August 28, 2014
Trusts have long been recognized as an effective way to manage assets for future generations. However, some individuals avoid these tools because they limit their ability to access the assets held in them or control how the assets are invested.
But that doesn’t have to be the case. Directed trusts and domestic asset protection trusts (DAPTs) are two trust models that provide a settlor — the person who creates the trust — with more flexibility in managing assets.
Directed trusts give settlors the ability to assign someone other than the trustee to manage the trust assets. While the trustee administers the trust pursuant to its terms and legal requirements, one or more other designees can fulfill up to three different oversight functions:
- Investment advisor
- Distribution advisor
- Trust protector
“You may choose this model because you believe more than one individual or entity needs to be involved to meet your objectives and/or to honor an existing relationship with a wealth advisor,” says Sally Mullen, Chief Fiduciary Officer for The Private Client Reserve.
Directed trusts may be useful for investors who prefer portfolios consisting primarily of concentrated stock positions or illiquid holdings because trustees are obligated to make “prudent investment decisions” that may tilt toward a more diversified strategy. Creation of a directed trust can relieve the trustee of the responsibility to get involved in the day-to-day management of a family business or closely held company held in the trust.
Currently, directed trusts are allowed in at least 20 states, including South Dakota, Ohio, Delaware and Nevada. “You don’t necessarily need to live in one of these states to set one up,” Mullen says. However, you do need to work with your legal and financial advisors to ensure that the trust is drafted and administered properly under applicable state statutes.