South Dakota Directed Trusts: Flexible and Powerful

Why South Dakota Leads in Trust Flexibility: Directed Trusts Explained

As we continue our series on why South Dakota is the best trust jurisdiction in the United States, today’s focus is on flexibility—and at the heart of that is the directed trust. We’ll compare this key feature to other states like Wyoming, Delaware, Alaska, and Nevada, and explain why South Dakota stands above the rest.

What Is a Directed Trust?

To start, let’s quickly recap the two primary types of trusts:

• A revocable trust, which allows the creator (grantor) to maintain control and amend it at any time.

• An irrevocable trust, which offers stronger benefits like asset protection, estate tax minimization, privacy, and multi-generational wealth planning.

Directed trusts operate within irrevocable trusts, and they dramatically enhance control and flexibility by dividing the traditional trustee role into specialized responsibilities. This prevents one person or entity from having to do everything—something that can be risky, overwhelming, or inefficient.

Traditional Trustee vs. Directed Trust Model

Traditionally, a trustee is responsible for:

• Managing trust assets (investments, property, etc.)

• Making distributions to beneficiaries

• Filing taxes and maintaining accountings

• Fulfilling all terms of the trust

However, managing all of these duties can be too much for one person or even a single corporate trustee. The directed trust model solves this problem by clearly assigning different duties to different roles—each with well-defined responsibilities and limitations.

South Dakota’s Directed Trust Structure

While any state can technically set up a directed trust, most do not have clear statutes or case law around liability and role definition. South Dakota, however, has the most comprehensive and well-defined directed trust laws in the country.

South Dakota law clearly outlines separate roles within a directed trust:

1. Administrative Trustee

2. Investment Trust Advisor

3. Distribution Trust Advisor

4. Trust Protector

5. (Optional) Family Advisor – Unique to South Dakota and deserving of its own discussion

Let’s look at the primary roles and why they matter.

1. Administrative Trustee

Usually a South Dakota-based trust company, this role handles the operational side of trust administration:

• Opening bank and investment accounts

• Compiling trust statements and accountings

• Filing tax documents and returns

• Executing distributions (when instructed)

They do not manage the investments—that’s assigned to another role.

2. Investment Trust Advisor

This is the person or entity responsible for managing the trust’s assets. They can:

• Buy, sell, or trade investments

• Leverage or reposition assets

• Oversee portfolio strategy

Often, the client appoints themselves to this role to maintain control over how the trust’s assets are managed, even after transferring ownership into the trust. Alternatively, they may appoint a trusted financial advisor with whom they’ve worked for years.

3. Distribution Trust Advisor

This person determines when and how beneficiaries receive distributions. They could be:

• A trusted family member

• A CPA, lawyer, or advisor

• An independent individual or entity

While the administrative trustee executes the distribution, the distribution advisor is the one who directs them to do so, providing a layer of oversight and protection.

4. Trust Protector

This role is responsible for oversight and long-term adaptability. A trust protector can:

• Replace trustees or advisors

• Amend trust provisions under specific conditions

• Ensure the trust evolves with changes in law or family needs

South Dakota’s laws ensure that each of these roles comes with clear responsibilities and defined legal protections, so there’s no confusion about who is liable for what.

Why This Matters: Control, Cost, and Clarity

The directed trust model offers a rare combination of:

• Maximum flexibility for managing and distributing assets

• Hand-picked roles, allowing clients to use advisors they trust

• Cost efficiency, as clients only pay for specific functions, avoiding expensive all-in-one corporate trustees

• Legal clarity, with South Dakota laws shielding each role from unintended liability

In contrast, other states may allow directed trusts but lack the legal precision and case law that makes the structure viable and safe. In those jurisdictions, unclear role definitions can expose trustees and advisors to shared liability, creating hesitation or legal risk.

Conclusion: Directed Trusts Make South Dakota the Clear Choice

Directed trusts are a powerful estate planning tool—but only when backed by robust laws and well-defined roles. South Dakota not only offers that framework, but it also allows clients to retain greater control, select trusted professionals, and reduce costs, all while enjoying the state’s other advantages like asset protection and privacy.

When it comes to flexibility, no state compares to South Dakota, making it the undisputed leader in directed trust planning.