How Innovative Modern Trusts Improve Your Estate Plan

Trusts have been around since at least medieval times, but their details change over time. Recent innovations can make your trusts more powerful and effective.

These innovations apply to a couple of features that frequently are treated routinely: the definition of a trustee’s powers and the selection of the trustee.

The first step is to decide whether to name one trustee or multiple trustees and advisors with separate duties and powers.

Trustees (and executors) can make or break an estate plan. You need the right people assigned to perform each task. Otherwise, things could go awry when you’re no longer around to help fix them.

Traditionally, a single trustee is appointed and usually is a family member or friend. The advantages are that trustee fees can be reduced or eliminated and the trust is controlled by someone who knows the family and knew the trust grantor and his or her intentions.

The traditional arrangement works best when the trust is fairly uncomplicated, significant wealth isn’t involved, there aren’t family issues, and the trust will be fully distributed within a few years.

Fewer and fewer trusts fit that description. The Baby Boomers are wealthier than previous generations. Many families are blended, have members in conflict, or have a troubled beneficiary or two. Beneficiaries might not have the knowledge or experience to handle the amounts they’re going to inherit.

For these reasons, trust grantors often set up trusts to last for some time.

Another reason the traditional structure might not be ideal is that non-professional trustees might have difficulty keeping proper records, filing trust tax returns, handling other administrative duties and investing well.

A professional or corporate trustee can be appointed instead of a friend or family member. The professional specializes in keeping the books, filing income tax returns and ensuring compliance with the trust agreement and applicable laws.

But a professional trustee can be expensive.

Also, a corporate trustee might not know the grantor and family well enough to fulfill the grantor’s intentions and preferences when taking discretionary actions.

The modern solution is known generally as the directed trust.

A directed trust splits the traditional duties and powers of the trustee among several people or entities.

The directed trust is very flexible, so there are many possible structures. But a standard directed trust designates one person or entity as trustee. But some powers and duties usually exercised by the trustee are given to others who are designated as either special trustees or advisors.

The result is specialists make decisions in discrete areas instead of one person or entity handling all the roles.

Several powers or duties often are assigned to special trustees or advisors of directed trusts.

Investments. Corporate trustees typically have mediocre investment performance and might not customize their investment strategies to satisfy the trust grantor. The investment function can be assigned to one or more investment advisors.

Special holdings. A trust might hold one or more unique assets, such as a small business, commercial real estate, or a collection, among other possibilities. Special expertise might be needed to manage an asset, decide when to dispose of it, negotiate the disposition, and take other actions. A person or firm with expertise in a special asset can be named to manage or advise on it.

Distributions. Some trusts provide that income or assets will be distributed on a schedule with no discretion by the trustee. But many trusts now give the trustee some discretion.

The trustee might be empowered to withhold distributions when they are deemed not in the best interests of a beneficiary, such as when the beneficiary has gambling or substance abuse problems, is potentially bankrupt, divorcing, is simply irresponsible with money, or has other issues.

The trustee could withhold distributions until the situation is resolved. The trustee also might be empowered to pay expenses directly to providers of goods and services instead of giving money to the beneficiary.

In other cases, a trustee might have discretion to make distributions to a beneficiary as needed for education, medical care, starting up a business, buying a home, or other expenses.

A professional trustee might not know a family well enough to make good decisions in these situations or might not have a good idea of the trust grantor’s likely preferences.

Knowledge of the family and grantor might lead to better distribution decisions. An individual can be appointed as a trustee or advisor in charge of distributions, or multiple family members or friends of the family can be appointed to make distribution decisions jointly.

In any case, the trust grantor often drafts a side letter to the trustee or adviser that gives guidelines for distributions.

A common directed trust structure is to name a corporate entity as the main trustee, responsible for accounting, tax returns and other administrative duties.

Investment discretion is given to one or more investment firms selected by the grantor. Investment performance is monitored by one or more individuals, who are authorized to replace an investment advisor when appropriate.

An additional trustee or advisor (or a group) can be named to determine distributions.

Most states now have laws specifically authorizing directed trusts and separation of trustee duties. The laws state the potential liability of each trustee or advisor. People who consider accepting one of the positions should be aware of their potential liability, their duties, and the limits of their authority.

Another advantage of a directed trust is each trustee or advisor separately bills its fees. A traditional corporate trustee provides all the services for one fee. The grantor and beneficiaries don’t know what each service costs.

Likewise, fees can be separately negotiated with each trustee or advisor.

Another modern trust innovation to consider is appointing a trust protector.

This position, historically, is used in foreign-based trusts when the grantor is concerned about the potential for fraud, changes in local law, confiscation of assets, or other unforeseeable events.

But more people, especially those creating valuable trusts, are adding protectors to U.S.-based trusts.

The trust protector might be given powers a trustee typically doesn’t have, such as removing a trustee, appointing a new trustee, and consenting to or vetoing certain actions of the trustee.

The protector might be authorized to change certain terms of the trust agreement (usually in response to changes in law), review the trust accounting, or move the trust to a new jurisdiction.

Some protectors have powers such as directing investments and distributions, changing beneficiaries, or changing a beneficiary’s interest in the trust.

You could give all or some of these powers to a trust protector.

For example, sometimes the grantor appoints the surviving spouse as trustee but is concerned that over time someone might exert undue influence or the spouse’s cognitive abilities might decline. A potential remedy is to appoint a trust protector to monitor trust transactions, veto the trustee’s decisions, or replace the trustee.

State law governs the use and powers of trust protectors, and about 36 states have specific statutes governing protectors.

Directed trusts and trust protectors are very flexible in most states and can be customized to meet your goals and concerns. If the idea appeals to you, meet with your estate planner to discuss what you want to accomplish and the options for doing so.