Directed trusts are reshaping the landscape of estate planning, offering financial advisors new opportunities-and new responsibilities and risks-that differ sharply from traditional trust models.
What Sets Directed Trusts Apart?
-
Division of Duties: Unlike traditional trusts, where a single trustee is responsible for both administration and investment management, directed trusts split these roles. The trustee handles administration, while an Investment Director (often a financial advisor) takes sole charge of investment decisions.
-
Advisor Empowerment: As Investment Director, you are appointed directly in the trust document-not hired by a trustee. This appointment elevates your role as a fiduciary, akin to a trustee or executor, with direct responsibility for all investment-related decisions. There is no client agreement dictating your terms; the trust document and state law govern your role, powers, and fees.
-
Ultimate Investment Authority: In a directed trust, you have the final say on asset allocation, selection, and strategy. The trustee must follow your direction and has no oversight or veto power over investment choices. This is a significant shift from the traditional model, where the trustee must approve all advisor recommendations.
-
Responsibility for All Assets: Your fiduciary duty and investment responsibility extends to every asset in the trust, not just marketable securities. This can include real estate, artwork, or closely held businesses-assets that, in a traditional trust, would remain under trustee control. You must conduct thorough due diligence before accepting an appointment to understand the full scope of assets and associated risks.
-
Trust Document is King: The trust instrument governs every aspect of your role, from powers and duties to resignation and compensation. Unlike traditional trusts, where trustee signed investment policy statements or client agreements play a significant role, these documents may be irrelevant in a directed trust context. Advisors must scrutinize the trust document and applicable state law to ensure compliance and clarity.
Why Should Advisors Care?
-
Greater Flexibility and Control: Directed trusts allow grantors to choose their preferred investment manager and maintain continuity even if the trustee changes. This can strengthen client relationships and provide job security for advisors, as your role is independent of the trustee's fate.
-
Heightened Responsibility: With increased authority comes increased liability. Advisors must be vigilant about compliance, especially regarding unique assets, concentrated positions, and performance monitoring, as the safety net of trustee oversight is removed.
-
Strategic Opportunity: Advisors who master the intricacies of directed trusts can offer clients more tailored solutions and differentiate themselves in a competitive market.
Action Steps for Advisors:
-
Carefully review trust instruments to confirm your role and responsibilities.
-
Re-examine any investment-related documents-client agreements, IPSs, etc.-to ensure they align with the directed trust structure.
-
Verify the nature of trust assets with the trustee and prepare for investment oversight of unique holdings.
-
Enhance compliance processes to monitor risks that would otherwise fall to a trustee in a traditional trust.
Bottom Line:
Directed trusts are not just an alternative tool-they’re a different paradigm. Advisors who understand their unique structure and obligations can deliver greater value but must be prepared for the expanded fiduciary role and the complexities that come with it.
Related: Why Single Doesn’t Mean Simple: Estate Planning You Can’t Ignore
[1] This is a summary of the author’s article “One of These Things is Not Like the Other: Key Differences Advisors Need to Know Between Traditional and Directed Trusts.”