Estate planning today often encompasses a variety of purposes, ranging from tax planning to asset management and asset control strategies. Many very high net worth families seek asset protection or divorce planning, multigenerational planning, privacy, control and flexibility of assets, and savings on income and estate taxes. Flexibility and control are increasingly key goals of estate planning. Fortunately, many states have changed their laws to adapt to today's changing estate planning landscape. The use of trusts directed within certain state jurisdictions is quickly becoming a planning solution that gives very high net worth families the control and flexibility they seek.
What is a directed trust?
To understand a guided belief, it is helpful to know how it differs from other beliefs. With most trusts, the trustee controls all aspects of the trust, including managing the investment of trust assets and making distribution decisions to trust beneficiaries.
A directed trust can be structured differently. This allows you to remove one or more powers from the trustee's control – such as investment authority and/or distribution authority – and give such authority to a designated individual instead, sometimes called ” trust adviser' or 'trust director'.
Who is involved?
In a directed trust agreement, a directed investment advisor is usually appointed to oversee the investment management of the trust assets. The investment management adviser may be the grantor – the creator of the trust – or someone else known to the grantor. A directed trust may also appoint a directed distribution advisor who makes distribution decisions, following the language in the trust agreement. The distribution direction advisor cannot be the grantor or anyone who will benefit from the trust, but can be someone the grantor trusts. This separation of administrator duties can make directed trusts so attractive.
A look at favorable jurisdictions
While increasingly popular, guided beliefs are not new. Delaware adopted the practice of using directed trusts in the early 1900s and modified their use in the mid-1980s. Directed trust law was created to accommodate wealthier families and, over the past 40 years, more states have changed their laws to attract more trust businesses. Currently, 17 states have adopted the Uniform Directed Trust Act and several states, including Delaware, South Dakota, Nevada, Alaska and New Hampshire, have the most flexible and favorable trust laws for high net worth families. But if your client is interested in using a directed trust and lives outside of one of these states, there's no need for them to pack their bags. Neither you, your client, nor their assets need to be based in a particular state to reap the benefits of estate planning. Only the trustee must be located in the state to take advantage of its trust laws.
These favorable state jurisdictions may offer other planning benefits:
- Significant benefits for dynasty planning and asset protection planning;
- Enhanced privacy;
- Ability to modify existing trusts; AND
- No state tax on trust income and capital gains.
The Power of the Protector
For another layer of control, flexibility, and security, you can use a trustee—a designated individual who can help ensure the grantor's goals are met. The concessionaire selects the individual for the role and spells out their competencies in the trust agreement.
A trust protector can potentially:
- Remove and appoint the trustee or successor;
- Change the legal position and governing law of the trust, which may be beneficial if the legal position and governing law in another state is favorable to the trust beneficiaries (eg, a change of situs to a tax-free state trust income);
- Terminate the trust (ie if the trust is small and uneconomic to continue);
- Amendment and modification of the trust agreement;
- Determine distributions from the trust; OR
- Name a successor trustee or co-trustee.
Remember that a trustee is not a trustee, but a power holder named in the trust agreement. A trustee can be a family member who is not a beneficiary of the trust.
Establishing a Directed Trust
Creating a trust is rarely a one-time process. By dividing responsibilities, creating flexibility and using a favorable jurisdiction, a directed trust can be a valuable tool for you and your family when creating an estate plan. Consider consulting with an estate planning attorney to learn how directed trusts and estate planning strategies can protect your wealth for future generations.
Chris Smith is Head of Trust Services at Morgan Stanley Wealth Management.