enhanced ability to properly administer and operate illiquid family assets in trust (i.e. LLCs, FLPs, real estate, oil and gas, etc.) Allows for holding large concentrations of stock both public and/or private assets Allows for extensive flexibility with asset allocations Privacy IRS ruled if properly established, the PFTC will not be subject to estate tax inclusion (I.R.S. Notice , PLR , PLR , PLR ) PFTCs allow for better informed trust distribution and investment decisions Enables families to efficiently work with their own Family Office and all outside product advisors (i.e., investment, insurance, etc.) Broad powers a PFTC is the only form a Family Office can take to provide fiduciary services directly to family members rather than just supporting the family s individual trustees or unaffiliated corporate fiduciaries A South Dakota PFTC has all the powers of a South Dakota money lending company and consequently all of South Dakota's great lending statutes Unregulated PFTCs can provide many of the same benefits of a regulated PFTC (e.g., increased privacy regarding trust matters, efficient family governance, liability protection, successor trustee resolution, flexibility in asset concentration and diversification, etc.) while also providing certain advantages over a regulated PFTC. South Dakota Trust Company LLC All Rights Reserved 15

16 For example, unregulated trust companies generally can provide regulatory simplicity and increased privacy. Furthermore, an unregulated PFTC does not have capital requirements, is not subject to state audits, does not need a charter, as well as provides greater flexibility in governance, a shorter formation timeline and increased cost savings in both establishment and operations. The question of whether to establish a regulated or an unregulated trust company is an important one. For more information, please see our Private Family Trust Company publications and Wyoming Unregulated Private Family Trust Companies Regulated Expertise for the Unregulated. CONCLUSION: South Dakota s favorable tax, trust and asset protection laws make it one of the top trust jurisdictions in the U.S. Please note, the January 2016 issue of Trusts & Estates magazine ranks South Dakota #1 in all categories. In fact, it is the only state that ranked #1 across all categories (i.e., tax, trust laws, private trust companies, premium taxes and asset protection). South Dakota Trust Company LLC All Rights Reserved 16

17 ÂfxÜä Çz YtÅ Ä xá Ç cxüñxàâ àçê Photo courtesy of the South Dakota Department of Tourism South Dakota Trust Company LLC 201 S. Phillips Avenue Suite 200 Sioux Falls, South Dakota Pierce McDowell (605) South Dakota Planning Company 10 East 40 th Street Suite 1900 New York, New York Al King (212) Trust accounts representing more than $35 billion in assets under administration No products of any kind purely trust administration services Work with all outside investment managers and custodians of the clients choice globally Work with most types of non-financial assets (both onshore and offshore) Excellent, timely and inexpensive reformation/modification and decanting statutes and processes Currently work with over 85 billionaire and 200 centa-millionaire clients 15% of clients are international families Private Family Trust Company (PFTC) relationships worth in excess of $82 billion ( Both Regulated and Unregulated PFTCs offered (WY office) 250 combined years of experience Highest ranked jurisdiction in the United States: #1 in all categories (January 2016) PRIVATEFAMILYTRUSTCOMPANY.COM DIRECTEDTRUST.COM For additional information on this or any topic, please contact us: South Dakota Trust Company LLC 201 South Phillips Avenue Suite 200 Sioux Falls, SD Phone: (605) Fax: (605) South Dakota Trust Company LLC 4020 Jackson Blvd Suite 3 Rapid City, SD Phone) (Fax) Info@sdtrustco.com South Dakota Planning Company 10 East 40 th Street Suite 1900 New York, NY Phone: (212) Fax: (212) IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, please note that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein. South Dakota Trust Company LLC All Rights Reserved 17