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The Top Benefits of a Directed Trust

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Chris Halverson

Chris Halverson

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When most people consider creating a trust, they think one person (the trustee) holds the keys to their personal kingdom—and all the power over their hard-earned money. 

The trustee does have many duties including holding, managing, and investing the trust’s assets, making distributions, and looking out for the trust’s best interest. Each of these roles carries a fiduciary duty and requires specialized knowledge and experience to perform effectively. 

You don’t have to put all of that responsibility on one party, however, which leads us to our primary topic—a directed trust. What is a directed trust and how can it optimize your wealth plan? Let’s find out.

What is a Directed Trust?

With a directed trust, the trustee’s responsibilities are separated between administration, investment management, distribution, and oversight. 

By dividing these obligations, each party’s liability (and burden) is lessened. More importantly, it enables each party to focus on what they do best, ultimately leading to better trust management.

South Dakota has the clearest statutes to achieve this goal and allows you to create a team of trusted advisors to build a comprehensive wealth plan. Let’s take a closer look at some of the benefits a directed trust can afford. 

Split the Duties of the Trustee

Splitting the trustee duties allows for greater flexibility, control, and targeted expertise than having one party do it all. 

You’ve likely heard the phrase “divide and conquer;” creating a directed trust allows you to do just that. You’re able to maximize the skills of your most trusted advisors and/or family members where you think they’ll fit best.

Those advisors and family members can fill the roles of distribution advisor, investment advisor, or trust protector. The administrative trustee is often a trust company, such as First Dakota.

The distribution advisor is responsible for distributing the trust’s assets to beneficiaries efficiently. The investment advisor will oversee the investments. You can even use multiple advisors, each with a responsibility for different asset classes or investments. 

The administrative trustee, as the name suggests, takes care of all the administrative concerns such as preparing tax returns and issuing statements. It’s here where a team like First Dakota Wealth & Trust particularly shines. Assuming an administrative role, we would own the assets, make distributions at the direction of the distribution advisor, and receive contributions.

The trust protector, if you choose to have one, has broad powers, which are explained more in the last section.

Keeps Standards High Over Time

A directed trust optimizes the benefits of specialization within your wealth management structure by putting your team of trusted advisors where they thrive.

  • The investment advisors focus solely on purposefully managing your assets.
  • A distribution advisor specializes in the beneficiaries’ needs.
  • The trust protector concentrates on oversight and ensuring all parties are doing what’s best for your wealth.
  • Your administrative trustee provides the vehicle to hold all involved parties.

As your family wealth structures become more sophisticated, having a process that separates duties enhances specialization and control, which continually creates a high standard. 

Not only are each of these roles performed by focused experts, but the joint nature of the arrangement means that fundamental issues are likely to benefit from multiple professional insights. 

Protects Your Long-term Vision

A directed trust may be revocable, irrevocable, or contain provisions similar to any other trust.

The main difference is the allocation of duties to several members of your wealth team. 

If you fill your team with family or close advisors who are more familiar with your vision, you can have more confidence in reaching your desired outcome.

Choosing the right advisors will allow for continuity of service, and long-term success for your wealth plan.

Provides More Flexibility and Control

Although one isn’t required, creating a directed trust with a trust protector will ensure that your legacy is maintained. That’s because the trust protector has broad responsibilities and authority to make changes to the trust or override the other parties.

A trust protector may,

  • Modify or amend the trust to fully utilize the new tax law or respond to the changes made by the IRS.
  • Advise the trustee.
  • Change the interest beneficiaries have.
  • Appoint or Remove investment advisors, distribution advisors, trustees, or other advisors to the trust as needed to ensure the trust is properly managed.
  • Terminate the trust.
  • Veto or direct trust distributions.
  • Change situs or which state law the trust is subject to.
  • Interpret the terms of the trust should there be any issues or questions

Employing a trust protector grants an opportunity to choose a trusted advisor or family member to control and change aspects of the trust to ensure it will continue to protect your legacy.

Does a Directed Trust Fit Into Your Wealth Plan?

As your family’s wealth becomes more sophisticated, your wealth management strategies need to adapt. More families are turning to a directed trust to grant the flexibility, control, and standard of care required for managing sophisticated wealth. 

South Dakota’s directed trust laws are among the best in the nation. First Dakota Wealth & Trust can work collaboratively with you and your trusted advisors to create a plan for your wealth. If you’d like to learn more about how a directed trust can protect your legacy, give us a call. We’d love to help you build a plan that suits your financial goals.  

At First Dakota Wealth & Trust, we are passionate about helping people reach their goals and are ready to work with you to find the right fit for your wealth management needs.

 

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.