What Is An Advisor-Directed Trust?
17 November 2022
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Directed trusts allow you to allocate your trust assets so that a trusted advisor can fill the roles of an investment advisor, distribution advisor, and trust protector.
The administrative trustee is typically a trusted company. The distribution advisor distributes the trust assets to the beneficiaries, while an investment advisor manages the trust’s investments. You can also assign different advisors to oversee different asset classes.
Investing
An Advisor Directed Trust is similar to an IRA, but it is more flexible and allows more control over distributions and investments. These trusts also have reduced fiduciary liability, which can be advantageous if you have complex financial affairs.
A directed trust is particularly advantageous in states with unique trust laws. It gives investors more options for asset allocation and diversification and can also help protect your assets from creditors.
An Advisor Directed Trust is a type of trust that separates administrative and investment management functions. A trustee is appointed by the grantor under a controlling document, while an investment advisor is responsible for investing the trust assets.
It is important to note that investment managers can be transferred to another trustee, which is common with all kinds of trusts. However, advisors and trustees can continue to work with their legacy advisors if they prefer.
Asset Protection
Advisor-directed trusts allow the holder to delegate control of trust assets to a professional advisor. An Advisor may have broad powers, such as making decisions about investments and distributions.
They may also have the power to change the situation of the trust. Additionally, a Trust Protector may be able to divide or combine a trust. A Trust Protector may even direct the trustee to revoke trust assets.
Among the states with favorable tax laws, Tennessee has adopted the Prudent Investor Act and the Uniform Trust Code. These updates have made it easier for clients to establish directed trusts.
These statutes also give beneficiaries more flexibility and freedom to decide their funds. The resulting changes have led to a shift in trust management to the advisor-directed trust model. This trust arrangement involves a client and a team of dependable advisors. Each party is given a specific set of responsibilities and makes up the client’s trust advisory team.
Privacy
A directed trust combines the control and flexibility of a trust with the services of a trusted investment advisor or family member. While a directed trust can have similar benefits to a standard trust, the two professionals have distinct responsibilities, and the privacy of a directed trust should be upheld.
Taxes
A directed trust can be beneficial in many ways. It can be set up through a trusted company that advises clients. It can also be set up through a committee, which provides direction to the trustee. Many ultra-high-net-worth families have set up private trust companies to handle their trusts.
In general, directed trusts have an administrative trustee, a custodian, and an external investment advisor, who manages the trust’s investments.
Some states, such as South Dakota, do not require an investment advisor to manage a trust but instead require an advisor to supervise investments. Each state has its own specific rules regarding this type of trust.
One benefit of an advisor-directed trust is the reduced liability of the trustee. Unlike other trust types, the trustees have minimal liability for investment performance. This is similar to the relationship between a contractor and a subcontractor.
Independent Corporate Trustee
The role of an independent corporate trustee for advisor-directed trusts is critical, even though it is typically considered a “back office” function. This is because the administration function is critical and often forms an important part of the decision-making process for the grantor.
Many sophisticated individuals may be more concerned about the administration function than the investment advice, so the advisor must understand the key duties of a corporate trustee.
An independent corporate trustee for an advisor-directed trust is a corporate trustee with a fiduciary duty to manage the assets of a trust. They are responsible for the investment decisions made by the trust, while the trustee is responsible for the administrative functions of the trust.
A directed trust can be set up for unusual assets, such as a closely held business or expensive luxury items.
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