Chris Klug
Chris is a trusted attorney with extensive experience in domestic and international taxation, corporate planning, mergers and acquisitions, and estate planning. He guides clients through complex tax matters to deliver practical solutions.
High Net-Worth Individuals (“HNWI”) will typically have a sophisticated estate plan given the size of their estate and uniqueness of their assets; this often includes a dynasty trust. The dynasty trust typically nowadays has many roles to fill in addition to trustee, one of the more important roles is the Investment advisor. Since the dynasty trust carries a significant amount of the HNWI’s wealth and is important to their family’s generational wealth, it is important that the HNWI understands the role of the investment advisor.
Directed Trusts and the Shift in Decision-Making Authority
Most dynasty trusts are now drafted as directed trusts. A directed trust is a trust that removes one or more powers or discretions traditionally held by the trustee and vests that power or discretion in a person who is either a special trustee or not a trustee at all. The power or discretion can relate to investment decisions, management decisions, distribution decisions, and any other decision affecting the administration of the trust.
The most common form of directed trust is one that is directed with respect to investment decisions. Often grantors find it desirable to bifurcate traditional trustee responsibility through the appointment of an investment advisor that has the ability to direct the trustee with respect to the investment of the trust assets.
Why Grantors Appoint Investment Advisors
The most common reasons for the use of an investment adviser are:
(1) the trust will be funded with a concentrated position that a corporate trustee would be uncomfortable holding, or
(2) the grantor would like to appoint a trustee to administer the trust and be responsible for distribution decisions while allowing the grantor’s financial advisor to make all investment decisions for the trust.
It is important to note that the grantor can be the investment advisor during their lifetime, but if this is the case, it is important that the trust agreement carves out certain investment decisions for which the grantor has no authority over such as life insurance.
Planning for Long-Term Continuity
Given the significance of the dynasty trust to the HNWI’s family’s generational wealth, it is important that the HNWI carefully consider if there should be an investment advisor, who should be the investment advisor, and how does the appointment of the investment advisor occur for future generations of beneficiaries of the dynasty trust.