Many older trust documents need more flexibility than a directed trust offers. In addition, family members often need help understanding the breadth of the distribution and investment-directed roles. That's why we're exploring the importance of advisor-directed trusts.
A typical directed trust structure includes an administrative trustee, a trusted advisor/advisory firm as the investment advisor, and a distribution advisor. Separating these duties enhances specialization and control, creating a high standard of care for your wealth plan.
Reduced Liability
Many financial professionals are reluctant to serve as fiduciaries because of the significant liability exposure accompanying such duties. The ability to split responsibility in a directed trust format (such as by naming a corporate trustee and an investment advisor) mitigates liability for those serving as fiduciaries because each party can focus solely on its area of expertise.
The administrative trustee focuses on the administrative aspects of the trust, like tax filing and statements, while the distribution advisor makes decisions regarding asset distribution to beneficiaries. In addition, the investment advisor can concentrate on purposefully managing the trust's assets, while the distribution advisor focuses on the specific needs and goals of the beneficiaries.
An advisor directed trust statute offers an effective tool to help families reduce their fiduciary liability while allowing them to select and hire family members or other non-independent advisors as investment and distribution advisors. However, the execution of directed trusts may have unintended estate, gift, and income tax consequences that should be carefully considered.
Flexibility With Investments
Some wealthy clients have unique assets that make sense in a trust but wouldn't fit within a corporate trustee's investment parameters. These include nontraditional investments like private equity interests, closely held businesses, family-limited partnerships, and real estate.
Advisors who want to offer their clients a new way of holding these assets often have the option to act as directed trustees along with their investment fiduciary duties. While many states' statutes treat both the director and the advisor as fiduciaries, they're usually separated in the trust document, and the directed trustee isn't required to perform the day-to-day tasks of a typical trustee charged with discretionary investment duties. This allows both parties to focus on their areas of expertise while reducing risk for the trustee through a streamlined process. It's also an attractive opportunity for advisors to create strategic partnerships and expand their business book with new clients.
Personalized Service
By separating the role of trustee from that of investment or distribution advisor, the Directed Trust model enables clients to reap estate planning benefits with tailored investments and increased flexibility in decision-making. Additionally, it can offer enhanced asset protection, efficient tax planning, privacy, and confidentiality.
Personalized service is the practice of tailoring products, services, and experiences to fit a specific customer's needs. It is the hallmark of good customer experience and an important competitive differentiator. Companies can implement personalization in many ways, including using a customer's name in communication and recognizing them through preferred contact channels. Using names transforms business interactions into personal exchanges between two humans and helps build customer loyalty.
Expertise
As your wealth grows and your structures become more complex, separating trustee duties allows for more flexibility, control, and targeted expertise. With a directed trust, you can choose to have a different team of advisors serve in distinct roles, such as administrative trustee, investment manager, and distribution advisor. This optimizes specialization and a high standard of care. Additionally, it helps to limit liability and fiduciary responsibility while providing peace of mind that your family's wishes will be carried out exactly as you intended.