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Over the last 30 years, you and your investment advisor have painstakingly built your portfolio from the ground up, carefully researching and evaluating each holding. Together, you've made adjustments here and there as circumstances and market conditions change. He knows your financial history intimately and understands your objectives and tolerance for risk. You trust him implicitly and know he would never make an imprudent move.
But now it's time to for some serious estate planning, and you need to establish a trust to both preserve and continue to grow your hard-won assets for generations to come. Unfortunately, your financial advisor doesn't have the tax, legal, and/or custodial expertise necessary to administer a trust, and yet there's no one else you trust with the management of your personal financial assets.
So how can you set up a trust for future generations and maintain the kind of performance you've come to expect? One option is by establishing a Direction Trust.
Basically, a Direction Trust allows you to establish any type of revocable or irrevocable trust that separates the responsibilities of trust administration from investment management. One entity may act as trustee and handle the fiduciary responsibilities of the trust, while another, separate party may manage the assets held within the trust.
New Trusts & Existing Revocable Trusts
The direction feature is best utilized when drafting a new trust or amending an existing revocable trust. That's because the language can be included in the drafting process to provide for the separation of investment management and fiduciary responsibilities.
New language can also be added to an existing revocable trust that allows a specific person or entity - known as the selected investment advisor - to name a new trustee and/or investment advisor. The language typically does not actually name the new parties - only the person or entity that has the power to make these selections. The trust may, however, include recommended guidelines for selecting a new trustee or advisor, such as a minimum number of years in operation and/or assets under management.
In addition to naming the selected investment advisor, the trust may also name an alternate investment advisor to take over this responsibility in the event that the primary person can no longer function in this capacity.
With a Direction Trust, the trustee is not responsible for the management of the trust's assets. As such, the trustee's fees are generally discounted to reflect this reduced liability. Fees are paid separately to the asset money manager pursuant to terms negotiated separate from the trust.
In all situations, whether a revocable or irrevocable trust, the assets remain in the custody of the trustee. Even if the management of the assets is directed by an outside financial advisor, actual trades are executed by the trustee - either by seeking out the best price on its own or through the services of the money manager's firm.
Existing Irrevocable Trusts
Existing irrevocable trusts typically do not have the required language to permit a Delaware Direction Trust. In these cases, the trustee is most likely to be responsible for the discretionary management of the trust assets. When the trust document empowers the trustee to engage outside professionals/advisors, including investment managers, the trustee may generally engage these services upon the request and with the written consent of the trust beneficiaries.
The Delaware Advantage
While other states may allow for the direction of trust assets by an independent investment advisor, the state of Delaware offers a unique combination of benefits best utilized by a Direction Trust. These benefits include:
When it comes to management and fiduciary responsibility, it's important to place your trust in the hands of a professional trust administrator with expertise in tax, administrative, and custodial matters. But thanks to the flexibility of a Direction Trust, you may also benefit from the coordinated efforts of the trustee and a longtime financial advisor to secure the ongoing investment and management of your trust assets.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.