Technical article
Do I Have to Diversify? When a Trust Can Keep the Family Business
South Dakota's law sets the prudent investor standard and tells the trustee to diversify.
Picture a founder with a manufacturing company worth most of what the family owns. The numbers are examples. She wants a trust for her children, and she wants the company kept in it, not sold. Her trustee is told to spread the money around. What does the law say?
The default rule
South Dakota's law sets the prudent investor standard and tells the trustee to diversify. Over 45 states use the Uniform Prudent Investor Act, which also frees a trustee from the decisions of an agent chosen and checked with reasonable care. A trust that holds one company is the opposite of spread out. The deed has to say so.
Three places that let the deed relax the rule
| Place | What the law lets the deed do | Limit |
|---|---|---|
| South Dakota | Trustee must diversify unless reasonably believing not to is better for the beneficiaries. If the deed allows or directs keeping a holding, or a specific concentration, no trustee is liable to a beneficiary for relying on it. A deed signed by the settlor or protector can also free the trustee from any duty to inquire into a closely held entity. | "Closely held" means the settlor, relatives and trusts together own at least 20 percent. |
| Delaware | The deed may expand, restrict or end the default investor rules, including whether the trustee must diversify. A direction to keep property is treated as waiving the duty to diversify for that property. | No protection for the trustee's own willful misconduct. |
| Cayman Islands (special trusts) | The ordinary duties to act prudently, avoid speculative investments and consider diversification can be excluded or restricted if carefully drafted. The trustee can be directed not to sell a business to diversify. | The trustee must include a Cayman licensed company or private trust company. Only enforcers, not beneficiaries, can enforce the trust unless it says otherwise. |
The Cayman material rests on law-firm guides, so it sits at tier C. The South Dakota and Delaware rows come from the statutes.
Keeping the vote
Many founders want the company and the vote. The 1972 Supreme Court case United States v. Byrum decided 6 to 3 that a man who kept the right to vote closely held stock held in trust did not thereby put it in his estate. The Court said he had no legally enforceable right to decide who would enjoy the income. His influence came from his position as majority shareholder.
Congress responded. Section 2036(b) of the federal code now says keeping the right to vote shares of a controlled corporation counts as retained enjoyment. A controlled corporation means 20 percent or more of the voting power in the three years before death.
What a bank says
A bank's marketing page says it generally asks that no single asset exceed 10 percent of trust assets. That is one trustee's practice.
You could
You could ask what percentage of the trust the deed lets one holding reach. You could ask who may sell the company and who may veto a sale. You could check how many shares carry the vote, because 20 percent is the line in two places above.
If you have built a business with your own hands, what would you want your trustee to do with it the day you are gone? Share it here. Someone else may find the words they have been looking for.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- South Dakota Legislature, statutes 55-5-8 and 55-5-9 (A)
- Delaware Code Online, 12 Del. C. 3302 to 3304 (A)
- Mourant guide to Cayman STAR (special) trusts, February 2026 (C)
- Supreme Court of the United States, United States v. Byrum, 1972, via Justia (A)
- Cornell Legal Information Institute, 26 U.S.C. 2036 (A)
- Uniform Prudent Investor Act summary (B)
- J.P. Morgan trust myths article, December 2025 (C)
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