Greg Bowman, CEO
When it comes to tax and estate planning, an entrepreneur or wealthy business owner is often faced with a paradox. They know that there must be a succession plan for the wealth, most often utilizing a trust, yet they want to maintain control either directly or within the family.
But first, a brief primer of directed trusts. A directed trust allows the duties of the trustee to be segregated with some function being assigned in the trust to a “trust director”. The remaining duties are conferred on a trustee, which is most commonly a corporate trustee such as Northwest Trustee & Management Services. The result is that a family can transition the family business or other assets safely to the next generation through a trust while maintaining control within the family through naming them as the trust director. This is codified in Washington at RCW 11.98B.010 and in the Gem State at Idaho Code Section 15-7-105.
The good news is the trust director can often be the grantor, as could certain family members, the CEO of the grantor’s company, or anyone else the grantor selects. The trust director could have trust powers including:
- Full investment management
- Controlling the management of an operating company
- Management of farms or timberland
- Making discretionary payments to beneficiaries
Northwest Trustee & Management Services acts alongside the trust director as the administrative trustee and often retains full responsibility for all other fiduciary duties, which can include:
- Creating trust accountings
- Tax work
- Payments to vendors for goods and services
- Discretionary decisions, etc.
In summary, a trustee no longer “has to do it all”—services can be unbundled to fit the specific situation. Two highly complex and dynamic recent examples will illustrate these points.
The “Deadliest Catch” in the Bering Sea
We are the trustee for a trust created by a deceased uncle for his nephew. The uncle was a successful entrepreneur who developed a large and successful fishing enterprise and left voting shares of this enterprise in our trust. The underlying assets include a commercial fishing boat used to catch crab, salmon, and other species in the Bering Sea. Additionally, other unique assets include valuable fishing quotas, and interests in other fishing operations. Think the TV series, “The Deadliest Catch”.
The nephew—our trust beneficiary—is an experienced fisherman in the Bering Sea and has been named as the trust director over all fishing related assets. This allows the nephew to use his decades of experience to effectively manage the fishing operations. Northwest Trustee’s role as trustee is limited to supervising a third-party investment advisor, making discretionary decisions, and completing all accounting and tax requirements. Neither the nephew nor our company are responsible for the actions of the other.
The Cure for Alzheimer’s Disease
A common trait among entrepreneurs is that they want to maintain control. Additionally, when the seed of their labor germinates and it is time to harvest, they want to avoid unnecessary tax.
Recently, a brilliant professor/scientist developed a drug that shows promise in developing a cure for Alzheimer’s Disease. The professor owned significant shares of stock in a closely held company owning the patent, and the company has the team necessary to pursue a cure for Alzheimer’s.
The professor and his wife have two well-adjusted adult children. From an estate planning perspective, they desired to provide for their children and grandchildren through long-term trust planning. Additionally, transferring the stock out of their estate as early as possible (and most definitely before the company went public) would save enormous amounts of estate taxes.
Through their estate planning attorney, the couple created two irrevocable trusts—one for each child and that child’s children. The company continued to grow and became a publicly listed and traded company. The grantor became the trust director and now retains control for all investment management of the trust. This includes making the decision to hold the stock, as well as how to diversify the trust investment portfolio at the appropriate time.
Northwest Trustee serves as a trustee alongside the family on these irrevocable trusts. It does not have any responsibility for the professor’s decisions relating to holding or liquidating the stock but has retained all administrative functions as well as making discretionary payout decisions to the trust beneficiaries.
In conclusion, whether you own a fishing fleet in the Bering Sea or have developed the cure for an “incurable” disease, the use of directed trusts offers families greatly enhanced control while still partnering with an independent trust company.
Northwest Trustee is a leading provider of directed trusts with hundreds of millions of dollars of such trusts under administration. We have the expertise to work with estate planning attorneys to fully manage unique and legacy assets, while we assure the smooth transition to the next generation.
Print Date: Summer 2021