Directed Trusts

Directed Trusts are a result of modern trust laws. However, Directed Trusts are only codified and available in a handful of states across the country. South Dakota’s Directed Trusts statutes have revolutionized the trust industry through unbundling asset management and trust administration functions from the Trustee. This results in putting control back into the hands of settlors, beneficiaries, and their advisors. Through bifurcating liability, the directed trust model creates a legal framework allowing trustees and beneficiaries to work with asset managers and independent trust companies of their choosing rather than only being limited to one party who might not have the technical expertise to best serve all the needs of the trust and its beneficiaries. This is accomplished via the Distribution Advisor and Investment Advisor.

“Bundled Trustee”

Traditional bank trust departments and corporate trustees perform distinct services, including investment management and distribution, preparation of fiduciary accountings and trust tax returns, and administration of the trust in accordance with governing instruments and applicable state trust laws. All of these services are “bundled” together and provided under a fee structure that is typically based upon a percentage of assets under management, and sometimes this works perfectly for the settlors and beneficiaries.

However, this approach can limit some clients depending on their preferences regarding which asset managers are employed by or are affiliated with the trust company. Under the “bundled” approach, clients are unable to work with an advisor not employed by or affiliated with the trust company..

“Directed” Trustee

The directed trustee model unbundles these services, bifurcates liability, and distinguishes between the investment and administrative functions of asset management and trust administration.

Not all states have Directed Trust statutes. These laws formally define the separate duties and responsibilities of the trustee and advisor (asset manager) and allows the settlor to appoint both as fiduciaries in a trust agreement. This results with the advisor being charged with and held responsible for all investment duties while the directed trustee is charged with and held responsible for all trust administration duties.

Under a directed trust model, a grantor or co-trustee can work with the advisor they choose while the trust administrative function is performed by an independent trust company. This approach allows clients to work with long-time trusted advisors in conjunction with trust administration.