A Directed Trust Plus LLC: Protecting Your Children While Giving Them Some Control

One of the topics I’m asked most frequently about (and also one of the topics I write about the most) is structuring inheritances so that they are protected from a child’s future potential divorce. For a general overview of the topic, click here.
 
Many clients wish to leave their children’s inheritances in a discretionary trust to protect from divorce, but still wish to allow their children to determine how the assets are invested. This tends to come up most frequently with clients whose estate is comprised in large part of a family business or real estate. These clients want protection for their child, but still desire that the child be able to run the family business or real estate holdings once they are gone.
 
This is a situation where you can have it both ways. The solution is what I like to call a DTPLLC (“Directed Trust Plus LLC”).
 
A DTPLLC can be set up before your children are ready to inherit (while you are still alive), or can lay dormant within your will, ready to spring into action only after your death. If you choose to set up the DTPLLC during life, it can be structured for estate tax savings. If you choose to have the DTPLLC spring to life only after death, the estate tax savings may not be as great, however the setup costs are much lower and there is no change to the structure of your business or real estate holdings at all while you are alive.
 
A DTPLLC has two “layers”, an LLC and a trust. 
 
The base of the DTPLLC is the LLC. All of the family real estate and/or business holdings are consolidated under the umbrella of one parent LLC.
 
On top of the LLC base comes the trust, which owns 100% of the LLC. Under the terms of the trust, in addition to a Trustee and Trust Protector, there is also a “Trust Investment Advisor”. The Trust Investment Advisor would generally be the child who will be running the family business or real estate holdings. The trust spells out that the Trust Investment Advisor controls all investment decisions with regard to trust assets and that the trustee must abide by the direction of the Trust Investment Advisor. The trust also states that the trustee has “no duty to diversify investments”. This is important because by default, under the Prudent Investor Act the trustee must maintain a diversified portfolio of holdings within the trust. This default rule must be overridden because the trust portion of a DTPLLC the trust usually holds only one undiversified asset: a 100% interest in the “umbrella” LLC mentioned in the preceding paragraph.
 
The Trust Investment Advisor directs the Trustee to hold the full interest of the umbrella LLC and not to sell it. The Trust Advisor then directs the Trustee to vote its LLC interest to appoint the child as Manager of the LLC. As Manager of the LLC, the child will be able to run all of the family businesses and real estate investments with no more constraints than if he owned the businesses outright.
 
This all may sound complicated, but it practice, it’s really pretty easy. A DTPLLC setup allows a child to be protected while not being handcuffed by a third party trustee in his investment decisions. The setup works well assuming appropriate safeguards are in place to prevent its abuse and subsequent “alter ego” finding.
 
If you have any questions about a DTPLLC, or anything else, don’t hesitate to contact me.
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