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.
The Importance of a Distribution Advisor in a Dynasty Trust
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 distribution 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 distribution advisor.
Directed Trusts and Bifurcation of Trustee Duties
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.
Another common use of the directed trust structure is to bifurcate traditional trustee responsibilities through the appointment of a distribution advisor who has the ability to direct the trustee when and how the beneficiaries will receive distributions from the trust based on the standards contained in the trust agreement.
Choosing the Right Distribution Advisor
Often the grantor will want a corporate trustee to be responsible for investment and administration of the trust assets but will want someone who is more familiar with the beneficiaries and their particular needs to decide when distributions should be made to the beneficiaries. This may be particularly true where the beneficiaries have special needs or substance abuse issues.
It is also a desirable tool in situations where the grantor has specific ideas about how and when distributions will be made to beneficiaries. The grantor can appoint a family member or trusted advisor to be the distribution advisor, who will have much more intimate knowledge of the family and their circumstances than the corporate trustee, to direct the trustee regarding trust distributions.
Preserving Grantor Intent Across Generations
A distribution advisor can be especially important if the grantor of the trust imposes lifestyle standards or other subjective standards as a condition of the beneficiary’s entitlement to distributions of income and principal of the trust.
Discretionary standards can be difficult for corporate trustees to administer due to lack of knowledge of a beneficiary’s lifestyle, and the expense required to obtain the necessary information. Appointing family members or a trusted professional as distribution advisor to make discretionary distributions to beneficiaries can provide for additional security that the trust will be administered according to the grantor’s intent.
Planning for Generational Continuity
Given the significance of the dynasty trust to the HNWI’s family’s generational wealth, it is important that the HNWI carefully consider whether a distribution advisor should be appointed, who is best suited for the role, and how future appointments will be made for successive generations.