Directed Trust Arrangements

Directed Trust Arrangements

When clients are considering trusts as part of a plan to manage assets, one issue that can emerge is a client’s prior negative experience with trust companies.  Some clients, whether by way of being the beneficiary of a trust, or when they worked with a trust company on behalf of a minor or parent, had a difficult time dealing with corporate or institutional trustees.  This experience can sometimes discourage a client from creating a trust agreement within their own estate plan, even when such a strategy makes sense.

A trust company has a job to do as a fiduciary and should follow the mandated language within the trust to manage the assets for the benefit of the named beneficiaries.  But whether it be from a lack of communication, a perceived conflict of interest in handling both the administration and the investment duties, or some other reason, clients can be hesitant to trust corporate trustees when considering trusts as a part of their legacy planning.

To alleviate some of these concerns in trust planning, there is an alternative arrangement that has gained traction with clients and estate planning attorneys over the last several years.  The Colorado Uniform Directed Trust Act (“CUDTA”) became effective in 2019 and allows the creator of a trust to delegate trustee responsibilities to different fiduciaries.

A corporate trustee can be chosen to handle the administration of the trust, where they will manage distributions, bookkeeping, file tax returns, pursue amendments or dissolve the trust when appropriate, and/or other housekeeping responsibilities.  A separate advisor could oversee the investment management of the assets and financial planning for the beneficiary.

This directed trust arrangement divides up duties, alleviates potential conflicts of interests that are inherent when a trustee is both the gatekeeper for distributions and is charging a fee for assets being managed, and allows a wealth advisor, who many times has a long-standing relationship with the creator of the trust and their family, to continue to manage and invest the assets.  This advisor can also serve as a liaison between beneficiary and corporate trustee.

When a directed trust is utilized, because the administrative trustee is accepting less in obligations and liability exposure, the total fee they charge should be less, and when combined with the investment advisor fee, the cost of such an arrangement can generally be about the same compared to when a corporate trustee manages all aspects of the trust.  Although the wealth advisor fee can vary depending on a number of factors as well, when presented with this type of solution, clients have tended to appreciate the added benefits a directed trust arrangement can provide them and their families.

If you have any questions about directed trusts, how they work, and whether such a strategy would be right for your situation, feel free to reach out to our financial planning team.  We are here to help.

Jason Foster, Director of Wealth Strategies and Legacy Planning

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