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Keep A Leash On Part Of Your Estate

It’s standard practice for wealthy individuals to transfer much of their assets to one or more trusts. Handled properly, a trust can provide a stream of annual income until the assets eventually pass to the beneficiaries—typically, children or grandchildren.

But these benefits have many limitations and come at a price that may seem particularly steep in some cases. In order for assets to be removed from your taxable estate, the trust generally must be irrevocable, and you have to give up control over all of its assets. Typically, you’ll cede your power to a trustee institution or individual you designate. But giving up control can be a real sticking point, especially if a business interest represents the bulk of your estate.

One solution is to set up a “directed trust” that enables you to continue to exert influence without jeopardizing the estate tax shelter. It’s like keeping a leash on your business interest.

The basic concept of a directed trust is relatively simple. The trustee of a trust holding your assets agrees to be “directed” by another party regarding how some or all of the assets are managed. In effect, this splits the trustee’s duties, leaving some responsibilities to the trustee and others to a third party you designate. Directed trusts are sometimes used to provide investment management by an entity other than the trustee institution. But a directed trust could also separate the management of your business, with the trustee agreeing to have that job handled by another person or group of people. Often, the optimal choice to manage a business will be other family members already involved in the operation. If this is part of a succession plan for the business, there may be additional tax advantages.

In many cases, trustees are receptive to having someone else handle part of the estate. Managing a business may not be something the trustee is comfortable doing, and from your point of view, family members with experience in the company will be more likely to take the business in the direction you’ve set for it.

Some 30 states have laws encouraging the use of directed trusts. But banks and other trustees aren’t likely to agree to a directed trust unless the trust holds assets worth several million dollars, and some institutions won’t touch a directed trust with less than $25 million. Moreover, the trustee may assess fees based on the entire value of the trust, including the assets it isn’t managing.

Also keep in mind that states impose varying standards of liability for trustees of directed trusts, with some states shielding trustees from accountability if any part of the trust is managed by someone else. We can work with you and your attorney to see whether a directed trust could work in your state and would serve your needs.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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