In Advisor-Directed Trusts, the grantor can allocate some or all of their assets to an investment advisor who manages their portfolio. They also give the trustee the authority to follow distribution instructions and hold legal title to the investment assets.
Directed Trusts are primarily used for investment accounts where the asset or assets generate income and require some degree of management. They also allow a client to keep their relationship with their long-time advisor.
The trust industry is undergoing a quiet revolution that is wresting control of assets away from large impersonal trust companies and back into the hands of independent trust companies, advisors and their clients.
As more families seek a more sophisticated wealth plan, they turn to directed trusts to grant flexibility, control and the standard of care required. Using South Dakota's clearest statutes, directed trusts allow grantors to split up fiduciary duties such as investment management, distribution and oversight, which reduces the liability and burden for both parties.
Advisor-Directed trusts provide the flexibility needed by clients to create a team of trusted advisors to develop comprehensive planning that can adapt as wealth changes and heirs grow. This client-centric value-add is a significant part of why advisors introduce their clients to directed trusts.
Clients may have a particular asset or situation to allocate to a specific advisor or relative. A directed trust allows them to do this.
The trustee manages the assets and controls distributions. In a delegated relationship, the trustee empowers investment decisions to an investment advisor but remains responsible for monitoring and evaluating the performance of that advisor.
An advisor directed trust allows you to maximize the skills of your most trusted advisors and family members where they are most suited, leveraging the benefits of South Dakota's trust, privacy, asset protection and tax laws. They can also ensure that your clients' legacy remains intact.
An advisor-directed trust's liquidity is often more significant than a client would find with a traditional bank trust company. For example, suppose the family business is the primary asset in a directed trust. When it's sold, the advisor will have more significant potential to capture the liquidated proceeds than they would with a traditional bank trustee.
Similarly, the liquidity of assets in a trust unique to the grantor can be increased by appointing a distribution advisor who understands the individual circumstances and needs of the family better than a corporate fiduciary. A distribution advisor also typically handles all the administrative aspects of trust administration, such as preparing tax returns and issuing statements.
Clients seeking a combination of flexibility and control with the skills of their trusted investment advisors may benefit from an advisor-directed trust. These clients often have unique assets that may not fit under the investment parameters of a corporate trustee but which they would like to hold in their trust under the guidance of their advisors.
Typically, these non-traditional assets are closely held businesses, limited family partnerships, LLCs and private equity interests. They may also include high concentrations of specific stocks, real estate and other types of assets that a corporate trustee would need help managing.
A client with complex wealth may find that a directed trust better fits their family's needs. It allows them to establish a US domestic trust without sacrificing the flexibility and control they need.
State statutes vary in the treatment and use of directed trusts. Still, some states like Alaska, Delaware, Nevada, New Hampshire, South Dakota and Tennessee offer strong executed trust laws that address the trustee liability issue.
In typical advisor-directed trusts arrangements, the client appoints an advisor or investment committee to oversee trust investments and hires an outside investment advisory firm to manage them. This approach is generally less costly than a full-service trust company because it reduces the cost of administration and investment fees.