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The Directed Trust Difference: Can my Trust be Moved?

In my travels as a trust officer and investment manager I have worked with a lot of individuals who are the beneficiary of a trust. On most occasions these trusts were set up by their parents or grandparents. During my conversation with these individuals I realized that they were under a misconception that the trust could never be changed no matter what. That is not 100% true.

I understand by its design, an irrevocable trust is just that, irrevocable, and so as a basic rule an irrevocable trust cannot ever be amended, modified, changed, or revoked. But the majority of the beneficiaries that I speak with wonder if there is any way to change the current trustee and to that my answer is an emphatic maybe.

Certain trust documents have been written with a provision that allows for someone to have the ability to remove the current trustee and appoint a new trustee. But if there is currently a corporate trustee serving, there is usually a provision in the document that says a corporate trustee must be replaced by another corporate trustee. One of the options that the person has is to either move the trust to another trust company or bank or have the trust modified to be a Directed Trust.

A Directed Trust allows an individual to designate a financial advisor to handle the investment management of the trust assets and appoint a separate administrative trustee to execute the administrative fiduciary responsibilities. A large number of administrative trustees administer trusts in the state of Delaware to take advantage of the state’s favorable trust laws.

Working with an administrative trustee offers some very specific and highly desirable benefits for both the individuals involved with the trust (beneficiaries) as well as the financial advisor.

Collective Thinking —the administrative trustee is as focused on trust administration as the financial advisor is on meeting clients’ overall objectives. This means the financial advisor would be able to consult with knowledgeable professionals and offer clients an enhanced level of experienced service.

Professional Knowledge —the administrative trustee has the expertise to manage the complexities of a trust.

Administrative Objectivity —having a corporate professional fiduciary instead of an individual family member serve as trustee can avoid potential conflicts and compromises to the objectivity in trust administration.

Control over Investment Selection —in separating investment management from fiduciary administrative responsibilities, Delaware law permits the appointment of an investment advisor to manage trust assets.

Potential Tax Advantages —Delaware does not impose a fiduciary income tax on irrevocable trusts that accumulate income and/or capital gains for future distribution to nonresident beneficiaries.

Longer Client Relationships —As Delaware repealed the rule against perpetuities for personal property held in trust, a properly structured trust has the potential to benefit multiple generations, which allows the financial advisor to extend their client relationship to the trust’s beneficiaries.

In general, irrevocable trust agreements are not easy to read and understand. If you are the Trustee or a beneficiary of an irrevocable trust that you would like to change, then check the trust agreement for the provision which dictates which state law governs the provisions of the trust (this section will usually be towards the end of the trust agreement and titled something like “Governing State Law”). You should then consult with an estate planning attorney who is familiar with the governing state’s trust laws to determine if anything can be done to change the provisions of your otherwise irrevocable trust.

This article covers the highlights of this subject and should not be construed as estate planning advice. For more information, please contact our office (610-651-2777).  We are always happy to help!