Directed Trust Article

Trusts are an important component of effective planning for wealthy families. While most clients (and their advisors) put a lot of thought and effort into the formation of trusts, they often make quick decisions about naming the successor trustees when the client passes away or becomes incapacitated. There are many factors to consider when choosing a trustee. A trustee is responsible for a number of tasks, some simple and some complex. Either way, these tasks must be performed taking into account the best interests of the beneficiary (ies) and exercising the highest level of integrity. A trustee is considered to be a fiduciary, and as such is required to manage, preserve and administer a trust with a greater standard of care than he or she would exercise for his/her own benefit. Duties include acting only in the best interest of the trust and its beneficiaries, remaining impartial and managing assets with reasonable care. Commonly, but perhaps incorrectly, clients often expect a trustee to act not only as a trustee but also as an investment manager, even if the trustee is not properly qualified in those fields or has a conflict of interest. Furthermore, a corporate trustee is typically named in the event that capable family members or friends are no longer alive or able to serve. Oftentimes, corporate trustee companies will use proprietary products or in-house asset managers that may not necessarily be the best choice available. Moreover, such corporate trustees do not always have the freedom to recommend independent or external asset management solutions.

Traditionally, the role of a trustee was quite separate from that of an investment advisor, and we believe this may become more common in the future. By separating the trustee role from the investment advisory role, clients accomplish several things. The trustee can isolate fees for trust services (from investment advisory fees), an action that provides pricing transparency and efficiency. The trustee can select best-in-class independent asset management services, which may broaden the investment opportunities for the trust and avoid potential conflicts of interests for the trustee. The trustee can focus on the needs of the end customer and beneficiaries and remain neutral with respect to investment management revenues. The trustee can also harness the specific and unique capabilities of multiple asset management institutions. We advocate an “open architecture” approach to wealth management because we believe it clarifies roles, responsibilities and capabilities while helping to maximize accountability and price efficiency. However, not all corporate trustees are comfortable administering such trusts, either because they do not fit the company’s business model (which generates revenues from in-house asset management services) or because they are unfamiliar or uncomfortable with the laws and standards that provide isolation of fiduciary liability from investment management liability. Clients should thoroughly investigate whether their corporate trustee is willing to and capable of administering trust responsibilities separately from investment management services before appointing a corporate trustee in their trusts documents.

A “Directed Trust” allows the creator of a trust to separate the trust administration role from the investment management role. By doing so the trustee can significantly reduce the administration fees. The combined trust administration and investment fees are often less than the fees charged by a "full service trustee."

HOW A DIRECTED TRUST WORKS?

Grantor appoints the Financial Advisor under the controlling document, thus assuring that the primary client relationship between the client and financial advisor continues on.

The Financial Advisor is charged with all investment duties and responsibilities.

This eliminates the trustee’s duty to supervise specific investments and therefore divides the responsibilities.

The trust company is charged with all trust administration duties and held responsible for their proper execution.

Directed trusts easily accommodate multiple fiduciaries and non-fiduciary appointments like trust protectors.

If you would like to learn more about how your trusts are structured and explore the benefits of a Directed Trust, please contact your estate planning advisor.

By Matthew T. Shafer

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Raymond James & Associates we are not qualified to render advice on tax or legal matters.

Any opinions are those of Matthew Shafer and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete