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You’ve worked hard to grow and accumulate wealth, and you want to pass it on. So how can you best achieve your estate planning goals to help ensure the people and causes you care about will be taken care of tomorrow?
Moreover, how can you make sure what you pass on remains working or invested in ways that you believe will maintain their track record of success?
To help protect their wealth and ensure it transitions as they’ve intended, many affluent families have utilized trusts as a tool to help accomplish their estate planning needs. Additionally, these vehicles can be set up as directed trusts to allow for the continuation of a particular investment approach or philosophy.
What’s a trust?
In basic terms, a trust is an entity created by the execution of a legal document known as a trust agreement. Once created, the trust can own property for the benefit of a third party. The agreement describes who will benefit from the property and assets held in the trust during the lifetime of the grantor — the person who establishes the trust — as well as when the grantor is gone. Typically, a trust will also describe how the property will be distributed, and over what time period. (Related: 7 times when a trust might help you)
Given that affluent clients may have wealth transition plans that could span generations, prudent and customized investment management is typically an integral component of a trust relationship.
As a fiduciary duty-bound to act in the client’s best interest, the trustee will carefully select an investment manager, or managers, who they believe are best suited to help the client reach their unique wealth management goals.
Management of trust assets: Potential stumbling block?
Selecting an appropriate investment manager, overseeing the portfolio’s management, and ensuring adequate diversification under the prudent investor rule (a legal standard for investment portfolio management) are typically the responsibilities of a trustee. But for some, ceding investment decisions and control to a trustee may not be a palatable or viable option.
For example, some high-net-worth families may have their wealth concentrated in certain assets or property — such as a family business — or in a specific field or sector they have expertise in, such as real estate.
Others, such as a retiring corporate executive, may have accumulated a large position in the employer company’s stock. Even though his or her portfolio may be heavily concentrated, the executive may wish to retain the holdings and forgo broader diversification out of loyalty to the company, or confidence in its future prospects.
As well, some families may have long-time, trusted relationships with a financial professional who is currently managing their portfolios. Given these relationships, and the desire to continue with their existing investment strategies, a traditional trust relationship that would turn investment management decisions over to a trustee may prove unappealing.
Directed trusts: A separation of services
In situations where a client may benefit from the estate planning advantages of a trust, but who wish to keep the management of the trust assets separate from trust administration services, vehicles known as “directed trusts” are available in certain trust-friendly states.
Under a directed trust, the trust agreement is drafted so that an investment advisor appointed under the agreement is given the authority to direct the trustee with respect to the discretionary investments held within the portfolio. This essentially separates the investment management responsibility from the trust administration responsibilities.
Through this separated, bifurcated model, clients can reap the estate planning benefits of a trust, and any personalized services offered by the trust department, while retaining the investment relationship with their current financial professional, as well as their existing assets or portfolio holdings.
For the trustee, the directed trust relationship essentially removes any liability and fiduciary accountability on their part as it pertains to the investment decisions made for the trust, as well as the assets held in the portfolio.
For the client, the creation of a directed trust enables them to gain peace of mind knowing that their wealth will transition as they’ve intended, while still being able to enjoy a continued relationship with their existing investment professional, and retaining their portfolio strategy.
To learn more about a directed trust, contact your MassMutual financial professional or the MassMutual Trust Company directly at 1-888-894-5354 or via email at info@MassMutualtrust.com. Together, your financial professional and MassMutual Trust can help you determine if a directed trust may be right to help you achieve your unique and personal goals.
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