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.
Importance of Directed Trusts in High-Net-Worth Estate Planning
High Net-Worth Individuals (“HNWI”) will like the tax advantages of establishing a dynasty trust, but may be resistant to transferring substantial assets to a trust that is not managed by their trusted advisors. In many favorable jurisdictions, many of the responsibilities or duties of a trustee can be bifurcated and vested with others.
What Is a Directed Trust?
A directed trust is a trust that removes one or more powers or duties that are customarily held by the trustee and vests the powers or duties with another individual or entity. The power or duty can include investment authority, management authority, distribution authority, or any other decision affecting the administration of the trust. The key is that the administrative trustee does not have fiduciary liability for powers delegated to others.
The powers can be delegated in a directed trust, such that the administrative trustee’s only powers are to maintain trust records, prepare or otherwise arrange for the preparation of the fiduciary income tax returns and maintain an office for its business in the selected jurisdiction. The administrative trustee will not be liable for actions taken or not taken for the powers delegated to others, absent the administrative trustee’s willful misconduct.
Limited Liability of the Administrative Trustee
The law relieves the administrative trustee from the duty to monitor a delegated advisor’s conduct, consult with or perform services on behalf of the advisor, and warn the beneficiaries in circumstances in which the administrative trustee would have exercised the delegated power in a different manner. This will allow a HNWI to create a dynasty trust, while at the same time keeping their key professional advisers in prominent positions within the trust.
Role of the Investment Advisor
The investment advisor will have the authority to direct the investments in the trust. This will allow the grantor’s trusted financial advisor, broker, or other trusted professional to continue to be involved with the investment of the assets transferred to the trust. All of the investment decisions will be made by the investment advisor in accordance with the terms of the trust agreement.
Role of the Distribution Advisor
The distribution advisor will have the authority to direct, consent to, or disapprove of discretionary distributions from the trust. 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 beneficiaries’ entitlement to distributions of income and principal of the trust. Discretionary standards can be difficult for corporate trustees to administer due to the lack of knowledge of a beneficiary’s lifestyle, and the expense required to obtain the necessary information. Appointing a family member 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.
Role of the Trust Protector
The trust protector is a disinterested third party with the powers and discretions provided in the trust instrument. Common powers of a trust protector include the power to remove and appoint a trustee, trust advisor, or investment committee; power to modify or amend the trust instrument to achieve or to facilitate the efficient administration of the trust; and the power to modify the terms of a power of appointment created under the trust instrument. The scope of the trust protector’s authority over the trustee, the trust advisors, the trust beneficiaries, the trust investments, and the terms of the trust will depend on the trust protector provisions in the trust agreement.
Benefits of Directed Trusts for HNWI Families
A directed trust is key to a HNWI family’s desire to preserve control over family controlled businesses and recognition of new kinds of unique trust investments that corporate trustees often look to avoid holding in a trust. Corporate trustees with fiduciary duties to diversify trust assets and deal impartially between income beneficiaries and remainder beneficiaries welcome the ability to limit their liability through directed trusts.
A Modern Framework for Trust Administration
The result is the creation of a framework in relevant jurisdictions authorizing a grantor to include in trust instruments a new regime for the administration of specific assets. In addition to the traditional trustee, the new regime often include trust advisors or co-trustees with exclusive authority over specific powers.
It is important that a HNWI customize their trust to their family situation as the trust will hold substantial assets and will be a resource for the family for generations.