STRUCTURES FOR FAMILY OFFICES

© South Dakota Trust Company, LLC ± All Rights Reserved

‡ A

L

W. K

ING

III

S

OUTH

D

AKOTA

T

RUST

C

OMPANY

LLC

www.sdtrustco.com / www.privatefamilytrustcompany.com / www.directedtrust.com

201 S. Phillips Avenue y Suite 200 y Sioux Falls, SD 57104 y (605) 338-9170

10 East 40

th

_{Street y Suite 1900 y New York, NY 10016 y (212) 642-8377}

_{(South Dakota Planning Company)}

‡ P

IERCE

H. M

C

D

OWELL

III

‡ J

AMES

P

ALADINO

‡ M

ATT

T

OBIN

N

EW

Y

ORK

:

S

OUTH

D

AKOTA

:

‡ W

ILLIAM

M

URPHY

‡ R

OBIN

S

TEPHENS

4020 Jackson Blvd y Suite 3 y Rapid City, SD 57702 y (605) 721-0630

´8

NIQUE

M

ODERN

T

RUST

S

TRUCTURES

FOR

F

AMILY

O

FFICES

µ

1.

Family Governance/Involvement, Education, and Succession

2.

Control and Flexibility: ´'LUHFWHGµ7UXVWV7UXVW3URWHFWRUVDQGRU3ULYDWH)DPLO\7UXVW&RPSDQLHV

± U.S. taxpayers reported making $122 billion in nontaxable gifts in 2012 (Bloomberg)

ƒ According to the IRS in 1995, traditionally only 12.5% of all gifts were to trusts (changed dramatically)

± ´7UXVWVDUHQRORQJHUYHKLFOHVWKDWODZ\HUVDQGEDQNVFUHDWHWRNHHSZKDWLVULJKWIXOO\WKHEHQHILFLDULHVµ

± ´Directed TrustsµDQG´Private Family Trust Companiesµ

3.

Investment Planning: (Control & Flexibility)

± Modern Directed Trust with family investment committee:

ƒ ´,DPQRWVRFRQFHUQHGZLWKWKHUHWXUQRQP\PRQH\DVWKHUHWXUQRIP\PRQH\µ² Mark Twain

‡ Principal & Income;; Current vs. remainder beneficiaries

ƒ Proper asset allocation ² ´GLUHFWHGWUXVWµ

ƒ Ability to hold one asset without asset diversification ² ´GLUHFWHGWUXVWµ

4.

Family Management: Promotion of Social and Fiscal Responsibility:

± 0RGHUQ´'LUHFWHGµ'\QDVW\incentive trusts:

ƒ ´,ZDQWWROHDYHP\IDPLO\HQRXJKPRQH\VRWKH\GRVRPHWKLQJQRWOHDYHHQRXJKPRQH\VRWKH\GRQRWKLQJµ² Warren

Buffet

ƒ Remember names and values of great great grandparents

ƒ Videotape of family values and goals (transcribe)

ƒ Draft Family Mission Statement

5.

Asset Protection: (Self Settled Trusts, Third Party Beneficiary Trusts, Discretionary Interests,

LLCs/FLPs) ² Both settlor/grantor [and] beneficiaries

6.

Tax Savings: (Estate, GST, State Income and Premium Taxes)

Summary

of the Most Popular

'HVLUHVRID3HUVRQ·V7UXVW3ODQQLQJ

© South Dakota Trust Company, LLC ± All Rights Reserved

‡

Popular

trustee or co-trustee

choices

are:

²

Family members

²

Business colleagues (possible conflicts)

²

Friends

‡

70%

of wealthy families do not use corporate trustees (FOX)

‡

Biggest family trustee concerns

and

liability issues

:

²

Concentration of assets/lack of diversification

‡

Proper asset allocation

²

Business interests

²

Delegated trusts: Improper due diligence and monitoring of investments/trust assets

²

Distributions: Taxable versus non-taxable, independent decision makers for taxable, documentation

²

Environmental

‡

Personal liability

: Most states ² High standards

‡

Solution

´'LUHFWHGµWUXVWVOLPLWOLDELOLW\RIIDPLO\DQGIDPLO\IULHQGVDVILGXFLDULHVJURVV

negligence and/or willful misconduct standards

²

Option #1: Name SDTC as directed Administrative Trustee

²

Option #2: Option #1 working with a Special Purpose Entity

²

Option #3: Name PFTC as trustee and SDTC as trustee agent for PFTC

Who to Name as Trustee?

© South Dakota Trust Company, LLC ± All Rights Reserved

Three Modern Approaches to

Trust Administration:

‡

Option #1

: Directed Trust

‡

Option #2

: Special Purpose Entity

combined with Directed Trust

‡

Option #3

: Private Family Trust Company

(PFTC)

© South Dakota Trust Company, LLC ± All Rights Reserved

*Combine all functions

Î

Full Trustee

Option #1: Directed Trust

Example - Typical South Dakota

Directed Trust

Structure

with a

Trust Protector

Promoting Flexibility and Control:

Trust Protector

(Family, Friends or Advisors)

(Fiduciary, Not Trustee)

Distribution Committee

(Fiduciary, Not Trustee)

Investment Committee

(Family & Family Advisors)

(Fiduciary, Not Trustee)

Directs Administrative Trustee

Re Investments

‡Stocks & bonds

‡ Insurance

‡ Art

‡ FLPs

‡ LLCs

‡ Real estate

‡ Private equity

‡ Closely-held stock

Administrative Trustee

(i.e., Sitused in South Dakota)

‡ Ownership of assets

‡ Establish & maintain trust bank

account

‡ Prepare & sign trust tax return

‡ Trust statements

‡ Make distributions

‡ Receive contributions

‡ Take direction from:

Family Committee

Independent

Committee

Investment

Committee

Distribution

Committee

Powers include:

‡ Terminate the trust;;

‡ Modify or reform the trust;;

‡ Veto or direct trust distributions;;

‡ Add or remove beneficiaries;;

‡ Change situs and/or governing law of the

trust;;

‡ Appoints successor trustees & fiduciaries;;

‡ Replaces trustees and fiduciaries.

Directs Administrative Trustee

Re Distributions

(Tax sensitive

distributions)

(Non-tax sensitive

distributions)

5

© South Dakota Trust Company, LLC ± All Rights Reserved

Modern Directed Trusts:

‡

´'LUHFWHGµ7UXVWHH

² Trifurcates the traditional trustee role into an investment

committee, distribution committee and a directed administrative trustee:

²

Section 185 2

nd

_{Restatement of Trusts ² the directed administrative trustee is generally not liable for following the}

instructions of an empowered person (i.e., investment and/or distribution committees) within the trust instrument ²

State Statutes.

²

The administrative trustee has no discretionary investment (3

rd

_{party) duties regarding the trust. The selection of}

investment managers is generally the responsibility of the investment committee run by the family.

²

The administrative trustee takes direction from either a co-trustee, trust advisor, investment committee, or LLC

regarding both investments and distributions.

²

State statutes and the trust document exonerate the administrative trustee from taking direction for investments

DQGRUGLVWULEXWLRQV7\SLFDOO\´JURVVQHJOLJHQFHDQGZLOOIXOPLVFRQGXFWVWDWXWHVµ

‡

Please Note: 6RPHDGYLVRUVXWLOL]H´GLUHFWHGµWUXVWODQJXDJHZLWKRXWVWDWH´GLUHFWHGµWUXVWVWDWXWHVQRWDVSRZHUIXO

²

Great combination of independent administrative trustee, family, friends and family advisors

²

Provides flexibility and control regarding investments and distributions

²

Liability Protection: Gross negligence/willful misconduct standard for liability of family members serving as

co-fiduciaries

²

State Statutes ² Not all states have directed trust statutes (i.e., Alaska, Delaware, Nevada, New Hampshire, South

Dakota and Wyoming)

© South Dakota Trust Company, LLC ± All Rights Reserved

Selected Popular Directed Trust States

with No State Income Tax:

Alaska

Delaware

Florida

(Limited Directed Trust Statute)

Nevada

New Hampshire

South Dakota

Wyoming

South Dakota Directed Statute

(SDCL Sec. 55-1B2)

´$Q\ excluded fiduciary (i.e. directed

administrative trustee) is also relieved from any

obligation to perform investment reviews and

make recommendations with respect to any

investments to the extent the trust advisor has

the authority to direct the acquisition,

disposition or retention of any such

investment.µ

© South Dakota Trust Company, LLC ± All Rights Reserved

Advantages of a

Directed Trust:

‡

No requirement to diversify trust investments/assets

²

Can hold large concentration in one stock (public or closely-held)

‡

Ability to provide broad asset allocation models for trust assets, for example:

‡

Investment Committee responsible for initial due diligence and quarterly monitoring of investment assets

²

Directed Administrative Trustee does not have to interfere

‡

Excellent control and flexibility in both up and down economic cycles

Source: Harvard University Endowment,

Harvard Management Company, 2012

Source: Yale University Endowment,

Yale University Investments Office, 2012

Harvard University Endowment:

Yale University Endowment:

Domestic Equities 13% Foreign Equities 13% Emerging Marketings 13% Private Equities 19% Real Estate 12% Natural Resources 15% Publicly Traded Commodities 2% Domestic Bonds 5% Foreign Bonds 2% High Yield

2% Indexed Bonds Inflation-4% Private Equity 35% Real Estate 22% Absolute Return 18% Foreign Equity 8% Natural Resources 7% Domestic Equity 6% Bonds and Cash 4%

9

Duemler Case

(Directed Trust Statute)

Duemler v. Wilmington Trust Co., No. C.A. 20033 NC (Del. Ch. Nov. 24, 2004)

‡

8SKHOG´'LUHFWHGµ7UXVW6WDWXWH

‡

,QYROYHGD´GLUHFWHGWUXVWLQYHVWHGLQDQRQ-diversified portfolio with extremely risky

assets

² Portfolio that required diligent monitoring

‡

Administrative Trustee forwarded a prospectus to investment advisor/committee

(Duemler):

² To make a decision regarding one of the investments

² Investment advisor did not provide trustee with any direction

² Investment experienced a significant drop in value

‡

Court Held:

² ´'LUHFWHGµ7UXVWVWDWXWHXSKHOG

² Investment advisor must make decisions in isolation

² Without oversight from administrative trustee

² ,IWKH´GLUHFWHGµDGPLQLVWUDWLYHWUXVWHHZDVUHTXLUHGWRRYHUVHHWKHLQYHVWPHQWDGYLVRUWKHUROHRI

´GLUHFWHGµDGPLQLVWUDWLYHWUXVWHHZRXOGQRWZRUNEHFDXVHWKH´GLUHFWHGµDGPLQLVWUDWLYHWUXVWHHZRXOGEH

required to second guess the investment advisor.

© South Dakota Trust Company, LLC ± All Rights Reserved

Grantor as Investment Co-Trustee/

Investment Committee Fiduciary:

‡

References

:

± Jennings v. Smith, 161 F. 2d 74 (2

nd

_{Cir. 1947)}

± IRC 2036(a)(2) ² Right to designate who will enjoy the trust

property

± IRC 2038 ² 3RZHUWRDOWHUDEHQHILFLDU\·VLQWHUHVW

‡

Alternatives

:

± LLC ² Manager

± Directed trust investment committee: Grantor and/or family

‡

Possible Issues

:

± State income tax?

± Asset protection?

Example: South Dakota Investment LLC

Promoting Flexibility, Control and Ease of

Trust Administration regarding Trust Investments:

South Dakota Trust Company (SDTC) -

Administrative Directed Trustee

‡ Directed Trust:

‡

Administrative Trustee: SDTC providing trust administration in South Dakota

‡

Investment Committee: Family directs SDTC to hold investment management

LLC

‡

Distribution Committee: Family, family advisors, and/or SDTC make

distribution decisions

South Dakota Investment LLC*

(South Dakota Trust Company ² Member)

(Family members or other ² Manager)

Investment Management

Trust assets

Directed Trust

* Please note//&FDQEHDQ\VWDWH//&IRUDGPLQLVWUDWLYHSXUSRVHV8VXDOO\EHVWLI QRWDQ//&IURPJUDQWRU·VUHVLGHQWVWDWHIRUDVVHW

protection and tax purposes, and also generally best if LLC provides sole remedy charging order as the exclusive remedy protection

available in most of the Directed Trust states.

© South Dakota Trust Company, LLC ± All Rights Reserved

Alternative to Directed Trust -

CA & NY Traditional Delegated Trust:

‡

´'HOHJDWHGµ7UXVWHH

² Trustee delegates to outside investment advisors following the

procedures below:

‡

State Statutes ² Delegated Trust statutes available in all 50 states.

Family Trustee

(Personal Liability

)

_{Delegates Investment}

Management and/or Asset

Allocation

Investment

Manager(s)

and/or Consultants

CA Trust

Due diligence on the consultants providing the asset allocation as well as the selection of investment managers for the

trust (i.e., those being delegated to) ² Experience, track record, ADV, Compensation, Duration

Monitoring of both asset allocation and trust investment managers being delegated to ² FMV drop, large concentration,

investment, improper allocations

Trust Investment Policy Statement ² Drafted by both trustee and investment advisors & managers, and updated and reviewed

quarterly or at least annually.

High liability standard for personal trustee delegating and monitoring:

‡ Exoneration for testamentary trusts not allowed in many jurisdictions (Example: NYEPTL 11-1.7)

Summary: &RPSDULVRQRID´'LUHFWHGµ 

´'HOHJDWHGµ,UUHYRFDEOH7UXVW

Individual Delegated

Trustee

Corporate Delegated

Trustee

Directed Trust Structure with

Administrative Trustee

Family & Friends Can Control

Investments

Yes

Not Usually

Yes

Trustee Initial Due Diligence

and Quarterly Monitoring of

Trust Assets

High Level

(Need to document file)

High Level

(Need to document file)

Low Level

(Left to Trust Family Investment

Committee)

Family & Friends Can Control

Distributions

Yes

(Need Independent Trustee

for tax sensitive)

Not Usually,

Unless Co-Trustee

Yes as Distribution

Committee Fiduciaries

(Need Independent distribution

committee member(s) for tax

sensitive)

Personal Liability

(For Investment & Distribution

Decisions)

Yes, as a Individual Trustee

or Co-Trustee

(High)

Yes, as a Individual Co-Trustee

with Corporate Trustee

(High)

Yes, but very limited and only as a

fiduciary (not trustee) running the

investment and/or distribution

committees with gross negligence

or willful misconduct standard

Trust Protector

Not Usually

Not Usually

Yes

Power to Remove Trustee

and/or Fiduciary

Yes

Yes

Yes

State Income Tax

Yes

Yes

Generally, No

Asset Diversification

Requirements

Yes

Yes

No

Broad Based Investments

Allowed in the Trust

(Investment Flexibility)

© South Dakota Trust Company, LLC ± All Rights Reserved

Special Purpose Entity

(South Dakota LLC)

‡Board of Managers

‡Trust Protector

‡ Investment Committee

‡ Distribution Committee

± Unique South Dakota SPE Statute

±Not a trust company

‡ Registers with the South Dakota

Division of Banking

± D&O, E&O Insurance

±More ties to South Dakota situs

Directs:

‡

Trust Protector

‡

Investments:

² Directs directed

administrative trustee to

hold investment

management LLC

‡

Distributions:

² As determined, usually

discretionary

South Dakota Trust Company-

Administrative Directed Trustee

‡ Directed Trust

‡Administrative Trustee

Trust assets

15

Directed Trust

‡

Trust protector, investment committee and distribution committee are housed in an LLC

acting as agents or employees of the LLC to further tie the trust to the favorable situs state

and reduce their liability by purchasing insurance (D&O) as well as provide continuity.

‡

Other states: Delaware Trust Protector company, Nevada and Wyoming (all less formal, and

case-by-case)

Option #2:

Special Purpose Entity (SPE) or Trust Protector Company

(i.e., Delaware, Nevada, South Dakota & Wyoming)

(Combined with Separate Investment Management LLC):

South Dakota Investment LLC

(South Dakota Trust Company ² Member)

(Family members or other ² Manager)

Investment Management

Example: Special Purpose Entity

(South Dakota- Statute):

Unregulated Special Purpose Entities: The unregulated special purpose entity alternative is generally used in combination

with the "directed trust" structure. A recent trend is to establish unregulated entities such as a limited liability company to

place a liability umbrella over the heads of the individuals filling the roles of Trust Protector, Investment Committee and/or

Distribution Committee.

Serves the role of:

‡

Trust Protector;;

‡

Investment and/or Distribution Committees

[And]

‡

Provides liability protection through D&O/E&O to independent

advisors serving the family in these roles.

It is very difficult, if not impossible, to acquire individual liability insurance coverage to serve as committee members and/or

trust protector. However, some insurance companies will provide coverage to an entity established specifically for these

purposes, thus 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 LQGLYLGXDO·V death, disability or resignation. The entity

typically has by-laws that allow 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 so as to avoid estate tax inclusion issues. South Dakota is the only state

with a specific state statute for these special purpose unregulated entities. These entities must generally be exempt from

regulated Private Trust Company status and are typically special purpose type entities with limited defined duties.

© South Dakota Trust Company, LLC ± All Rights Reserved

Reformed/Modified

New York Trust

New York

´'HOHJDWHGµ

Trust

New York Law for

Interpretation, Construction,

Validity and

Administration

New York Law:

Construction,

Interpretation and

Validity

South Dakota Law:

Administration ²

‡ ´'LUHFWHGµ

‡ ´7UXVW3URWHFWRUµ

1.

Change Situs to South Dakota by naming a

South Dakota Trustee;;

2.

Upon change of Situs and appointment of

South Dakota Trustee, reform/modify to SD

Law for administration;;

To Save State Income Tax/

Modernize Administration to

Directed Trust & Trust Protector

Change of Trust Situs:

Reformation/Modification of Existing

Irrevocable Trust

Reform/Modify Existing Trust after change of trust situs

:

‡

Generally keeps original state law for construction, interpretation and validity purposes

‡

5HIRUPDWLRQPRGLILFDWLRQFDQQRWFRQIOLFWZLWKWKHVHWWORU·V´material purposeµRU´probable intentionµ

‡

Reform/modify administrative provisions or mistake of law or fact to IDYRUDEOHWUXVWMXULVGLFWLRQ·VODZ

±

Once trust situs is moved to favorable state with the appointment of a trustee within that state

‡

Example: Reformation/Modification process is generally quick and inexpensive in South Dakota (2 days-2 weeks and

$3,000)

‡

Grandfathered Generation-Skipping Trusts ² OK (cannot extend duration)

‡

Privacy (varies by state) ² South Dakota ² Total seal perpetuity

±

0RVWRWKHUVWDWHV´RSHQWRWKHSXEOLFµ

‡

Virtual Representation: Unborn beneficiaries represented

Example: Change of Trust Situs and Reformation/Modification:

© South Dakota Trust Company, LLC ± All Rights Reserved

Trustees or Beneficiaries Might Wish to Reform or

Modify an Existing Irrevocable Trust in Order to:

‡

Modernize

an outdated

trust

agreement

;;

² Change the administrative terms of the trust to add directed trust structure with investment and

distribution committees/advisors;;

² Add trust protector;;

‡

Save

state

income

taxes

;;

‡

Add

flexibility

regarding

appointment

of

trustees

;;

‡

Change

the

governing

law

applicable to the trust;;

‡

Improve

WKHWUXVW·V

governance

structure

;;

‡

Improve

tax

provisions

;;

‡

Change term/dispositive provisions

: Tax and asset protection advantages

² Change term: i.e., remove 1/3 of principal at age 25, 1/3 at age 30, and 1/3 at age 35 and make discretionary

for asset protection purposes (family as distribution committee directs administrative trustee as to

distribution).

² Cannot change trust duration (i.e., RAP).

© South Dakota Trust Company, LLC ± All Rights Reserved

South Dakota Law Trust

with South Dakota Trust Company

as Trustee

(Interpretation, Construction, Validity,

and Administration)

Trustee Decants

New York Law Trust:

(Interpretation, Validity, Construction

and Administration)

±

Trustee power to distribute assets

±

Appoint a South Dakota trust

company as trustee

Existing Trust

New Trust

Decanting

:

‡ If trustee has both statutory authority and appropriate discretionary power in the trust

document to distribute assets:

± Change trust situs

± Generally appoint a new trustee who then decants

± Distribute from old trust to new trust

± Generation-Skipping Trusts OK, but caution and cannot extend the duration beyond the existing duration.

Example: Change of Trust Situs and Decanting:

Please see

: ´'HFDQWLQJ$6WDWXWRU\&RUQXFRSLDµE\Rashad Wareh & Eric Dorsch, Trusts & Estates0DUFK´7UXVW5HPRGHOLQJµE\Rashad Wareh,

Trusts & Estates, August 2007.

Change of Trust Situs: Decanting from

an Existing Trust to a New Trust

Summary of Some of the More Popular

Reasons to Decant are as follows:

(Most are also reasons for Reformation/Modification/Restatement)

1.

Amending

administrative provisions

of a trust (adding Directed Trust provisions and/or Trust Protector)

2.

Modifying

powers of appointment

3.

Adding

spendthrift

protections

4.

Adding (or removing)

grantor trust provisions

5.

Qualifying a trust as a qualified

subchapter S trust

, a QDOT, an IRA conduit trust, etc.

6.

Combining

trusts for greater efficiencies

7.

Separating

trusts to allow investment philosophies to be "fine tuned" for beneficiaries

8.

Segregating

higher risk assets

9.

Avoiding state and local

taxes

10.

Reducing distribution rights

for Medicaid eligibility planning purposes

11.

Amending trustee succession

provisions, removing or replacing a trustee

12.

Extending

the term of a trust

13.

Changing the

governing law

provisions of a trust

14.

Correcting a

scrivener's error

or ambiguity

15.

Decanting a beneficiary's share of a trust to a

supplemental needs trust

in order to preserve or obtain eligibility for public benefits

16.

Combing

, segregating or otherwise improving

irrevocable life insurance trusts (ILITs)

and

credit shelter trusts

17.

Dynasty trusts

, although less common, are also excellent candidates for decanting

Source: "Decanting and Its Alternatives: Remodeling and Revamping Irrevocable Trusts" by Thomas E. Simmons South Dakota Law Review,

2010.

© South Dakota Trust Company, LLC ± All Rights Reserved

Option #3:

Private Trust Companies -

Introduction:

‡ A

growing

and

popular trend

among

families

is the

creation

of their

own trust company

to

serve

as

trustee

for their trusts.

‡ A

private trust company

can be

designed

to

meet

the

dynamic needs

of any

family

.

‡ Providing

continuity

,

formality

, and

structure

without disrupting

the normal

functions

of the

traditional family office

.

Example: Typical Modern PFTC ²

Promoting Flexibility and Control:

Step 1: Form a SD LLC and apply to SD Division of Banking to be a PFTC

±

Need office in South Dakota, one SD Board Member, and a SD Corporate Agent ² SDTC sits on the board and serves the role as corporate agent i.e.

providing office space to PFTC, collecting mail and answering the phone, service of process.

Step 2: South Dakota PFTC leases services from FO in another state.

Step 3: Trust administration can be done in South Dakota to benefit from South 'DNRWD·V favorable trust laws by hiring SDTC as trustee agent for PFTC [or]

administration can be done in another state (interstate administration allowed) by family office and its advisors. The latter will not garner the benefits of South

Dakota trust and tax laws.

Investment Committee

Corporate Agent

South Dakota Board Member

Administrative

Trustee

Distribution

Committee

Family

Independent

Non-South Dakota

Family Office

Subsidiary

South Dakota Private

Family Trust Company

(SD LLC)

SDTC as PFTC trustee agent

providing back office trust

administration

SDTC

Service

Agreement

© South Dakota Trust Company, LLC ± All Rights Reserved

What is a Private Family

Trust Company?

‡ A

Private Family Trust Company

(PFTC) is a

family-owned entity (e.g. LLC) authorized by state

or federal law to operate as a trust company serving

their family as trustee for family trusts.

‡

Structured like a corporation

:

‡ Shareholders

‡ Board of Directors/Board of Managers

‡ Investment Committee

‡ Distribution Committee

Family Members and

Trusted Advisors

Organizational Structure

and Ownership:

‡ PFTC

ownership varies

with

each family

experience Æ

Flexibility

:

² Organizational structure - Three primary entity choices for PFTC:

‡ ´&µ&RUSRUDWLRQ² Two levels of taxation

‡ ´6µ&RUSRUDWLRQ ² Pass through entity;; owner may build basis

‡ ´//&µ ² Most flexibility;; pass through entity

² Ownership structure:

‡ Senior family members outright

‡ Purpose trusts:

² Dynasty Trust provisions ² SD special statute

² SDTC as trustee

© South Dakota Trust Company, LLC ± All Rights Reserved

´3XUSRVH7UXVWµ6WDWXWH

‡

Definition

:

² Trust that exists for stated (non-charitable) purpose

² Established to care IRU´somethingµUDWKHUWKDQ´VRPHRQHµ

‡

Trust Enforcer

:

² $SSRLQWHGWRHQVXUHWKHWUXVWHHVFDUU\LQJRXWWKHLUREOLJDWLRQVLQIXOILOOLQJWKHWUXVW·VSXUSRVH

‡

Non-Grantor

: Typically

‡

Examples

:

² Pet Care

‡

Cryogenics?

² Maintain Family Property ² Antique cars, homes

² Private Family Trust Company

‡

Delaware

&

South Dakota

(perpetual Dynasty Purpose Trust statutes)

‡

SDTC

generally

serves

as

trustee

When Does a Family Create a Private

Family Trust Company?

‡

Net worth

:

² Generally ² dynamic and dynastic family with $200 million and above (some exceptions)

‡

Families

where

family members and individuals

are

named

as

trustees

for

IDPLO\·VWUXVWV

² Personal liability

‡

Families experiencing issues

with

bank/institutional trustees

‡

Allows

for a

sophisticated asset diversification

model (i.e., Yale Endowment,

FOX, IPI)

‡

Illiquid assets in trust

(i.e. closely-held stock, real estate, oil & gas interests,

gambling interest, etc.)

© South Dakota Trust Company, LLC ± All Rights Reserved

Advantages of the Family

of a Private Trust Company:

1.

Provides

control

and

continuity

to family trust administration - permanent trustee

‡

Resolution of successor trustee issues

2.

Better family

governance

² provides control over decision makers and succession

3.

Absolute

privacy

4.

Exempt

from registering as an

investment advisor

with SEC - entity has all the powers of an SEC

regulated entity without SEC registration

5.

May offer

tax efficiency

by locating in a state without state income tax (South Dakota) or capital gains tax

on trusts

6.

Increased

liability

protection ² important when recruiting family members and advisors to serve ² may

obtain D&O insurance for even greater protection

7.

Services can be

tailored

and

responsive

to specific family needs

8.

May provide

employment

opportunities for family members

9.

Provides excellent vehicle for complete

investment flexibility

unlike the rigidity of institutional corporate

fiduciaries

10.

Planning opportunities for deducting investment fees

(in light of the Knight case, a decision by the U.S.

Supreme Court)

© South Dakota Trust Company, LLC ± All Rights Reserved

Example - Overview of South Dakota

Application/Set-Up Process:

‡

Application Process and Set-Up

:

² 4-6 months (minimum 30 days once application complete);;

² Work with attorneys;;

² Consult and guide the application process;;

² Application is private.

‡

Application Requirements

:

² Capital ($200,000 in South Dakota);;

² $1,000,000 bankers fidelity bond and D&O coverage;;

² At least 3 directors (1 from South Dakota) ² no more than 12 total.

‡

Board members must attend meeting in SD with Division of Banking as part of

application process

‡

SDTC Services

:

Can assist with application and set up process

© South Dakota Trust Company, LLC ± All Rights Reserved

© South Dakota Trust Company, LLC ± All Rights Reserved

Necessary Steps to

Create a PFTC:

Investigation

Creation of entity and

Development of

Business Plan

Application

Meeting with

Division of

Banking

Charter

(versus

License)

29

Example ² South Dakota

Operational Requirements:

‡

Private Trust Company

must maintain a

minimum presence

and provide the

following:

² An office in South Dakota

² Staffed by at least one person

² Open during normal business hours

² All trust company records must be maintained in office

² Should support and promote the public good

¾ SDTC will provide all of these services as part of service agreement!

‡

Annual Shareholder Meeting

‡

Quarterly Meetings

² None have to be in South Dakota ² although usually a good idea

² If utilizing SD for tax situs, then should meet in SD and make all trust decisions in SD

‡

Trustee Agency Services

: SDTC can provide trust administration in South Dakota as

Trustee Agent of the PFTC

© South Dakota Trust Company, LLC ± All Rights Reserved

Private Family Trust Companies ²

Regulated Versus Unregulated:

Regulated

Unregulated

Best states

South Dakota, Nevada, New Hampshire, Wyoming

Wyoming, Nevada

Regulatory authorities

South Dakota ² excellent & experienced (since 1995)

Wyoming ² Okay, only 2 regulated WY PTCs (better with

unregulated)

Nevada ² New (2009)

New Hampshire ² New (2006)

Nevada ² None, unless problem (2009 Legislation)

Wyoming ² Minimal

State Banking Accreditation

(Conference of State Banking Supervisors)

South Dakota ² Yes

Nevada - No

New Hampshire ² No

Wyoming ² Yes

Nevada ² No

Wyoming ² Yes

Improves governance and protects individual

family members from liability

Definitely ² If structured properly

Less protection than regulated

Interstate Administration allowed

Yes, if reciprocity

Not generally available with unregulated

Investment advisors exemption

Yes (If state level of regulation acceptable to SEC)

No

Common trust funds & Business Trusts

Yes (proposals ² regulation key to SEC exemption)

No (proposals ² subject to SEC regulation)

Capital required

Yes:

SD $200,000 (Family & Commercial)

NV $300,000 (Family), $1,000,000 (Commercial)

NH $250,000 (Family), $500,000 (Commercial)

WY $250,000 (Family), $500,0000 (Commercial)

No ² EXWVKRXOGFDSLWDOL]HVRFDQ·WSLHUFHFRUSRUDWHYHLO

Note: Even with capital, protection not as good as regulated

Policy & Procedures Required:

Yes

No ² another opportunity to pierce corporate veil.

Tax sensitive trust distributions

More protection

Less protection

Summary: Based on the factors listed above, regulated trust companies are typically a safer option than unregulated regarding the possibility of piercing the corporate veil, as well

as other key reasons listed above.

Example - Trust Administration in

PFTC State (South Dakota):

‡

Trust administration

:

² Trust administration may be performed by trust company or delegated to third party such as the

family office

‡

South Dakota: Reciprocity with most states for trust administration

² Also, the administration may be delegated to SDTC² which will serve as a trustee agent to provide trust

administration. This arrangement helps establish nexus with South Dakota for tax, asset protection and

other purposes

‡

Nexus with South Dakota for tax and asset protection purposes

:

² Trustee must be domiciled in South Dakota

² Trust administration in South Dakota

² Official books and records must be kept in South Dakota office, which include:

‡

Trust documents

‡

Board minutes

‡

Reviews

‡

Other trust documentation

² Distribution decisions: Best if made in South Dakota and not client resident state

² Tax returns are reviewed and/or prepared and mailed from SD

© South Dakota Trust Company, LLC ± All Rights Reserved

Example:

Proposed South Dakota Private Family

Trust Company (PFTC) Structure:

Investment Committee

Corporate Agent

South Dakota

Board Member

Administrative Trustee

Distribution Committee

Non-South Dakota Family

Office: Manage

Trust Assets ²

All titled to the trust

Service

Agreement

South Dakota Private Family Trust

Company (SD LLC)

(Board of Managers)

Service

Agreement

SDTC Services

‡ Real Estate LLCs

‡ Closely-held voting stock

‡ Liquid Investment Accounts

‡ PFTC designated as investment

committee in trust document

‡ PFTC directs family office or

others to handle investment

management ² Per service

agreement

Dynasty Trust #1

South Dakota PFTC as Trustee

‡ PFTC would hire SDTC as trustee

agent for PFTC

‡ SDTC as PFTC trustee agent

would provide trust administration

for family trusts per service

agreement

‡ SDTC as trustee agent also helps

with trust situs

South Dakota

Dynasty Purpose Trust

‡ SDTC as administrative

directed trustee

‡ PFTC would be designated as

the distribution committee in

the trust documents.

‡ PFTC Distribution Committee

meets monthly, quarterly or

annually, and directs SDTC as

trustee agent for PFTC to

make distributions for all

trusts.

‡ Family (non-tax

sensitive distributions)

‡ Independent advisors

(tax sensitive

distributions)

Dynasty Trust #2

South Dakota PFTC as Trustee

Choosing a PTC Jurisdiction:

‡

PTC laws and experience:

²

Regulated

²

Unregulated

‡

State Division of Banking:

²

Experience

²

Conference of State Banking Supervisors (CSBS) Accreditation - (NV & NH not accredited) ² Only four states not

accredited

‡

&RUSRUDWHDJHQW·VH[SHULHQFH:

²

Documents in drawer vs. experienced mentor

²

Key for: SEC exemption, audits, etc.

‡

National vs. State Charter

‡

Trust laws:

²

Purpose trust statute (special Dynasty provision) ² Only South Dakota and Delaware

²

Unlimited duration Murphy case state for Dynasty Trusts: South Dakota & New Hampshire

‡

Versus term state: Nevada (365 years), Wyoming (1000 years) ² Issues?

²

Asset protection statutes: Best South Dakota and Nevada

²

Privacy statutes: South Dakota is the only state total seal privacy in perpetuity for all court matters involving trusts

²

Beneficiary quiet statute: South Dakota best statute ² 3URWHFWLRQEHIRUHDQGDIWHUFOLHQW·VGHDWK

²

Tax laws: All no income tax states

‡

Health of state economy: South Dakota balances its budget every year;; 2

nd

_{lowest unemployment rate in}

© South Dakota Trust Company, LLC ± All Rights Reserved

4 Ways Trusts Interrelate

with the PFTC?

1.

Main Purpose of PFTC

:

²

Serve as trustee of family trusts: Both South Dakota law and non-South Dakota law trusts

²

Including Dynasty Trust

2.

Some families

structure

trusts

(i.e., draft or reform/modify) to

act

like a

PFTC

with

Investment

and

Distribution Committees

(i.e., Directed Trusts)

ȥ

Special Purpose Entities

3.

Family Bank

alternatives:

ȥ

PFTC

ȥ

Dynasty Trust

ȥ

Special Purpose Entity LLC

ȥ

Other

ȥ

Combination

4.

Dynasty

Purpose Trusts

:

ȥ

Cares IRU´somethingµnot ´someoneµ

ȥ

Holds family PFTC

© South Dakota Trust Company, LLC ± All Rights Reserved

Importance of Proper Situs:

Trust Situs:

‡

Directed Administrative Trustee appointed in Alaska, Delaware, Nevada or South Dakota:

²

Newly drafted trust governing law of trust document

‡

Change of situs: Trust law governing administration (Alaska, Delaware, Nevada or South Dakota)

²

Location of trustee (Alaska, Delaware, Nevada or South Dakota)

²

Location of trust administration (Alaska, Delaware, Nevada or South Dakota)

²

Investment management: Usually done outside of Directed Administrative Trustee state

‡

If Family Office ² Service agreement

Private Family Trust Company Situs:

‡

2 levels of situs:

²

PFTC entity level situs:

‡

Accomplished by hiring a corporate agent in PFTC state

‡

PFTC enters into a service agreement with family office in another state

²

For investment management, asset allocation and other non-trust administration services

²

Family trust level situs:

‡

PFTC named trustee for family trusts

‡

Situs sensitive trusts* - Hire trustee agent in PFTC state to do trust administration

‡

If not situs sensitive trusts* - *HQHUDOO\UHFLSURFLW\WRGRDGPLQLVWUDWLRQLQDQRWKHUVWDWHLQFOXGLQJJUDQWRU·VUHVLGHQWVWDWH

* Situs sensitive trust examples: Dynasty Trusts, Asset Protection Trusts/DAPTs, change of situs trusts to save state income taxes,

desire to take advantage of other favorable state laws and statutes in PFTC state

© South Dakota Trust Company, LLC ± All Rights Reserved

Alaska

Delaware

California

New Hampshire

Nevada

South Dakota

Wyoming

Experience Modern Trust Laws Since ₁₉₉₇ Modern Trust Laws Since ₁₉₉₅ N/A Modern Trust Laws Since 2006

Modern Trust Laws Since 2005

Modern Trust Laws Since 1983

Modern Trust Laws Since 2003 Ranking* #3 (2007), #1 many categories (2010/2012), Top Tier (2014) #2 (2007), #1 many categories (2010/2012), Top Tier (2014) Not Ranked (2007, 2010, 2012, 2014) #3 (2007), Honorable Mention (2010), Rated #5 (2012), Second/third tier (2014) #9 (2007), #1 many categories (2010/2012), Top Tier (2014) #1 (2007), #1 all categories (2010/2012), Top Tier, #1 in all categories (2014) #9 (2007), Honorable Mention (2010/2012), Second/Third Tier (2014) RAP Unlimited Duration; Partially Follows Murphy Case -1000 year limit with

LPA (Possible Issues)

Unlimited Duration; Partially Follows Murphy

Case (Possible Issues with LPA)

USRAP (90-110 Years)

Unlimited Duration; Follows Murphy Case

Post 1986

365 years; ³7LPLQJ´2QO\ (Problematic? Issues?)

Unlimited Duration; Follows Murphy Case and pre-1986 (1983) (Excellent)

1000 Years; ³7LPLQJ´2QO\ (Problematic? Issues?)

Directed Trust Statute Yes Yes No Yes Yes Yes Yes

Trust Protector Statute Yes Yes No Yes Yes

Yes Yes

Modification/ Reformation/

Decanting Statutes Yes Yes Yes/No Yes Yes Yes Yes Virtual Representation Yes Yes No No Yes Yes Yes

Unregulated Entities allowed for Committees and

Protectors

Yes? Yes No No Yes? _(statute) Yes Yes

Non-Charitable Purpose Trust Statute

Yes (Pets Only)

Yes

(Perpetual) Yes Yes

Yes (Pets Only)

Yes (Perpetual- All Assets;

Broadest Statute) Yes

Self-Settled Statutes Yes Yes No Yes Yes Yes Yes

Fraudulent Conveyance

Period/ Discovery Period 4 Years/ 1 Year 4 Years/ 1 Year - 4 Years/1 Year 2 Years/ 6 Months 2 Years/ 6 Months 4 Years/ 1 Year Sole Remedy Charging

Order/ Exclusive Remedy: both LLC/LP

Yes Yes Only LP No Yes Yes Only LLC

Discretionary Trusts ± Not Property Interest Yes (Limited ± 3 Levels) Yes (Limited-1 Level) No No Yes (Limited- 2 Levels) Yes (Powerful - 4 levels) No

State Income Tax No No: non-resident _{Yes: resident} Yes No No No No

State Insurance Premium

Tax 10 basis points 200 basis points 235 Basis Points 125 basis points 350 basis points 8 basis points 75 basis points Privacy _{(Courts Option)} Open Seal 3 years, _{Then Open} Open Open _{(Courts Option)} Open Total Seal Forever Open

Waiver of Beneficiary Notice (Optional- Notice of Trust

Assets)

Yes, during the life of settlor or until incapacity

(Grantor option)

Yes, until death of settlor

(Beneficiary option) Yes (Beneficiaries Only) (Beneficiary option) Yes Silent

Yes, even after death of settlor (Very Flexible Statute)

(Grantor option)

Yes

Private Family Trust

Companies Yes, mainly commercial

Yes, But Favor

Commercial No Yes, Regulated (New)

Yes, Previously Unregulated Unless Commercial New Regulated Family?

Yes ± Excellent Statutes and Extensive Experience,

Regulated - Families

Mainly Unregulated

Accredited State Banking

Department** Yes Yes Yes No No Yes Yes

Domestic Trust Situs Comparison Summary: As of 9/2014

Please  See:    ³Perpetual  Trust  States:  The  Latest  Rankings´  by  Dan  Worthington,  Trusts  &  Estates:  January  2007),  ³Which  Situs  is  Best?´    by  Dan  Worthington  &  Mark  Merric,  Trusts  &  Estates:  January  2010.  ´Which  Trust  Situs  is  Best  in  

2012?´  by  Dan  Worthington  and  Mark  Merric,  Trusts  &  Estates:  January  2012;  

Disclaimer:

These informational materials are intended to provide and advise clients, prospects and

advisors with guidance in estate planning. The materials do not constitute, and should not be

treated as, legal and/or tax advice regarding the use of any particular tax, trust or estate

planning technique. South Dakota Trust Company, LLC and South Dakota Planning

Company, LLC and any of their related entities and/or Holding Company do not assume

UHVSRQVLELOLW\IRUDQ\LQGLYLGXDO·VUHOLDQFHRQWKHZULWWHQRURUDOLQIRUPDWLRQGLVVHPLQDWHG

Current strategies and techniques should be independently verified by the client and/or

SURVSHFW·VOHJDODQGRUWD[DGYLVRUVEHIRUHDSSO\LQJWKHPWRDSDUWLFXODUIDFWVLWXDWLRQDQG

should be independently verified to determine both the tax and non-tax consequences of

using any particular tax, trust or estate planning technique.

© South Dakota Trust Company, LLC ± All Rights Reserved

Al W. King III, J.D., LL.M., AEP (Distinguished), TEP

Co-Chairman and Co-Chief Executive Officer,

South Dakota Trust Company LLC

Al W. King III is based in New York City and the Co-Founder, Co-Chairman and Co-Chief Executive Officer of South Dakota Trust Company,

LLC (SDTC), South Dakota Planning Company, LLC (SDPC) and the Estate Planning Institute (EPI). South Dakota Trust Company is a

national trust boutique for the wealthy based out of Sioux Falls, South Dakota serving clients nationally and internationally.

Mr. King was previously Managing Director and National Director of Estate Planning for Citigroup. Mr. King was also the Co-Founder and

Vice Chairman of Citicorp Trust South Dakota. Mr. King also previously served as Director of Financial and Estate Planning for Coopers and

Lybrand in Stamford, Connecticut.

Prior to joining Coopers and Lybrand, Mr. King was a Vice President and Director of Financial and Estate Planning with Shawmut Bank and

the Northeast Director of Financial and Estate planning for Prudential-Bache Securities. Mr. King was also a Senior Staff Attorney/Financial

Counselor with the AYCO Corporation, a fee-based financial counseling firm.

Mr. King is the Co-Vice Chairman of the Editorial Board of Trusts & Estates Magazine. He has been a member of the Editorial Board for 20

years. Mr. King has been inducted into the National Association of Estate Planners & Councils (NAEPC) Estate Planning Hall of Fame as

an Accredited Estate Planner (AEP), Distinguished. In addition, Mr. King currently serves on the Board of Directors for NAEPC and is the

Chairman of the NAEPC Foundation Advisory Board. He is also a member of several groups and organizations including the Society of

Trust and Estate Professionals (STEP), the International Association of Advisors in Philanthropy (AiP), New York Philanthropic Advisors

Network (NYPAN), Fairfield County and New York City Estate Planning Councils, etc. In addition, he is frequently published and quoted by

several publications on various Estate Planning topics and addresses several professional organizations, special interest groups, and

general audiences on the subject of estate and financial planning.

Mr. King received a Bachelor of Arts cum laude from Holy Cross College, a Juris Doctor from Syracuse University Law School and an LL.M.

in Tax Law from Boston University School of Law.

Pierce H. McDowell III, J.D.

Co-Chairman and Co-Chief Executive Officer,

South Dakota Trust Company LLC

Pierce H. McDowell III is currently the Co-Founder, Co-Chairman and Co-Chief Executive Officer of South Dakota Trust

Company, LLC and South Dakota Planning Company, LLC. The former is a national trust boutique and financial advisory company

for the wealthy based out of Sioux Falls, South Dakota and the latter an estate planning consulting firm based out of New York City.

McDowell was formerly the Co-Founder and President/Chief Trust Officer of Citicorp Trust South Dakota. Due to South Dakota's

attractive trust and tax legislation, Mr. McDowell is responsible for servicing the trust and estate needs of clients across the United

States and world in the creation and movement of trusts to South Dakota.

Prior to joining Citibank, Mr. McDowell practiced law with Woods, Fuller, Shultz and Smith of Sioux Falls, and was formerly a Vice

President, Trust Administrator and Business Development Manager for both Norwest and First Banks.

Mr. McDowell is nationally known and frequently quoted by Forbes and other publications on the advantages of South Dakota trust

law. Mr. McDowell received the Citibank outstanding sales awards for both 1996 and 1998 as well as the 1997 Epic Award for his

Trusts & Estates magazine's articles on South Dakota Trust planning.

Mr. McDowell serves on the Board of the South Dakota Planned Giving Council. He has been appointed to the Philanthropy

Committee with the South Dakota State Bar Association. He is the Chairman of the South Dakota Bankers Association's Trust

Committee, a member of the South Dakota Bar Association's Real Property, Probate & Trust Law section and serves on its Probate

and Trust Committee and the Legislative Committee, a member of the University of South Dakota Foundation Board of Trustees,

as well as a former member of the Advisory Board for Trusts &Estates magazine.

Mr. McDowell received a Bachelor of Science from Arizona State University and a Juris Doctor from the University of South

Dakota.

© South Dakota Trust Company, LLC ± All Rights Reserved

Matthew Tobin

Managing Director/Legal Counsel

South Dakota Trust Company LLC

Matthew Tobin is the Managing Director/Legal Counsel of the South Dakota Trust Company, LLC in Sioux Falls, South

'DNRWD+LVSULPDU\UHVSRQVLELOLWLHVLQFOXGHPDQDJHPHQWRIWKHILUP·V3ULYDWH3XEOLF7UXVW&RPSDQ\EXVLQHVVEXVLQHVV

management, legal, human resources, and public relations/legislation. He also serves as President of SDTC Services, LLC

which provides consulting services to the nondepository trust company industry, and serves as Director of the SDTC

Foundation. In addition, Mr. Tobin also serves on the Board of Directors for numerous private and public trust

companies.

Mr. Tobin was formerly a member of the law firm Siegel, Barnett & Schutz, LLC where his private law practice focused on

general and business litigation. He also received considerable experience in negotiations, mediation, and alternate dispute

resolution. Prior to joining Siegel, Barnett & Schutz, Mr. Tobin was a partner in the law firm of Johnson, Heidepriem,

Miner, Marlow & Janklow, LLP.

Mr. Tobin attended St. John's University in Collegeville, Minnesota, and received his Bachelor of Arts degree in 1994 with

an emphasis in political science/government and economics. Mr. Tobin worked for United States Senator Thomas

Daschle in Washington, D.C. and in the field office in Sioux Falls, South Dakota.

Mr. Tobin attended the University of South Dakota School of Law and received his Juris Doctor in 1998. While in law

school, he received the Cali Award for Excellence, was a member of the Dean's List, was a member of the Moot Court

Board, and served as the director of the R.D. Hurd Volunteer Law Society. After graduation from law school, Mr. Tobin

served as a law clerk for the Honorable Roger Wollman, Chief Judge, U.S. Court of Appeals, Eighth Circuit, from 1998 to

1999. +HLVDPHPEHURIWKH6WDWH%DURI6RXWK'DNRWDDQGDFWLYHO\VHUYHVRQWKHEDU·VEXVLQHVVODZFRPPLWWHH

Mr. Tobin is married (Tara) and enjoys spending time with his wife and children. He also enjoys sports, traveling, hunting,

golf and coaching youth hockey.