To learn more about directed trusts, distribution committees, and fiduciary duties of the company that handles the directed trust, learn about the investment choices of an independent trustee.
Table of Contents
Principles of Directed Trusts
Directed trusts serve the interests of the most vulnerable individuals. They allow multiple parties to control fees and expenses. This may not be the best option for fee-sensitive beneficiaries or settlers. Directed trusts also have benefits and disadvantages.
The most important thing to remember when drafting a directed trust is that a DTC should be clear and concise. Advisor Directed Trust must contain specific provisions that protect the trustees from liability for acts not in the beneficiaries’ best interests. A DTC must be able to price its administrative services without a surcharge to cover due diligence costs. A DTC should not be able to charge fees beyond the trust’s scope.
A trust’s trustee must carefully consider when and to whom trust distributions should be made. In some cases, trust distributions are taxable in California. The trustee must communicate with beneficiaries to determine how much the trust assets are worth. The trustee may also appoint a distribution committee to make these decisions. This committee will oversee the distribution of the trust assets. The committee should meet with the beneficiaries at least once a year to review the trust document.
The powers of a distribution committee are limited and can only be exercised with the creator’s consent. No one else can serve on the distribution committee unless it is a beneficiary with an adverse interest. Distribution committees are required to determine whether the person on the distribution committee has a substantial adverse interest in the trust and may only act if it is satisfied that the coholder does not have an adverse claim.
When selecting a directed trust company, advisors should remember that their client’s best interests may be at stake. While the fee structure and responsibilities of a directed trust company will vary depending on its size and scope, there are a few differences between them and unitary trust companies. While most directed trust companies do not custody investment assets, leading custodial providers provide this service. Wealth Advisors Trust Company is one example. Clients are still equipped with a separate trust statement.
While a directed trust company is not a traditional investment company, it is still a legal entity subject to the law. It operates in states with delegated trust statutes, although many don’t have as much recognition as more vibrant trust statutes. In a commissioned trust company, a trustee accepts direction and delegates investment functions, but the primary client relationship is maintained with the legacy advisor. Only a handful of trustees take risks in their business, such as accepting the direction of a third party.
Investment Choices by an Independent Trustee
Most directed trust companies do not hold investment assets. Instead, they delegate this responsibility to one of the largest custodial providers, Wealth Advisors Trust Company. The assets remain on the advisor’s custodial and trading platforms, allowing the trustee to access them. The advisor and the trustee have separate relationships, so they have no conflict of interest.
In directed trusts, the grantor appoints the trustee. The advisor is then responsible for investing the assets in the trust. Because of this separation of duties, the trustee has much more flexibility. For example, the advisor may hire an independent financial institution or an individual with no investment background, reducing the burden on the trustee. The client can still retain their current investment professional, although the investment decisions are made separately.