Empowering Your Financial Future With Advisor-Directed Trusts
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Table of contents
Financial empowerment is about knowing your goals and planning how to get there. But many people are one costly car repair or unexpected medical bill away from disaster.
Unlike traditional bank trust companies, directed trust statutes formally define the separate duties and responsibilities of trustee and advisor. This helps to mitigate liability for both parties.
Flexibility
Most advisors and clients understand the value of a directed trust for their wealth planning strategy. However, many must realize a directed trust’s added flexibility for nontraditional assets such as closely-held businesses and family-limited partnerships.
This arrangement allows clients to choose trusted financial professionals as investment advisors and distribution advisors. This reduces the potential for conflict of interest and mitigates liability by limiting fiduciary duties to parties well-suited to their roles.
In addition, an advisor directed trust can offer enhanced flexibility for asset allocation and diversification while maintaining full control over investments, all under favorable asset protection, privacy, and tax laws.
Liability
Using the directed trust statutes of certain states, a client can split the decision-making between a trustee and an advisor. This allows the trustee to work collaboratively with a long-time trusted advisor while having an independent, reputable fiduciary perform the administrative function of trust administration. Directed trusts separate the investment management decision from the trustee’s liability, reducing the overall risk of a fiduciary relationship. For clients with unique assets like a family business, real estate, or other complex asset types, having this flexibility to appoint trusted advisors as the direct investment manager can be a big benefit.
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Taxes
Many clients seek more than a bank trust company that offers traditional delegated trustee services. They want to work with a directed trust provider that can offer them flexibility in managing their trust assets. Directed trusts allow clients to select different people to administer distinct aspects of the trust, such as investments and distributions. This allows each professional to focus on their expertise and reduces liability. For example, a directed trust may include an administrative trustee who takes care of all administrative concerns and an investment advisor who is responsible for the overall management of the assets. The distribution advisor then makes the distribution decisions to beneficiaries. This arrangement optimizes specialization within the wealth structure and mitigates liability for the financial professionals who serve in a fiduciary capacity.
Investments
Directed trusts offer flexibility with wealth planning strategies. They allow the trustee to separate elements like distributions and investments from the overall trustee responsibilities. This allows the trustee to focus on administrative duties while the advisor handles the investment management. Some directed trust statutes formally define the duties and responsibilities of trustee and advisor (asset manager) and allow the grantor to appoint both as fiduciaries. While the trustee retains liability for investment performance, it is generally minimal compared to traditional “bundled” trust services. Clients can choose their trusted investment advisors or family members to serve as the administrative trustee, trust protector, and distribution trustee. This can be particularly helpful for high-net-worth families with unique assets (e.g., commercial buildings, oil/gas & ranches). It also eliminates the need to pay the fees associated with an all-in-one corporate trustee service.
Estate Planning
A modern directed trust can help families reduce their fiduciary liability by separating investment and distribution fiduciary duties. It allows family members and advisors to act in a fiduciary investment capacity without worrying about the day-to-day administrative tasks of trusteeship.
Having a direct trust company serve as an administrative trustee reduces client expenses by allowing the distribution and investment advisor to focus on their areas of expertise. The administrative trustee takes care of tax filings, statements, and other administrative concerns, while the distribution and investment advisors concentrate on purposefully managing assets and maximizing the returns for beneficiaries.
