One of the most common questions we hear from financial planners, investment advisors, and estate planning attorneys is, “What is a directed trustee?”
Tennessee has some of the most progressive directed trust laws in the country, making it an attractive jurisdiction for those families interested in estate planning. Codified in Tenn. Code Ann. § 35-15-710, a directed trust bifurcates the trustee’s fiduciary responsibilities, granting authority over certain trust functions (such as investments) to a separate trust advisor. The trust advisor exercises its authority by directing the trustee to act in accordance with its decisions. This is a significant change from the traditional non-directed trust, where the trustee retains responsibility for all aspects of trust administration.
Under Tennessee law, directed trusts may be created by 1) explicitly appointing a trust advisor in the trust document, 2) using a binding non-judicial settlement or modification agreement signed by the qualified beneficiaries to convert to the directed trust model, 3) by way of a court ordered modification, or 4) by decanting the trust into a directed trust.
There are several benefits to the directed trust model. For example, allocating fiduciary duties to multiple professionals promotes efficiency in trust administration. In addition, many grantors and beneficiaries do not feel comfortable relying on a corporate trustee to invest trust assets and would instead prefer to work with their existing investment manager. In such cases, the directed trust model can be used to shift investment discretion and responsibility from the trustee to the trust advisor who then oversees their chosen investment manager. In some cases, the investment manager may even serve as the named trust advisor. This facilitates prudent investment of trust assets and allows the directed trustee to focus solely on trust administration.
Furthermore, families with traditional non-directed trusts tend to worry about being excluded from the trust administration process, particularly with corporate trustees when they retain all discretionary power and responsibility. The directed model allows for more checks and balances, with multiple fiduciaries acting as a check on each other. In some cases, the grantor may even maintain a role in the administration process by serving as the trust advisor; in others, he or she may appoint a third-party advisor or even create an advisory committee. Typically, the committee includes the grantor and a team of financial planners and investment advisors.
Pendleton Square Trust Company, LLC specializes in serving as directed trustee with respect to a trust’s investments. In this role, Pendleton Square follows the direction of the trust advisor and their designated investment advisor(s), to carry out the advisor’s investment decisions. The trust advisor is often the grantor themself, a senior beneficiary, or a third-party registered investment advisor. When faced with a decision, the trust advisor collaborates with her team of professionals. Once a decision has been reached, the trust advisor directs Pendleton Square accordingly.
Following our client-centric approach, Pendleton Square serves under various iterations of the directed trust model. In most cases, our families assign investment responsibility to the trust advisor, while Pendleton Square retains responsibility for discretionary distributions and the administrative functions of the trust. Furthermore, some clients take advantage of Tennessee’s favorable trust laws and create a Special Purpose Entity (“SPE”) to direct Pendleton Square on investments and distributions. The SPE is a limited liability company established for the exclusive purpose of acting as trust advisor or trust protector.
Pendleton Square welcomes the opportunity to work with families in converting to the directed trust model and navigating Tennessee’s advantageous trust laws. Moreover, we look forward to serving as directed trustee alongside a team of estate planning attorneys, financial planners, and investment advisors.
Pendleton Square guides generations forward and provides an unsurpassed client experience. We welcome the opportunity to help you meet your estate planning goals.
