When considering a directed trust vendor, advisors should look for a strong client-centric process. Ask how they handle custody of investment assets, distribution advisory, and a protector role.
Directed trusts allow you to maximize the skills of your trusted advisors and family members by assigning each a specific role in the trust. This allows each party to focus on maximizing their function, improving the overall quality of your trust over time.
Adaptability
Adaptability is molding your thinking and actions to meet changing circumstances. This skill is critical to success in today’s working environment, where constant change and innovation are required. Being flexible to ideas, listening to other opinions, and pausing during stressful situations can help you come up with a better solution that would not have been your first thought.
An advisor directed trust gives clients control over their trustee and investment advisor responsibilities while maintaining the relationship with their current financial professional and retaining their portfolio strategy. They also offer a great solution for families with heavily concentrated assets, specialized investments, or family businesses.
Directed trusts can also help avoid conflicts of interest, fiduciary liability, and regulatory concerns. Separating the investment management and administrative tasks offers greater transparency and accountability for the trustee and investment advisors. This makes directed trusts a great planning tool for highly concentrated assets and specialized asset types such as private equity investments or family businesses.
Flexibility with Investments
Many financial advisors and their clients know that directed trusts offer flexibility unavailable from other trustee services. However, the hows, whys, and why-nots of directed trust can sometimes be difficult to grasp. A key component of the trustee’s fiduciary duty is to ensure that investment decisions are made in the best interests of beneficiaries. A directed trust structure allows the settlor to appoint an outside investment advisor. This independent advisor may be an investment professional, family member, attorney, or trusted friend. This flexibility allows the settlor to retain their relationship with their investment advisor and benefit from the expertise and guidance of a new professional. It also allows the settlor to participate more actively in their estate planning strategy, as they can distribute to beneficiaries as needed.
Tax Benefits
Some clients want their trusted financial professionals or family members to make distribution decisions rather than the trustee. A directed trust allows for this and separates duties, which aligns with the client’s goals and ensures that both parties focus on their specialties and create a high standard of fiduciary care.
Many large banks and trust companies consent to this trend, offering to act as administrative trustees but leaving the investment responsibilities with an outside firm that can manage investments. In this arrangement, the directed trustee company typically gets custody of the investment assets on its trading/custodial platform, which increases service and operational efficiency for advisors and clients. With these benefits, more clients are considering directed trusts. If you are a financial planner or wealth management advisor, consider discussing the option of an advisor-directed trust with your clients.
Specialization
As directed trusts continue to gain momentum in the industry, many estate planning attorneys are looking for advisors prepared to serve as investment fiduciaries under this model. This can be a great way to expand your practice with a new client type and establish strategic partnerships. The adaptability offered within a directed trust is also valuable for advisors as it allows them to focus on specific areas of the trust while maximizing their knowledge and expertise.
Grantors often name an existing advisor or advisory firm in the directed trust document to carry out the duties of distribution and investment trustee. In this scenario, the advisory fee is separate from the corporate trustee fee, often lower than a traditional bank trust company would charge for a comparable level of service. This may be a significant benefit of a directed trust, especially for clients with unique assets like real estate, family businesses, and more complicated asset types.
