Directed Trust? Why You Should Consider One
Written By: Daniel Gleich
“The time to repair the roof is when the sun is shining.” John F. Kennedy may have said that to inspire a nation, but he might as well have been talking to individuals focused on estate planning. Trusts are powerful estate planning vehicles that individuals use to manage, preserve, and transfer their assets for a variety of reasons. These reasons may include passing on generational wealth and assets, caring for particular needs, preserving current wealth, planning for eventual distribution, protecting entities from liability, and minimizing specific taxes.
Why a Directed Trust?
In a word, Directed Trusts offer flexibility to the trust grantor. When assets and requests are straightforward, a traditional trust may well serve the grantor’s purpose. However, in complex financial situations with many moving parts and considerations, a Directed Trust divides the responsibilities of the trust management. By designating specific trustees to determine courses of action in particular areas of expertise, a Directed Trust allows for greater control and oversight over the trust's administration, providing peace of mind for the trust grantor.
This arrangement also allows each individual involved in the trust administration to work in their area of expertise, as well as the ability to focus their complete attention on their responsibilities. Additionally, by limiting the advisor’s responsibilities to specific areas, financial professionals who may be serving in a fiduciary capacity may benefit from mitigated liability.
Roles and Advisors in a Directed Trust
Some common divisions of responsibility in a Directed Trust include investment managers, trust protectors, distribution advisors, among others.
See the Difference: Two Stories
People often wonder what the significance really is when they have the ability to select different people to administer distinct aspects of the trust.
Here are two scenarios illustrating the difference when someone has a traditional trust versus a Directed Trust.
Laura is a successful businesswoman with significant assets and a blended family. She has two children from a previous marriage and is currently married to a spouse with whom she has no children.
Laura decides to establish a traditional irrevocable trust to manage her assets and provide for her family. She designates a close friend as the trustee and includes detailed instructions for how she wants her assets to be managed and distributed.
Unfortunately, after a few years, Laura’s friend and trustee becomes ill and is no longer able to manage the trust effectively. Laura's family members are left to sort out the trust's administration, which becomes complicated due to the blended family and the various assets involved.
Laura’s family members are left without clear guidance on how to manage the trust's assets. They are compelled to seek assistance from outside advisors and attorneys to navigate the complex trust administration process, which results in significant costs, delays and acrimony.
Consider the inverse.
Michael is a successful serial entrepreneur with a complex financial situation, he has multiple business ventures and various streams of income, as well as several real estate holdings. Within his personal life he has two children he had later in life, both of whom are under 10 years old.
Concerned about preserving his wealth for his family and ensuring his children have not only financial security but also educational opportunities , Michael establishes a Directed Trust. The Directed Trust is established with Michael as the grantor, his chosen financial professional as the trustee, and designated advisors, to render decisions in specific areas, such as investment management, tax planning, and distribution. Michael also designates a trust protector, who has the authority to remove and replace the trustee or other advisors if necessary.
This arrangement helps Michael in several ways. The flexibility of assigning different and set roles means that everyone is well suited to execute their role, it’s within their area of expertise. Michael can now optimize his portfolio and preserve his wealth by working with finance professionals to execute his wishes. Additionally, this arrangement reduces liability. If any advisor doesn’t perform, it affects a limited aspect of the trust administration. Considering the other angle, financial professionals are more willing to take on trust roles when their task is focused and limited, and their liability mitigated.
With a Directed Trust established Michael can sleep well knowing his family will be cared for as well as his last wishes carried out with his vision.
What Should Individuals Do?
Estate planning is complex, and comes with a lot of emotional and financial stakes. Establishing a trust is a wise step for many individuals. Those with complex needs or a desire to maximize every aspect of the administration should consider a Directed Trust.
Want to learn more about establishing a Directed Trust?
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Disclaimer: All of the information contained in our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relied as, legal, tax, investment advice, statements, opinions or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.