Compensation tests start in six months. Fiduciaries still have questions about what they need to show the examiner to prove that they’re pushing out commission-based securities sales. Bank examiners have started checking on trust companies to make sure that everyone can either demonstrate that they’re obeying Regulation R, even though the specifics still perplex industry […]
South Dakota is becoming the top choice for trust providers. With ten new launches this year and a roster of 50 institutions shortly, it’s easy to see why banks and advisors alike are flocking to the wealth-friendly state. But despite the welcome mat, screening for new players “isn’t easy.” This week, the South Dakota Division […]
Trust clients expecting to deduct bundled fees to the limit of the law may need to find providers who can break down fees as the IRS requires. Two years ago, the US Supreme Court in Knight v. Commissioner held to be eligible to deduct investment management fees in a trust, they cannot be grouped together or bundled with […]
Decade-old trust feature that splits trustee and advisor into separate operations has become accepted practice for banks and trust companies nationwide; but questions remain: will they last?
On the surface, directed trusts are an obvious win for everyone. Splitting the administration of a newly created trust from the responsibility of managing the assets within it lets legacy advisors keep their accounts and custody provider—such as Schwab or Fidelity. Trustees avoid the headaches of managing exotic assets, while their clients can feel secure knowing that experts are in charge of every aspect of their wealth.
Jeffrey Lauterbach gets credit for turning the concept into a trust operation that propelled his firm, Capital Trust, from zero to $6 billion in trust assets in six years. “It was always market driven,” he told me in a recent interview. “Advisors told us want they wanted, and we delivered.”
Lauterbach sold his operation in 2005, which was subsequently sold to Wilmington Trust in 2007. He added, “Wilmington tried to make a go of it by itself, but didn’t stick with it long enough to make it work. We did”
Today, firms like Advisory Trust of Delaware (Capital Trust’s successor, owned by Wilmington Trust), Santa Fe Trust, Reliance Trust and Wealth Advisors Trust Company of South Dakota are actively courting advisors who want to add value without handing off the relationships they’ve worked so hard to build. Fees are generally split between trustee and investment manager, which helps make sure everyone stays happy.
These advisor-oriented trust companies are also promoting the directed trust model directly to wealthy people who may benefit from a trust but don’t feel like handing the reins of a family business, for example, to a relative stranger who knows nothing about how to keep the business going. In these cases, setting up a directed trust lets insiders stay in charge and still enjoy the other advantages of ownership under the trust structure.
“A corporate trustee doesn’t want to get involved in running a closely held business, and families don’t want corporate trustees interfering in a lot of their decisions,” trusts and estates lawyer Bruce Stone told Lawyers USA (a professional monthly for the legal profession) back in 2007. “With a directed trust, the corporate trustee only has to do certain things.”
Liability in the Details
So far so good, but if things go wrong, the question of who gets blamed still gets decided on a state-by-state basis. The limits of a trustee’s responsibility to monitor the advisors assigned to direct the trust’s investments are often nebulous, and some have been sued for failing to spot and stop misconduct fast enough.
It’s a controversial topic even among The Trust Advisor’s readership. When we posted back in January our analysis of the most trust-favorable states, estate planners piped up with corrections.
“In your chart, you indicated that Florida doesn’t have a power to direct,” wrote Lester Law, a senior vice president at U.S. Trust Bank of America Private Wealth Management working in Naples, Florida. “Can you review the … statute and let me know what you think?” And Boulder, Colorado attorney Scott Robinson alerted us that “The chart indicates that Wyoming does not have a directed trust statute. Wyoming does in fact have such a statute.”
In an influential 2007 white paper on the subject which may be downloaded, “Directed Trusts: Can Directed Trustees Limit Their Liability?,”
Experts aren’t sure if the tax hiatus is a loophole or pitfall for estates. With taxes set to begin again in 2011, estate planners now wait and wonder how to determine a client’s current estate tax obligations.
In 2011 the estate tax is scheduled to return at a rate similar to that in place prior to tax cuts enacted under President George W. Bush. The one-year repeal of the tax this year has been on the books for years, but estate planners and congress watchers have widely anticipated the congressional democrats would prevent the repeal from taking effect.
Instead, amid disagreement over the proper level for the tax and preoccupation with health care overhaul legislation, lawmakers punted last year and left the repeal intact. Congressman Richard Neal (D-Mass.) said in a recent Wall Street Journal interview “Ten years ago, there was a lot of gallows humor about repeal when somebody said it would never happen.” Neal chairs the House Select Revenue Subcommittee. “Now, one of those never-happen moments has happened, and nobody’s laughing.”
Mr. Neal said “there is no question” that Congress will reinstate the tax, retroactive to January 1. That is also the intention of Senate Finance Committee Chairman Max Bacchus (D-Mont.). But others aren’t so sure.
Veteran estate planner Steven J. Oshins, said in an interview with The Trust Advisor yesterday, “I am anticipating Congress will try to adopt an estate tax that is retroactive to January 1, 2010 in an attempt to fix the problem. However, it is not clear that a retroactive estate tax would be constitutional.” Oshins added, “It is likely that there will be many lawsuits brought by wealthy families of decedents who die in 2010 prior to a retroactive estate tax system being adopted.”
University of Virginia Law School Tax Professor George K. Yin, said in a Wall Street Journal interview last week, “There are plenty of instances where Congress has changed tax laws retroactively but this one is particularly high profile. Since Congress has had so much difficulty around a permanent estate tax solution to begin with, there is no reason to think a retroactive solution would be less controversial.” There are big questions on whether the Democrats will even succeed with a retroactive extension.
All of this uncertainty has left the rich and their financial advisors with no end of planning conundrums and few opportunities. In addition to the estate tax, the so-called generation-skipping tax also disappears in 2010. That tax was imposed at 45 percent in 2009 on gifts to grandchildren.
Multimillionaires might try to take advantage of the repeal of the generation-skipping tax by making large gifts to grandchildren in 2010. However, according to Oshins, those gifts would still be subject to a 35 percent gift tax still in effect for this year.
Why the comeback? A demand for lower expenses and more flexibility make qualified plans a major market
Collective investment funds, sometimes referred to as common trust funds, are not a new investment structure in the U.S. market. In fact, they have been available in the market for decades, to both defined-benefit and defined-contribution plans.
In the past, however, collective investment funds had also always been perceived as a bank product, and mutual fund companies were, for several decades, the growth leaders in the retirement plan arena. As 401(k) plans began to grow quickly in the 1980s, they found mutual funds an easy-to-use product, further slowing the development of collective investment funds.
Now, collective investment funds are making a very strong comeback for several reasons.
The primary factor in the last few years has been faster computers and better communication networks. These have allowed collective investment funds to be priced and traded on a daily basis.
Collective investment funds are remarkably similar to the mutual funds many of us are familiar with in the marketplace; they can invest in equities, fixed income, ETFs and even mutual funds.
Additionally, they can create custom asset allocation portfolios to meet the needs of a particular client. This feature has been extensively used by pension plans that desire the collective investment funds to be utilized as a life-cycle fund.
While many pension plan sponsors had shied away from including collective investment funds in their employees’ plans in the past, there are now more than 800 collective investment funds available, and that number keeps growing.
Many of the collective investment funds available today are near mirror images of mutual funds that asset managers already offer to pension plans.
In fact, some of the stable value funds already available are so identical to the mutual funds they mirror that many plan participants are unaware of the transition from mutual fund to collective investment trust.
There are a few key differences, however, which make them remarkably well suited for use within 401(k) retirement plans.
There are several factors which make CIFs different from mutual funds. Nearly all of them are helping drive more and more business toward the collective