Directed trusts are providing an increasing number of advisors the ability to continue to manage their client assets. The flexible South Dakota trust laws have led to some creative approaches by advisors on behalf of their clients. Let’s explore three emerging trends to watch for in 2019.
1. Clients establishing a committee to select managers and guide the investment advisors
The decision to use a committee approach is driven by several factors, including succession planning, flexibility and control concerns raised by trust attorneys. Clients may be comfortable directing investment in the trust at the time it is drafted but are recognizing the need to transition the decisions, and share knowledge, with the next generation of decision makers.
The committee structure available through a directed trust is flexible enough to assign, delegate and manage the authority of each person contributing to decisions. Grantors find the committee particularly useful when contemplating extended travel and potential disability from health issues that inevitably arise. Drafting attorneys are increasingly finding the committee approach effective to address arguments that the grantor exercises too much control over trust assets.
2. Limited Liability Companies as the primary holding company for all trust assets
Consolidating investment accounts, family business and various assets in an LLC owned by the trust gives clients several benefits that are increasingly attractive.
- Dashboard-Level Asset View – All client assets owned in the directed trust can be managed through an LLC. With the investment accounts, real estate, private placements and family business all rolling into a single entity, clients are able to establish the elusive consolidated view of all assets.
- Increased Asset Protection – The asset protection trust features are enhanced when a South Dakota LLC is used as the entity for asset management. Directed trusts offer powerful asset protection features when combined with the protective South Dakota LLC laws.
- Succession Planning – LLC document modification is proving to be an efficient way to address management succession of family businesses and other assets. Rather than modifying trust documents to address control, families are adjusting the authority and responsibility of the next generation within the LLC. The ability to quickly adjust control through the LLC allows families to be more nimble in a dynamic and changing world.
3. Including health professionals in the Distribution Trust Advisor Committee
Families are increasingly recognizing beneficiaries who are frequently requesting distributions for questionable reasons may have an underlying health issue at the center. This challenge leaves parents in a confrontational position with a beneficiary, or a trust officer in a position where they do not understand the family dynamic. Directed trusts allow families to appoint Distribution Trust Advisor Committees, which can include a mental health professional to identify behavior issues early and intervene when necessary. This provides extraordinary relief to families. Substance abuse issues, manic behaviors, and the influence of toxic relationships have all been identified early when the mental health professional receives and reviews requests for money with the client and advisor team.
Changes in the economy, tax laws and family dynamics are ever-present. South Dakota’s flexible directed trust laws allow advisors to creatively and uniquely address these issues for their clients. This nimble approach to asset management will continue to evolve to meet the needs of families.
As we progress throughout 2019, I anticipate further growth and discussion on the trends outlined above. What trends are you seeing for the directed trust industry?