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"Directed Trust"

A directed trust is a trust in which the trustee is directed by a number of other trust participants in implementing the trust's execution. That trustee is referred to as a Directed Trustee. Examples of other trust participants include a distribution committee, trust protector, or investment advisor. A directed trustee's role often include: following distribution and investment instructions, holding legal title to the trust assets, providing fiduciary and tax accounting, coordinating trust participants and offering dispute resolution among those participants. Typically, these duties and the other participants in the trust are defined and governed by the trust document itself.

High net-worth families face an ever increasing set of challenges managing their wealth across generations. Major changes in trust law, combined with modern investment strategies, new tax factors and complex family and financial advisor dynamics, have created demands that traditional trusts and trust companies are not well equipped to handle. In the face of these demands, many families, based on guidance from their expert advisors, are moving away from conventional trusts that rely on single or co-trustees to new “multi-participant” trusts, with a directed trustee central to the administration of their trust. Please follow this link. This arrangement is also commonly referred to as "open-architecture" trust design.

As families move to gain more control over certain trust functions, multi-participant trusts have emerged as a powerful tool for achieving optimal estate planning results, while limiting risks to participants. The participants, or "agents" of this new form of trust are granted specific powers by the trust based on their skills, location in advantageous trust jurisdictions or past relationships. They are responsible, and therefore liable, only for matters that they are best equipped and prepared to manage. This approach is an advance over the traditional unitary trust model, where single or co-trustees lack either the in-depth expertise or the appetite for risk needed to effectively manage the gamut of issues that trusts face.

A family living in a traditional trust state needn't move to a progressive state to secure the benefits of a directed trust established and administered in that jurisdiction. They need only enter into a trust agreement with a DTC domiciled in a 'preferred' state that will own and administer the trust's intangible personal property. Trust statutes change from year to year, although currently certain states are more amenable than others to supporting multi-participant trusts, with Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming often cited as the leading jurisdictions for directed trusts. These states frequently update their laws to keep pace with the market for specialized, advantaged trust services. As an example, with the passage of the Trust Modernization and Competitiveness Act (TMCA) in 2006, New Hampshire overhauled its trust and trust company laws in an effort to improve its standing among jurisdictions in the country in which to establish and administer individual and family multi-participant trusts. (Please see http://www.concordtrustcompany.com/index.php/news-and-resources for several articles related to directed trust and specifically the emergence of multi-participant trusts in estate planning.)  In the years since then, New Hampshire has enacted continuous amendments to its statutes.

Economics of a Directed Trust

Recently there has been an emergence of non-depository public Directed Trust Companies (DTC) as a result of trends toward the open-architecture or multi-participant model of trust management. DTCs can operate inexpensively, with more manageable risk management policies and procedures, less high-priced management personnel, no investment professionals and an appropriate number of administrative personnel to handle their accounts. As non-depository institutions typically operating under hospitable state regulatory regimes, they can benefit from lower capitalization and bonding requirements and less onerous supervision, reducing operating overhead. DTCs generally charge a relatively modest annual fee for services commensurate with the DTC's correspondingly lower levels of risk, responsibility and overhead. This allows any other co-fiduciaries handling more labor-intensive, higher risk investment and distribution functions to profitably charge a reasonable fee for their services. Thus, the total fees paid to the DTC and the other compensated participants can be comparable (in some cases lower) to the single annual fee paid to a traditional bundled provider.

Notes:

1. Attorney John P.C. Duncan coined the term “multi-participant trust.” See John P.C. Duncan and Anita M. Sarafa, “Multi-Participant Trusts Need a Coordinator,” Trusts & Estates (November 2008) at p. 32.

2. See, e.g., David A. Diamond and Todd A. Flubacher, “The Trustee's Role in Directed Trusts,” Trusts & Estates (December 2010) at p. 24; Mary Clarke and Diana S.C. Zeydel, “Directed Trusts: The Statutory Approaches to Authority and Liability,” www.flprobatelitigation.com/uploads/file/DirectedTrusts.pdf.

3. “Open-architecture trust” refers to a multi-participant governance structure first described in Trusts & Estates magazine by John H. Lahey in “Open-Architecture Trusts: The Wiser Choice,” Trusts & Estates (August 2003) at p. 44.

--Gazelle Woods (talk) 19:28, 20 February 2012 (UTC)