Jim Flynn

Jim Flynn, Money & the Law

One of the more significant legal inventions in the past several centuries is the trust. That’s because trusts offer an opportunity, without need for supernatural powers, to control worldly affairs after death.

There are usually three players involved in a trust — the settlor, who establishes and funds the trust; the beneficiaries, who receive distributions from the trust; and the trustee, who invests the trust’s assets and makes distributions to beneficiaries.

A frequently used estate planning tool involving trusts is a revocable living trust. That type of trust is established while the settlor is still alive and he or she serves as trustee and beneficiary until death. Then, the trust becomes irrevocable and someone else takes over as trustee to carry out the settlor’s wishes. After the settlor’s passing, the trustee and the beneficiaries must follow rules created by the settlor, as stated in a legal document known as the “trust instrument.” Trusts can also be established in a will, with the trust formed at the settlor’s death.

It’s not a surprise that, after a settlor’s death, trustees and beneficiaries don’t always agree on distributions. (Beneficiary to trustee: “I want a Corvette.” Trustee to beneficiary: “Well, you’re getting a Kia.”) They may also disagree on investing the trust’s assets. (Beneficiary to trustee: “I think you need some pork belly futures in the portfolio.” Trustee to beneficiary: “I’m sticking with CDs.”)

A settlor, seeing the possibility for such future disagreements and knowing he or she won’t be around to act as peacemaker, will sometimes decide to name as trustee an individual, or company, that specializes in trustee services, and is trained and experienced in these duties — a professional trustee. On the other hand, settlors sometimes think it’s best to have a family member serve as trustee, since that person will know the settlor’s intentions on a more personal and intimate level.

Another option for settlors with enough wealth to cover the additional administrative overhead is a “directed trust.” Such trusts have both a trustee and a “trust director.” The trust instrument assigns to the trust director certain specified functions, such as investment management or distributions, and, under a Colorado statute known as the Uniform Directed Trust Act, the trustee is subordinate to the trust director. Thus, the trustee must do what the trust director orders even if the trustee, left to his or her own devices, might act differently.

This structure allows the settlor to name a trustee who knows the settlor (and beneficiaries), but hire a trust professional to handle administrative duties beyond the skills of the trustee or that could be a source of controversy. The directed trust arrangement also shelters the trustee from criticism (and whining and nagging) from the beneficiaries. (Beneficiary to trustee: “So where’s my Corvette?” Trustee to beneficiary: “That’s not my decision. You’ll have to talk to the trust director. He’s in Chicago.”)

As you might expect, the Uniform Directed Trust Act sets out rules on how the trust director and trustee interrelate and carry out their functions.

The act makes both fiduciaries, meaning they must act at all times in the best interests of the beneficiaries. Under the act, the trustee must follow the trust director’s instructions unless the instructions would cause the trustee to engage in wrongdoing — defined as conduct “designed to defraud or seek an unconscionable advantage.”

Under the act, the trust director and trustee are not required to monitor each other’s activities, but they must share information as it relates to their responsibilities.

Directed trusts are more complex than ordinary trusts (if there is such a thing) and they are not do-it-yourself projects. If you think a directed trust — meaning use of both a trust director and a trustee — is right for you, hire a lawyer who’s been down this road before to help you.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Contact him at moneylaw@jtflynn.com. “Best of Jim Flynn’s Money & the Law” is now available at amazon.com — paperback or e-book.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Contact him at moneylaw@jtflynn.com. "Best of Jim Flynn's Money & the Law" is now available at amazon.com — paperback or e-book.

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