Maintaining Greater Control Over Assets Using Trusts

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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

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:


  1. Investment advisor
  2. Distribution advisor
  3. 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.

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August 28, 2014

Domestic Asset Protection Trusts

A DAPT is a unique type of trust that allows individuals to protect a portion of their assets from third party liability, and permits settlors to be discretionary beneficiaries of their own trusts. Physicians, lawyers and other professionals who may be litigation targets commonly create DAPTs. Professional athletes who have volatile earning potential and want to preserve assets for future contingencies may create them as well.


Once an individual establishes a DAPT, most creditors can’t touch the assets unless state statute provides otherwise (for example, child support obligations are one common exception). A designated trustee has responsibility for distribution of the assets in accordance with the terms of the trust document. However, these trusts can be overturned if they are set up with fraudulent intent. In other words, you can’t create a DAPT while a lawsuit is in process and expect it to make you judgment proof. DAPTs can also be overturned if there is any suggestion that the settlor has control over how the assets are distributed, Mullen says. For example, if there is proof that the trustee is distributing excessively large amounts of the principal assets to the settlor without due cause a judge may determine that the settlor controls the asset and can then give creditors access to it.


“When setting up a DAPT, be realistic about howmuch you want to contribute to the trust,” Mullensays. A useful rule of thumb is to only include assets that you intend to eventually pass on to beneficiaries either later in life or after death — not assets needed to meet daily living needs.

Meeting Legal Requirements with DAPTs

It’s also important to ensure that DAPTs meet all legal requirements. If they are not set up properly, settlors run the risk that they could be overturned in court. “These are complicated tools that are relatively new in the United States,” Mullen says.

There are some states that have led the way over the years. These states include Delaware, Nevada, Ohio and South Dakota, although each state has slightly different rules. “While you don’t necessarily need to be a resident of one of these states to set up a DAPT, you do want to make sure you work with legal and financial advisors who are familiar with the governing laws,” Mullen says. “Otherwise you could go to a lot of trouble setting up a DAPT, only to have it invalidated in court.”


Using Trusts to Achieve Your Unique Goals

Directed trusts and DAPTs are designed to meet very specific needs based on individual circumstances. Consult with your financial, tax and legal advisors as you assess which strategies may be right for you.

This article was adapted from The Private Client Reserve's paper, "Maintaining Greater Control Over Assets Using Trusts." 


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Estate Planning , Wealth Transfer