South Dakota was the first state and is one of only two states that recognize Special Purpose Entities by statute.

This has distinguished South Dakota as one of the most popular states for these types of entities. 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 but still must register with the South Dakota Division of Banking, which only further ties the entity to South Dakota. This can be very beneficial for income tax, asset protection and purpose trust situs. 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 utilization of a Special Purpose Entity may also maximize trust situs for income tax, asset protection and trust law purposes. Please see the example below:

Special Purpose Entity
(South Dakota LLC)

  • Board of Directors
  • Trust Protector
  • Investment Committee
  • Distribution Committee
  • Not a trust company
  • D&O, E&O Insurance
  • Unique South Dakota Statute
  • More ties to South Dakota Situs


South Dakota Trust Company

  • Administrative Trustee

South Dakota Investment LLC
(South Dakota Trust Company® – Member)
(Family members or other – Manager)
Investment Management

The Special Purpose Entity alternative must generally be used in combination with the “directed trust” structure. 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 (i.e., employees or agents) 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 as 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.

Consequently, South Dakota was the first state (and is now one of only two) with a statute recognizing these unregulated Special Purpose Entities. As previously discussed, these entities are not Private Trust Companies have limited defined duties. In addition, they must work in conjunction with a qualified South Dakota “directed” administrative trustee (i.e., SDTC) and register with the South Dakota Division of Banking.