A rising number of people near retirement age are turning to so-called directed trusts to gain control over a certain part of their estates.
Directed trusts are designed for those who want to put their whole estate into a trust but wish to hold the reins on one asset-say a company. A bank or trust company manages the trust overall, but the individual picks an outsider to handle a particular asset.
Florida recently became the latest state to revise its statutes on directed trusts, adding to the list of some 30 states that have them. The push for a rule change came from banks and trust companies with clients who own businesses and real-estate developments.
An entrepreneur near retirement, for instance, 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," says Bruce Stone, a shareholder at Goldman Felcoski & Stone in Coral Gables, Fla.
Banks often don't want to administer a closely held company because they're not in that line of work. 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, Stone adds.
Joan Crain, senior director of wealth-management strategies at BNY Mellon Wealth Management, says she has heard of wealthy people using directed trusts to keep hedge fund investments in the hands of a long-standing 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 advisors say $1 million is the minimum number 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, according to 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, says Richard W. Nenno, managing director and trust counsel at Wilmington Trust Co. Nenno is chairman of the committee of the Delaware Bar Association that works on updating Delaware trust law.