In light of Bruce Willis's highlight of dementia, it makes sense for wealthy families to understand how to use directed trusts in a simple way under the South Dakota trust law to plan for current or future incapacitation planning. This blog will answer the questions of why, when with situational examples, and how with case studies.
A directed trust is a type of trust that gives a grantor greater control over the management of trust assets. In a directed trust, the grantor first appoints an independent trust company. Then, within the same trust document, they appoint an investment trustee (i.e., the family's financial advisor/wealth advisor/financial planner) responsible for managing the trust assets per the grantor's instructions. However, the grantor can also appoint a "trust protector" who has the authority to remove and appoint new investment trustees and the corporate trustee. This can provide the grantor with greater flexibility and customization in managing the trust, while still ensuring that the trustee acts in the best interests of the trust beneficiaries.
South Dakota trust law is considered to be one of the most favorable in the United States for directed trusts. This is due to several factors, including strong privacy protections, favorable tax laws, and a progressive approach to trust administration. South Dakota allows for greater flexibility in the creation and administration of trusts, including directed trusts, which can offer grantors greater control and customization over their trust assets. Additionally, South Dakota has a robust trust industry with experienced and knowledgeable trust professionals, which can provide added assurance and peace of mind to grantors (e.g., like us).
Planning for incapacitation is critical for wealthy families as it ensures that their assets and well-being are protected in the event of diminished faculties. Here are a few reasons why:
Directed trusts offer several advantages for grantors who want greater control over their trust assets, particularly in the context of incapacitation planning. Here are a few examples:
While directed trusts offer many benefits, there are also potential drawbacks that grantors should be aware of when incorporating directed trusts into their incapacitation planning. Here are a few examples:
A revocable trust can be an effective tool for incapacity planning when the directed trustee is named as the successor trustee. In a revocable trust, the grantor retains control over the trust assets during their lifetime and can make changes or revoke the trust at any time. However, in the event of incapacitation, the directed trustee roles (aka splits into two) can step in and manage/distribute the trust assets according to the grantor's wishes. The corporate trustee makes the distribution decisions tied to the grantors overall comprehensive financial plan and the investment trustee has the broad authority to manage the trust assets, including making investment decisions. Additionally, each trustee (corporate and investment) are held responsible and liable for their specific roles while serving in the best interests of the trust beneficiaries. This can provide added assurance to grantors who want to ensure that their assets are managed properly in the event of incapacity. It's important to work with an experienced and knowledgeable trust professional when setting up a revocable trust with a directed trustee, to ensure that the trust is structured properly and all legal requirements are met.
The challenge: A financial planner’s client, a UHNW successful entrepreneur in their late 50s, had built a successful business and amassed significant wealth. However, they were increasingly concerned about their health and the possibility of losing their faculties. They wanted to ensure that their assets would be properly managed and that their family would be provided for in the event of incapacity. The financial advisor approached us to help create a concept plan that would be drafted by the client’s estate planning attorney that would provide them with peace of mind.
The solution: After conducting a thorough analysis of the client's financial situation and their concerns, working in collaboration with the financial advisor and estate attorney, the creation of a revocable trust with directed trust features was created. We worked closely with the client and their advisor team to create a tailored plan that included detailed instructions for the management of their assets in the event of incapacity. The trust documents named the financial advisor as the investment trustee, who had the sole fiduciary authority to manage the assets according to the client's wishes.
The outcome: The client was extremely pleased with the final plan, which gave them peace of mind that their assets would be properly managed in the event of incapacity. The team approach between the corporate trustee and the investment trustee (i.e., the financial advisor) was able to step in and manage the assets according to the client's wishes, providing added assurance to the client and their family. The trust also included privacy protections and asset protection features, ensuring that the client's personal information and assets would be kept confidential and protected from potential legal challenges or creditors.
Wrapping up, the use of a revocable trust with directed trust features can be a powerful tool for incapacity planning, providing clients with greater control over their assets and added assurance that their wishes will be carried out in the event of incapacity.
An irrevocable trust can also be an effective tool for incapacity planning when the directed trustee is appointed to manage the trust assets immediately. In an irrevocable trust, the grantor transfers ownership of their assets to the trust and gives up control over them. Once the trust is created, the grantor cannot revoke or make changes to the trust, except in limited circumstances. By appointing a directed trustee, the grantor can ensure that the trust assets are managed according to their wishes, even if they become incapacitated. The directed trustee can be given broad authority to manage the trust assets, including making investment decisions and distributing assets to the trust beneficiaries. Additionally, the directed trustee has a fiduciary duty to act in the best interests of the trust beneficiaries and can be held accountable for their actions. It's important to work with an experienced and knowledgeable trust professional when setting up an irrevocable trust with a directed trustee, to ensure that the trust is structured properly and all legal requirements are met.
The challenge: An advisor's client, multi-generational, thinking about legacy issues in their late 60s, had accumulated significant wealth through their career and investments. However, they were concerned about the possibility of incapacitation and wanted to ensure that their assets would be appropriately managed and distributed to their beneficiaries in the event of incapacity. The advisor approached us to work together to create a plan that would provide their client with peace of mind.
The solution: After a thorough analysis of the client's financial situation and their concerns, we collectively recommended the creation of an irrevocable trust with directed trust features. The advisor lead the charge working closely with our onboarding team and the estate planning attorney and the client to create a customized plan that included detailed instructions for the management and distribution of their assets in the event of incapacity. We were named as the corporate trustee and the financial advisor was named as the investment trustee under a directed trust, who had the authority to manage the trust assets and we would make distributions to the client's beneficiaries according to the client's wishes.
The outcome: The client was extremely satisfied with the final plan, which provided them with peace of mind that their assets would be properly managed and distributed in the event of incapacity. The directed trustee situation under their irrevocable trust was able to step in and manage the trust assets immediately upon the client's incapacity, providing added assurance to the client and their family. The trust also included asset protection features, ensuring that the client's assets were protected from potential creditors or legal challenges.
Bottom line, the use of an irrevocable trust with directed trust features can be a powerful tool for incapacity planning, providing clients with greater control over their assets and added assurance that their wishes will be carried out in the event of incapacity.
"Planning for Diminished Capacity: Directed Trusts and Powers of Attorney" by Richard C. Ausness - This article discusses how directed trusts and powers of attorney can be used to plan for a grantor's potential future incapacity. It explores the benefits and drawbacks of each option and provides guidance for estate planners.
"Directed Trusts and Fiduciary Liability: New Law, Old Lessons" by Thomas W. Abendroth and Kyle D. Noller - This article analyzes the legal and practical considerations surrounding directed trusts, including the potential risks and benefits for fiduciaries. It also discusses recent changes in the law and provides guidance for trustees.
"Directed Trusts: The New Kid on the Block" by Brett W. Johnson - This article provides an overview of directed trusts, including their history, advantages, and potential drawbacks. It explores how directed trusts can be used in estate planning and provides guidance for trustees and estate planners.
"Directed Trusts: Practical Considerations for the Estate Planner" by Kevin Matz - This article discusses the practical considerations involved in creating and administering directed trusts. It explores the benefits and drawbacks of using directed trusts in estate planning and provides guidance for estate planners.
"Directed Trusts - When and Why to Use Them" by Robert W. Goldman and Mindy Herzfeld - This article explores the circumstances in which directed trusts may be useful in estate planning, including situations where the grantor has concerns about future incapacity. It provides guidance for estate planners on how to incorporate directed trusts into their clients' estate plans.