Demystifying trusts: What can and can’t you do?


May, 2015 |

“You are able to get the tax savings without giving up control, which is important to the families we are working with.”—David Warren, President, Bridgeford Trust Company

Many clients have initial reservations about setting up irrevocable trusts, even though they can often provide significant income and estate tax benefits. The common refrain we hear is, “I will no longer have control and my wishes won’t be carried out. I won’t be able to use the advisors I want and my children or a corporate trustee will get to decide everything.”

But these concerns are not warranted. We recently sat down with David Warren, President of Bridgeford Trust Company, a South Dakota trust company and asked him to debunk some of these myths and provide solutions to put our clients and others at ease.

Q: Are irrevocable trusts really irrevocable?
A. That is a great question and one of the areas where certain asset protection states like South Dakota are able to excel and provide insights into preconceived notions many people have. Modern trust-law concepts such as trust protector, directed trust, decanting, reformation, modification, removal of trustees and relaxed rules around transfer of trust situs have revolutionized the trust industry. I know this is quite a bit of legal jargon but I am happy to put some of these concepts into plain English.

Q. Great, why don’t we start with what is a directed trust?
A. Directed trusts are only available in a handful of states across the country, including South Dakota. Directed trusts provide a family with maximum flexibility and control regarding the trust’s asset allocation, diversification, investment management and distributions. A directed trust allows the client, who appoints an administrative trustee in a directed trust state, to appoint a trust advisor or an investment trustee/committee. The directed trust concept unbundles functions (asset management and trust services) that have traditionally been bundled by large bank-based corporate trustees.

Q. What does this mean for clients and how does it allow them greater flexibility?
A. A directed trust can be used by a settlor who wants to fund an irrevocable trust with a closely held company or a specialized asset, but who also wants to place control of such assets in the hands of a particular individual (or a group of individuals) familiar with the company’s operations or that type of specialized asset. This means that the client is in control of who they want to work with and can use the same advisors they would have whether the asset is in a directed trust or held outright. They are able to get the tax savings without giving up control, which is important to the families we are working with.

Q. What are the states I should be looking at when considering directed trusts?
A: That is another great question. My personal bias is towards South Dakota. That being said, Nevada attorney Steve Oshins came out with an objective ranking looking at which are the best states in terms of flexibility/decanting. South Dakota was ranked number 1, followed by Nevada. Other states many people look at are Delaware, Alaska and Wyoming.

Q. If you had to summarize the take-away from our discussion today, what would it be?
A. The trust world has become extremely dynamic with many more tools available to the well-versed planner to better serve clients and provide far more control and flexibility in the creation and modification of solid wealth planning now and for generations to come.

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Bill Loftus

Bill is one of four founding partners of Coastal Bridge Advisors.   Bill leads the Corporate Executive Services, Lending and Alternative Investment operations of the firm. Bill is also responsible for overseeing business development and the firm’s west coast operation. With a career spanning almost 30 years, Bill began his career at Merrill Lynch in 1986. …

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