Probate & Trust Law Section Conference Manual ... - Minnesota CLE

investment committee and/or distribution committee. These individuals are employed by
the Special Purpose Entity to carry out the functions of the Special Purpose Entity.
i. It is very difficult, if not improbable, to acquire liability insurance coverage for
individuals serving as co-trustees, members of the investment or distribution
committee or trust protector. Most of these roles are subject to a gross negligence
standard; however, some insurance companies will provide coverage on a caseby-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 by-laws that allow for additional members to
be added or removed so that the entity can continue along with the trust. 99 These
entities have to be properly structured so as to avoid estate tax inclusion issues. 100
b. Many states do not have specific state statutes, such as Alaska, Nevada and Wyoming.
However, these states may allow families to establish Special Purpose Entities on a caseby-case
basis. 101 These entities must generally be exempt from regulated Private Trust
Company status and are typically special purpose type entities with limited defined
duties. 102
6. THE TRUST INSTRUMENT
a. New trusts are very easily drafted as directed trusts. Additionally, older trusts may be
converted to directed trusts as a result of state modification and reformation statutes. 103
This generally takes place if circumstances, which were not anticipated by the trust’s
grantor, have arisen and the modification would substantially further the trust or its
purpose, such as the desire for directed trust status regarding the administration.
i. In addition to reformation and modification statutes, several states have
privacy 104 and virtual representation statutes 105 to protect a family’s privacy and
provide sign-off by the future vested and/or contingent beneficiaries as part of the
modification or reformation.
b. Another strategy involves older non-directed Irrevocable Life Insurance Trusts (ILITs).
An insurance policy can generally be sold from the old ILIT to a newly drafted ILIT with
directed trust provisions. If properly structured, there should be no “transfer for value”
99 Information based upon the authors’ previous experience and informal discussions with advisors.
100 Same analogy as Private Family Trust Company Private Letter Rulings, see I.R.S. Priv. Ltr. Rul. 20053003,
200546055, and 200548035, see also I.R.C. §§ 2036, 2038, 2041 and 2514.
101 Information based upon the authors’ previous experience and informal discussions with advisors.
102 Id.
103 Alaska (ALASKA STAT. §§ 13.36.340 - 13.36.360); Delaware (DEL. CODE ANN. tit. 12, § 3313(f)); South Dakota
(S.D. CODIFIED LAWS § 55-3-24); Tennessee (TENN CODE ANN. §§ 35-15-410 – 35-15-416); Wyoming (WYO.
STAT. ANN. §§ 4-10-411 – 4-10-416).
104 Delaware Court of Chancery Rule 5(g); South Dakota (S.D. CODIFIED LAWS § 21-22-28).
105 Alaska (ALASKA STAT. § 13.06.120); Delaware (DEL. CODE ANN. tit. 12, § 3547); D.C. (D.C. CODE § 19-
1303.01 -.03); Illinois (760 ILL. COMP. STAT. 5/16.1); Nevada (NEV. REV. STAT. § 155.140); New York (N.Y. SURR.
CT. PROC. ACT § 315); South Dakota (S.D. CODIFIED LAWS §§ 55-3-31 – 55-3-38); Wyoming (Wyo. Stat. Ann. §§
4-10-301 – 4-10-305).
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