Retain Flexibility and Control With Your Advisor Relationships While Gaining the Long Term Consistency of a Corporate Trustee
Affluent families utilizing trusts to protect their assets and to successively plan for future generations is not only prudent but is also necessary. However, many high-net-worth families carry warranted concerns about losing control of their assets by placing them in a trust. Since the mid-1980’s, a handful of states of adopted directed trust statutes, including Nevada, for this reason.
What is a Directed Trust
A directed trust names independent advisors to carry out essential functions when executing a trust, directing the corporate trustee and removing these duties from the corporate trustee. Typically, investment advisors, distribution advisors, and trust protectors are named as directed trustees.
Advisors may be institutions separate from the corporate trustee and may be established in a different state or even country than the corporate trustee. In many instances, family members also carry directed trustee duties such as distribution trustee and trust protector.
Common Use Cases for Directed Trusts
- Direct voting stock in a family-held business. In this case, a family member is often appointed as a directed trustee.
- Family holds a significant amount of their assets in a single investment sector such as real estate or complicated asset types. Often, an investment advisor or firm is named as the directed trustee in this case.
- A family has beneficiaries with special needs wanting a distribution advisor to make decisions in their best interests. While often a family member is named as a directed trustee, professional distribution advisors are utilized as well.
- A trust protector is named to remove and appoint trustees in the best interests of the intentions detailed in the trust document. A trust protector may remove and change a corporate trustee.
- A trust protector may also make decisions regarding appointing and changing directed roles per the intentions of the trust document.
- A trust protector may direct investment decisions as well as appoint directed investment advisors.
- A trust protector may also appoint beneficiaries and direct and veto beneficiary distributions.
- A trust protector may amend a trust, per the terms of the trust document.
In many Nevada directed trusts, the corporate trustee becomes an administrative trustee carrying out record-keeping, tax return preparation, and custody duties for the trust.
Directed Trusts Versus Delegated Trusts
Nearly all U.S. trust jurisdictions support delegated trusts while only a few support directed trusts. So how are they different?
What is a Delegated Trust
In a delegated trust, the corporate trustee delegates investment responsibilities to investment advisors in behalf of the trust. The trustee is often liable for the outcomes of the delegated advisor’s decisions. Therefore, the trustee monitors investment decisions closely.
A delegated trust often not the right tool for heavily concentrated assets and specialized or complex asset types, such as family businesses, hedge funds, private equity investments, and cryptocurrencies.
Directed trusts allow qualified and appropriate investment advisors to direct decisions and removes the culpability from the corporate trustee.
Directed Trust Considerations
At Crawford Trust, we believe directed trusts are a robust planning tool that many families may gain significant benefits when utilizing. Below are a few items to consider when drafting directed terms in a trust.
- How will naming a family member to make distribution and/or investment decisions impact family dynamics? Often, decision-making family members create tensions with siblings that do not carry such responsibilities, especially regarding distributions.
- When naming a family member to fulfill directed responsibilities, do they understand the breadth of what the duties entail. Both distribution and investment directed roles often have significant duties and take more time than a family member realizes. A trust protector may modify and relieve the family member of the responsibilities.
- When naming an investment advisor to a directed role, what is the successive plan for the role? In Nevada, with dynasty provisions, a trust may remain in place for up to 365 years and extended when appropriately drafted.
- If appointing a family member in investment capacities, removing the duties from a corporate trustee because of cost concerns, is the family member qualified to make such decisions? Many family members hire third-party professionals carrying significant costs to manage thei duties. The types of assets should be considered when directing investment responsibilities.