One common theme among many clients is the desire to have control, which seems to increase as the client’s net worth increases. When bringing up the topic of estate planning with clients, their typical reaction is comparable to telling them they will have to quarantine for another two months: dread. To avoid this reaction, try leading with offering them the opportunity to control assets, so they can determine how and when they are taxed, when beneficiaries will receive assets and how assets will be managed over time. Offering a client the ability to control decisions regarding their estate planning may attract their attention and keep them involved in the process.
Directed trusts are one way of giving clients more control over their estate plan by letting them either play a key role in the trust or naming their advisers to play important fiduciary roles outside the control of the corporate trustee. Corporate fiduciaries have offered an element of control to wealthy families as far back as the early 1900s in Delaware. These families could craft estate plans using trust structures to accomplish estate and tax planning while also retaining control of the family businesses that were part of the assets inside the trust. Delaware was the first state to enact specific laws allowing a family to name a corporate trustee to carry out the specialized functions of administering the trust, and to also name independent advisers to take on the responsibility of other specialized functions, such as determining which assets should be held in trust or when and how a beneficiary should be given a discretionary gift from the trust.
Many people are familiar with Co-Trustee arrangements where a grantor may name several advisors to make the important decisions required to carry out the wishes of the grantor expressed in the trust document. Co-Trustees can delegate certain functions to one Co-Trustee, but all Co-Trustees are individually responsible for all the fiduciary duties outlined in the trust and by statute. Therefore, they must oversee any activities that are delegated to others to carry out. If a beneficiary of the trust is unhappy with those actions, all Co-Trustees are liable for any damages the beneficiary suffers due to the actions of just one of the Co-Trustees.
Trust documents can be complicated because the grantor may be trying to accomplish competing priorities that must be managed by experts who understand the nuances of the tax plans, the succession plans, the need to protect assets and the family dynamics involved with the estate plan, as well as the nuances of the federal and state laws that may impact those plans. Corporate trustees are often a good choice for sophisticated planning since corporate trustees are regulated and must have a strong operational structure in place to administer trusts. Corporate trustees also add an element of continuity, expertise and an objective point of view centered on a fiduciary duty to always act in the best interests of all the beneficiaries of a trust.
Trust planning and trust law have become more sophisticated and flexible in the last thirty years due to the industry trying to accommodate the needs and wishes of families. A Directed Trust gives the grantor more flexibility in planning his or her estate because, unlike a Co-Trustee arrangement where everyone has responsibility and liability, the grantor can name individuals to carry out certain isolated functions in the trust while taking advantage of the benefits of a corporate trustee for administration of the trust. These named individuals are either called Advisers or Directors in the trust.
A typical Directed Trust would name a corporate fiduciary as Trustee and then name the grantor as the Direction Investment Adviser. The grantor acting as the Direction Investment Advisor could then direct the corporate trustee to hold a variety of assets in trust that the corporate trustee would not have any responsibility or liability for managing. A corporate trustee is required to diversify assets in trust to make sure that both current income beneficiaries and future remainder beneficiaries are considered. However, if the grantor names themself the Direction Investment Advisor, he or she could direct the trustee to hold assets that may make sense to hold in a trust, but that most corporate trustees would have trouble holding if they have the investment fiduciary duty to manage the assets in the trust. In addition to investment accounts, assets that often trigger a need for a directed trust are unusual assets like a high concentration in a particular stock, real estate, small closely held businesses and expensive luxury items like jewelry, artwork, planes and boats.
Other fiduciary duties can be separated from the corporate trustee and given to any number of Direction Advisers. Another common role is a Distribution Direction Adviser that could be utilized when the grantor wants to have a lot of control over distributions and set lifestyle restrictions on the beneficiaries. For example, when the grantor does not want a beneficiary to get a distribution if that beneficiary is in jail or suffering from substance abuse, the grantor could elect a person who understands the grantor’s wishes and the family better than the corporate fiduciary to act as Distribution Direction Advisor. When Direction Advisers are named in a trust, the corporate fiduciary is required to follow their direction.
Like Delaware, many states have now enacted beneficial trust laws including Direction Trust Statutes. However, each state is different, and the laws have many nuances. When setting up a Directed Trust, it is important to consider the laws of the state where you want to establish the trust and also make sure that you have an attorney specialized in trust drafting in that state not only to explain the provisions, but appropriately draft provisions that are clear. It is important to choose the proper corporate trustee that understands the grantor’s plans, the language in the document and the applicable state’s laws. Setting up the trust while keeping all of these elements in mind will help to keep your clients’ control of their assets and their future plans for those assets in their hands, resulting in a happy client and thus, a happy advisor.
Heather Flannagan is Head of Trust Fiduciary and Client Accounting Services for Rockefeller Capital Management.