Planning an Effective Trust Diversification Strategy

The fiduciary responsibility to create an effective estate investment plan is something that some trustees and administrators find to be a challenge. Trust laws allow estate planning clients a fair amount of control and flexibility in asset diversification. If the goal is to generate income while minimizing taxes, and protecting assets for the purposes of family legacy, working with a licensed estate planning specialist who offers expert advice about trust investment, will assist a client in accomplishing the financial objectives of an estate.

Asset Diversification Strategies

Most high net worth estate planning clients require a diversified portfolio of equities, fixed-income securities, hedge funds, private equity, real estate, and natural resource funds. Since enactment of the Uniform Prudent Investor Act (UPIA) in 1994, all trustees in the United States must consider specific guidelines when formulating an investment strategy. In accordance with the legislation, a trust investment planner must consider the duration of the trust; the size of the portfolio; liquidity and distribution; tax consequences; expected total returns; individual investments; and the overall economic environment. Rules of UPIA fiduciary duty stipulate that trust assets are to be diversified, unless the purpose of the trust is solely for the targeted transfer of a family interest in a business, or to avoid capital gains. Trustee fiduciary liability is the premise of the legislation; also limiting client exposure to high-risk diversification strategies.

Directed Trusts

Comprised of an investment committee, distribution committee and directed administrative trustee, a directed trust entity is formed to instill check and balance process within the governance and administration of the trust. No discretionary investment role is assigned to any party involved in planning and management of the trust. Asset allocations and control are generally subject to the investment committee advisory, which in turn is liable “fiduciary.” An individual trust protector with executive power to approve or veto investment decisions may be elected to further control within a trust.

Trust Liability

Formed in coordination with the structuring of a directed trust, investment management limited liability companies (LLCs) limit fiduciary liability for trust investment strategy. Family investment partnership(s) (FIPs) are another option. Like the LLCs, FIPs allow for delegation of power to partnership units or trusts for each asset class of an estate, thus limiting liability to specific investment management decisions. U.S. federal Securities and Exchange Commission (“SEC”) guidelines Unit investment trusts (“UITs”) provide a limited trust vehicle with the purpose of investment in a fixed portfolio of securities with a specific termination date. In the case of UITs, the composition of the investment portfolio remains the same for the duration of the trust.

Trust-owned Insurance

Generally purchased for protection of an irrevocable trust, life insurance to pay estate debts, taxes, and distribute survivor income, trust-owned insurance policies are structured to maximize death benefits, while minimizing cash value. Private placement life insurance (PPLI) is another option, structured to maximize cash value, while minimizing the death benefit of a trust. A capital gains taxation strategy for trust investors, PPLI reduces the tax owed income from publicly traded securities, hedge funds, private equity, and many alternative investments.

Real Estate and Other Assets

Qualified personal residence trusts (QPRTs) allow for trust funds to purchase real estate for the beneficiaries of a trust. Tax-exempt, and protected from creditor attachment under law, QPRTs are a popular estate planning vehicle. If the trust is structured properly, a trust protector can convert other trust assets such as antiques, art, and tangibles to real property on behalf of beneficiaries as well. By structuring a trust for each asset component, trustees and administrators can effectively avoid fiduciary liability, while enhancing the investment potential of a trust.

New York Estate Law Firm

Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule a consultation about an estate or trust law related matter.     

See Related Blog Posts

Estate Bitcoin Assets Taxable End to “Like Kind Exchange”

The New Rules to International Estate Planning

Contact Information