Florida recently adopted it’s own version of a “directed trusts” statute [click here]. And if you take a look at the agenda for the upcoming Florida Bar Trust Law Committee meeting [click here], you’ll see we’re not done tinkering with that statute just yet.
Is this amount of focus on directed trusts by Florida’s Bar and Banking Industry really worth it? Well, according to a Wall Street Journal article by Arden Dale entitled Estate Plans With Reins (Wall St. J., Sept. 13, 2008), there’s a lot of really smart folks out there who think the answer is a resounding YES!
Hint: If you’re a Florida trusts-and-estates lawyer or bank trust officer, you may want to take a quick look at this new statute.
The WSJ piece is short and it’s full of Florida references, so here’s all of it:
People near retirement age are turning to directed trusts as part of their estate-planning strategy.
Directed trusts are designed for those who want to put most of their estate into a trust but wish to hold the reins on one of the assets in it — say, a company. A bank or trust company manages the trust overall, but the client picks an outsider to handle a particular asset.
Florida recently changed its rules to make it more attractive for people to use directed trusts; some 30 states now have such statutes. The push for the change came from banks and trust companies with clients who own businesses and real-estate developments.
An entrepreneur nearing retirement, for example, might choose a directed trust to safeguard his company along with the rest of his estate, but also give family members the power to buy, sell and have voting rights on the company stock.
Putting a business into a larger trust is for those who “think the long-term economic interest of the family is to not sell the business, to let it go on generating money,” said Bruce Stone, a shareholder at Goldman Felcoski & Stone PA, a law firm in Coral Gables, Fla.
Banks often don’t want to administer a closely held company. On the other hand, a business owner is likely to have family or other associates who can take on the job as co-trustee.
In Florida, the proliferation of troubled real-estate developments is giving people another reason to choose directed trusts. Clients holding such assets tend not to want a trust company to manage them, said Mr. Stone.
Joan Crain, senior director of wealth-management strategies at BNY Mellon Wealth Management in Fort Lauderdale, Fla., said she has heard of wealthy people using directed trusts to keep specialized investments, such as hedge funds, in the hands of a longstanding money manager. Another common reason to use a directed trust is to put a relative or family lawyer in charge of doling out money from the trust to beneficiaries.
Directed trusts don’t have dollar-amount requirements, but some advisers said $1 million is the minimum to make the strategy worthwhile. BNY Mellon generally handles directed trusts of about $25 million and up in total assets, but also works with some smaller ones depending on the client’s long-term estate plan, said Ms. Crain.
Banks and trust companies like directed trusts because they don’t have to worry about managing assets in which they have no expertise.
A good trustee recognizes there are categories of assets he or she isn’t as good at managing, said Richard W. Nenno, managing director and trust counsel at Wilmington Trust Co. Mr. Nenno is chairman of the committee of the Delaware State Bar Association that works on updating Delaware trust law.
Anyone thinking about setting up a directed trust should tread carefully when choosing the outside manager, called a co-trustee or special trustee, protector or adviser, depending on the state where the trust is created.
The main trustee may not be responsible for that piece of the estate, and so the directed trustee “better be someone good and trustworthy who can be held accountable if something goes amiss,” Mr. Nenno said.
It also is important to realize that all directed trusts aren’t created equal. States hold trustees to different standards of liability, and one should get to know the rules that apply in any specific case. In several states, one could theoretically draft the trust so that no one is responsible should something go wrong, said Mr. Nenno.
However, he said, “an attorney drafting one of these is going to want to make someone responsible for the performance of the asset.”
Fees can be a sticking point with directed trusts; the bank or trust company typically charges a fee for the special asset, even though someone else is managing it. One reason is that the bank will end up performing some basic administrative work on the asset. The fee could be a flat fee or a percentage of the value of the asset in question.
Work to negotiate the lowest fee possible if you set up a directed trust. The result will depend on your relationship.
Credit goes to the Wills, Trusts & Estates Prof Blog for bringing the linked-to WSJ article to my attention in the blog post entitled “Directed Trusts” gain in popularity.