Directed trusts celebrate their first anniversary today, and give Iowans a vastly more flexible way to apply trusts to protect their assets now and for the future.
A key provision of the new Iowa law does away with the practice of one trustee who is in charge of all facets of a trust -- administration, investments and distributions. The grantor of the trust can assign those duties to different people, and in some instances himself. A financial institution trust department typically would have handled all those duties, and just as typically would be conservative with its investments as it controlled where assets would go. That almost always ruled out a business.
“The traditional structure makes it hard to hold a family business,” said Nate Birkholz (pictured above), president of BTC Trust Co. of South Dakota, a unit of Bankers Trust Co. The trustee has a duty to manage the trust in a responsible manner that maintains its assets, and that would be very difficult to do with an entity that is run by other people.
Now, the Investment Trust director tells the trustee which assets to hold. That could include that family business, or a concentrated position in a business or real estate.
“The family tells us what assets are to be in the account,” said Birkholz. “They can let us do some. They can let a registered investment adviser do some.”
The new law also allows for a separately named distribution director. This allows you to appoint someone who knows the family well, Birkholz said, and understands family dynamics. And it’s especially helpful as the number of beneficiaries of a trust grows.
Qualifying trusts are still irrevocable. But their terms are no longer chiseled in stone for life, as the new law allows changes to be made to a trust – it’s called decanting – to adapt to new situations.
“Decanting is a big change for the better,” said Jay Syverson, an attorney in Des Moines who makes trust agreements. “As life goes on and circumstances change (these trusts can last for decades), you build it in almost as a matter of course.”
A trust that was established in the 1960s may not be all that suited to the current economic situation. Plus, the tax code changes, and it could be helpful to change a trust to adapt to it.
Iowa’s directed trusts aren’t the best in the nation when it comes to treatment of the grantor – that distinction probably still lies with South Dakota, which has added privacy benefits. But they’re a marked improvement for grantors who wish to remain Iowa-based.
