Understanding the Basics of Advisor Directed Trusts – A Comprehensive Guide

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Some wealthy clients want to retain the value of a corporate trustee for situs, tax, and administration. Still, they also desire to work with their trusted financial professionals for investment and distribution decisions. The directed trust concept enables this. The trustee’s investment liability is formally eliminated and delegated to a third party in directed trusts. Here’s how that works:

Investment Discretion

Some clients want to give a trusted financial professional or a family member investment discretion in their trust. They may have nontraditional assets like a closely-held business, family limited partnership, LLCs or private equity interests that don’t fit within a corporate trustee’s parameters.

In these cases, we typically recommend a directed trust with an administrative trustee, a distribution advisor and an investment advisor. The executive trustee takes care of all the administration concerns, the distribution advisor focuses on distributing assets to beneficiaries efficiently, and the investment advisor oversees the investments. Separating the duties allows each party to specialize in their expertise and reduce overall liability. This is a key component of a client-centric approach to wealth management and estate planning.

Distribution Discretion

Often, wealthy clients would like to give their trusted financial professionals investment discretion in their trust, but they also may want to retain distribution control. This is where directed trusts are useful.

A directed trust allows for separating fiduciary duties by distinct professionals: an Administrative Trustee, a Trust Protector, a Distribution Advisor and an Investment Advisor. This enhances specialization within your family wealth structure and minimizes the risk of a failure to fulfill a role due to conflicting interests, liability concerns or other complexities in trust administration.

For example, a grantor acting as the Direction Investment Advisor can direct the corporate trustee to hold unique assets such as commercial buildings, oil/gas, ranches, and private equity that aren’t appropriate for the typical corporate trustee’s investment parameters.

Family Discretion

For many clients, one of the most significant value-adds of a directed trust is giving their family advisor control over certain elements of the faith. This may include distributions or investments. The trustee is still in charge of all the administration and investment fiduciary duties, but the advisor handles the specific elements they are best suited to handle.

Clients often name their long-standing advisor in their trust document as the “Direction Investment Advisor.” This helps to keep a relationship with the firm and provides flexibility for the family.

The advisor will often serve as the “Trust Protector.” This allows a trusted financial professional or family member to take on broad responsibilities and change aspects of the trust to address changes in situs, tax law or new guidance from the IRS.

Tax Discretion

Advisor directed trust allows clients to delegate investment management and distribution decisions to an independent party. The trustee’s role remains the same, with a fiduciary responsibility to abide by the trust document’s terms.

Many clients have unique assets, such as private equity investments, family limited partnerships and closely held businesses that do not fit well under a corporate trustee’s investment parameters. This is where the advisory-directed trust shines.

Directed trust companies are increasingly offering their services in a bundled solution where they have custody of the investment assets on behalf of their client. They charge a combined fee less than you would pay in an all-in-one bank trustee situation. Generally, the fee schedules include an investment advisory fee plus an administration fee.

Administration Discretion

Most wealthy clients desire a trusted advisor they know to manage their investment assets. However, their unique assets, such as family businesses, private equity investments, cryptocurrencies and other nontraditional holdings, may not fit within the investment parameters of a traditional corporate trustee.

A directed trust structure allows family members or advisors to assume decision-making responsibility for distribution and investment actions, removing the trustee’s administrative duties. This enables families to achieve their desired planning goals without compromising the trustee’s fiduciary duty.

Educating yourself and your clients on directed trust can be a valuable opportunity to strengthen relationships and grow your business. Contact estate planning attorneys in your area and make yourself available for seminars and CLEs.

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