How a Directed Trust Can Help Financial Advisors Avoid Losing Clients to Trust Departments

This is part one of an introductory series on directed trusts. In upcoming articles we will dive deeper into the powerful planning available through South Dakota.

For decades, financial advisors have lost relationships due to estate planning that transferred their clients’ assets at death to large impersonal trust companies that use their own proprietary in-house investment management. Another option is for advisors to suggest that their clients use the directed trust structure, which keeps clients with their lifetime advisors and keeps control with the clients and their beneficiaries. Due to South Dakota’s directed trust laws, simply establishing or moving a trust to South Dakota opens trust management to a whole new, modern world of flexibility.

Dividing Trustee Roles in a Directed Trust

A directed trust recognizes that a traditional trustee has three distinct roles and places the responsibilities for each piece with the advisors best suited for the role.

• Administrative Trustee – Provides administration in South Dakota and provides access to the protections of South Dakota trust laws. Will usually custody non-marketable assets.
• Investment Trust Advisor – Retains physical custody, establishes the strategy, executes tactical shifts, and determines the assets to hold in the trust. Depending on the circumstances the Investment Trust Advisor may retain physical custody of investment assets and execute transactions.
• Distribution Trust Advisor – Determines who receives money from the trust in what amounts and when.

The primary complaints that have plagued multi-generational trust management over the years can be reduced to one primary category – duties were being fulfilled by the wrong institution or professionals who are not best suited to serve the client. South Dakota’s modern trust laws are a shift back to a central concept that predates most states’ trust laws: the ability to hire the right professional for the right job. This practice eases a pain point experienced by many wealthy clients and their advisors who have become frustrated with the inflexible control exercised by many large trust departments.

How Directed Trusts Work

Directed trusts start with an administrative trustee, such as BTC Trust Company of South Dakota, bringing the trust under the laws of South Dakota. The client is then free to hire the investment advisor they have always worked with, and is free to establish a strategy that is not constrained by corporate policies and limited model portfolios. The Investment Advisor can maintain custody of the marketable investment assets on their firm’s platform and can continue to manage the portfolio in line with the plan they have established with their client.

This flexibility allows the investment advisor to manage to the exact needs of the client. Depending upon the advisor, this could Include:

• Concentrated Positions – A client can retain a concentrated position in a low-basis asset or sentimental stock.
• Cryptocurrency – The ability to be nimble and pursue unique opportunities can be directed by the client’s advisor.
• Private Placements and Hedging Strategies – Partnerships, private placements, Reg D offerings, long/short strategies, and alternative investments can be available to clients.
• UMA / SMA – Unified Managed Account and Separately Managed Account structures can be employed to engage one or more preferred managers.
• The Family Business – The primary asset that is driving the wealth and potential liquidity may be the family business. A directed trust can position advisors to better capture the liquidity upon sale of the business. The same can be said of real estate, art on the wall, mineral rights and any other asset that has value.

The directed trust allows clients to choose their financial advisor, and invest in the assets they choose. Flexibility and control should be the hallmark of any good estate plan, and directed trusts make this possible. BTC Trust Company of South Dakota is the longest existing state-chartered trust company in the state, and we have a history of administering trust assets which are controlled by clients and managed by advisors. Contact us to learn more about how directed trusts could work for your clients.

What assets have you found trustees unwilling to accept? Comment and share your stories below.

Check out this article to learn more about using Directed Trusts to protect unique assets.