South Dakota’s 2016 Trust Law Changes - June 2016
South Dakota is the only state in the U.S. that has a standing Trust Law Task Force whose mandate is to ensure that the state’s laws reflect changes in trust law jurisprudence and practice. The 2016 session of the South Dakota legislature, as in previous years, approved most of the task force’s recommendations, which will become effective on July 1, 2016, through amendments and additions to current law. This year’s noteworthy trust law changes are explained below.
Statutory recognition is given to the role of a family advisor. Subject to the obligation to act in the best interests of beneficiaries, a family advisor has the power (i) to remove and replace fiduciaries and protectors; (ii) to determine what notifications should be given to beneficiaries entitled to receive information from a trustee; and (iii) to advise a trustee on matters concerning beneficiaries, accounting matters and reporting by the trustee. The family advisor may attend meetings with a trustee to provide advice on fiduciary and non-fiduciary matters.
Importantly, the family advisor is not a fiduciary and has no fiduciary obligations. Except in those instances where the advisor acts dishonestly or with an improper motive, the advisor will not be liable for his/her conduct as family advisor. In addition, the family advisor’s acts are not subject to judicial review except in circumstances involving dishonesty or improper motive.
A family advisor is entitled to compensation for trust-related services.
The office of family advisor can be contrasted with that of a Protector who, under South Dakota law, enjoys more extensive powers and discretions than a family advisor. In addition, pursuant to the provisions of a trust agreement, fiduciary obligations can be imposed on a Protector, who also will be considered to be acting in a fiduciary capacity to the extent that the Protector exercises the authority of an investment trust advisor or a distribution trust advisor.
South Dakota Special Spousal Trust
Nine U.S. states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are community property states. Under the laws of these states, property acquired by spouses during marriage is owned jointly by both spouses and is automatically the property of the surviving spouse upon death and otherwise must be divided upon divorce or annulment. By contrast, in non-community property states, joint ownership of property does not occur by operation of law and must be conveyed through proper deeds granting survivorship rights.
One of the purposes of the new spousal trust provisions is to allow spouses resident in non-community property states to convert ownership of their separately owned property into community property by transferring such property to a South Dakota Special Spousal Trust.
Property transferred to a spousal trust can receive community property treatment for tax purposes and have all of the community property attributes when elected, even though South Dakota is not a community property state. The trust, whether revocable, irrevocable or part of a qualified disposition, must follow the specified guidelines for its creation and may hold both community and non-community property. The new spousal trust provisions include specific guidelines for amending and challenging the trust.
Physical Presence Requirements for Public Trust Companies
South Dakota permits the establishment and operation of public and private trust companies. The former is permitted to serve as a fiduciary to the public at large; the latter is normally established for the benefit of a single family. To ensure that public trust companies have a physical presence in the state, this year’s legislation expands the presence requirements for maintaining a public trust company license.
Clarification of Power Holder’s Status
An amendment to an existing provision confirms that a power holder with a general or limited power is not a beneficiary of a trust solely due to the existence of the power.
The relevant amendment also confirms that the person holding a general or limited power cannot be compelled to exercise the power.
Trusts without Assets
A new provision confirms that a trust is valid under South Dakota law even though the trust does not hold any assets. The new provision addresses the situation where a trustee is appointed ahead of the transfer of assets to the trust; for example, the use in the international context of a pour over trust in advance of the death of a settlor of a foreign grantor trust. The provision also confirms that a trustee has no duty with regard to such a trust until it is funded.
Enhanced Confidentiality Protection
Current law provides for court records relating to a trust to be sealed on application. A new provision extends confidentiality protection automatically without the need for a court application. As with the existing law, only the trustor (settlor), trustee, a beneficiary or their attorneys have a right to view court filings relating to trust-related proceedings. Other interested persons have to successfully demonstrate to the court a need to have access to the court records. It is worth noting that South Dakota currently is the only state that permits court records to be permanently sealed.
Protections for Excluded Fiduciaries
South Dakota law recognizes that a fiduciary may be excluded from exercising certain powers under the terms of a trust agreement. Where such a restriction exists, the fiduciary has no liability for the actions of another fiduciary and no duty to review such fiduciary’s actions unless such a duty is imposed in the terms of the trust agreement. A new provision clarifies that if an action is brought against an excluded fiduciary on the grounds that the fiduciary actually acted in a fiduciary capacity, the plaintiff must prove such liability by “clear and convincing evidence.”
Expansion of Protector Powers
In contrast to the Uniform Trust Code, which affords Protectors three general powers, South Dakota now lists fifteen specific powers and discretions that a Protector may exercise. The three new powers added by this year’s legislation are: (i) the power to add beneficiaries from a class of individuals identified in the governing instrument; (ii) the power to add a charitable beneficiary from a class of beneficiaries identified in the governing instrument; and (iii) the power to exercise such other powers and discretions as may described in the governing instrument.
Clarification of Evidentiary Standard for Reformation Applications
South Dakota law allows a trustee or beneficiary to petition the court to reform the terms of a trust to conform to the trustor’s (settlor’s) intention if the failure to conform was due to a mistake of fact or law and the trustor’s (settlor’s) intent can be established. Prior law did not specify the standard that a petitioner had to satisfy in order for a reformation petition to be approved. The current provision in the law has been amended to provide that a reformation petition need only show “by the preponderance of evidence and without any preliminary showing of ambiguity” that the trust does not conform to the trustor’s (settlor’s) intentions.
Notice Date of Transfers to Asset Protection Trusts
The law regarding ‘notice’ in order to calculate the start date of the two-year look back period for qualified dispositions (sometimes referred to as a self-settled trust) is further clarified with regard to assets that are conveyed by a public record, such as a deed or a financing statement. The notice requirement will now be satisfied when the appropriate public filing is made. Notice of the transfer of personal property can be effected in the transferor’s county of residence, if within South Dakota, or in the county where the trustee maintains its principal residence or place of business within South Dakota. It is noteworthy that South Dakota’s two-year look back rule is among the shortest of all states which have asset protection trust legislation.