A client names a sibling, longtime friend, tax professional, or bank as trustee. The choice makes sense: the person or institution knows the family, can administer the trust, and has the client’s confidence. But when the trust receives an investment portfolio, a business interest, real property, or a large block of legacy stock, another question comes into focus: Who is making the investment decisions?
Tax professionals often see the answer before anyone else does. It may surface while preparing a trust return, estimating the tax on a proposed sale, reviewing a distribution, or trying to obtain information from several trust-owned entities.
A trustee can be conscientious and capable in the administrative role yet welcome a specialist to manage the investments. The trustee can remain in place while an investment specialist takes on an appropriate, clearly defined role and builds a plan for the trust.
There is more than one way to divide the work.
In a traditional trust, the trustee generally has responsibility for administration, distributions, and investments, subject to the document and governing law.
Delegation is a continuing relationship, not a one-time handoff.
The trustee may be able to delegate appropriate investment functions to a professional manager. In that arrangement, the trustee selects the manager, sets the scope of the assignment, and monitors the work under the applicable standard. The manager implements its agreed investment mandate. Delegation is a continuing relationship, not a one-time handoff.
A directed trust gives someone other than the trustee authority over investments.
A directed trust uses a different design. Its governing document gives a person other than the trustee authority over specified decisions, such as investments. That person may be called an investment adviser, trust director, or another name under the document and governing law.
The trustee follows properly given directions within the framework of that law; the duties and liability of each party depend on the arrangement. The professional managing a portfolio and the person holding formal power to direct the trustee might be the same firm, or they might be different people.
The investment agreement should match the trust document.
This distinction matters when a family tells its tax professional, “We want our adviser to handle the trust assets.” Does the trustee plan to hire a manager while retaining investment authority? Does the trust already appoint an investment decision-maker? Does it need an amendment or other action under applicable law?
The trustee, estate planning attorney, and proposed investment firm should answer those questions together before anyone assumes authority to trade, retain a concentrated asset, or direct a sale. The investment agreement should match the trust document.
The need for trust investment management can arise in any trust.
The need for dedicated investment management is not limited to large or geographically distant trusts. It can arise whenever the trustee’s strengths lie elsewhere and the assets require sustained investment attention. Consider a few common signals.
The trust holds a concentrated legacy position.
A founder’s stock or a long-held public company position may carry substantial unrealized gain and family significance. Leaving it untouched is itself an investment decision. Diversification, income needs, market risk, tax cost, and any retention instruction in the trust all belong in the same conversation.
Real property dominates the balance sheet.
A residence used by family members may consume cash without producing income. Investment property may require reserves for repairs, debt service, insurance, and taxes. If an LLC owns the property, the trustee’s rights as an LLC owner and the manager’s powers also need to be understood. Portfolio liquidity may have to support assets that cannot be sold quickly.
Beneficiaries need different things.
One beneficiary may depend on current distributions while younger beneficiaries need long-term growth. The trustee needs an investment policy and a cash forecast that takes both into account, along with taxes and trust expenses.
The structure has outgrown its original process.
Several revocable and irrevocable trusts, related entities, private investments, and multiple family branches can make it difficult to see the total exposure, coordinate distributions, or collect timely tax information.
These signals call for a closer look at who owns the trust’s investment work, how decisions are made, and what professional support the trustee has. The tax professional can help frame the questions because the tax returns and entity records often reveal connections that an account statement does not.
A trust investment manager balances more than the portfolio.
A trust portfolio cannot be managed as though it were an individual’s unrestricted brokerage account. The trust’s terms define its purposes, beneficiaries, distribution provisions, and any special instructions about particular assets.
The investment horizon may span generations. A strategy that looks attractive before tax may create a very different result after a concentrated position is sold or an entity distributes income.
Take a trust holding appreciated stock and a family-use property.
A trustee requests cash for a beneficiary’s medical costs and for a major repair to the house. The investment manager should know what liquid assets are available, the cost basis and risk of the stock, the expected cash needs of other beneficiaries, and who is authorized to decide whether to sell.
A decision to retain the stock may be sensible for a time, but it needs a reason, a liquidity plan, and a trigger for revisiting it. The property’s personal value to the family matters, too; so do its carrying costs and the interests of beneficiaries who do not use it.
Clear answers prevent a sound investment idea from failing in execution.
The manager also needs a reliable connection to the trustee and the tax professional. Who forecasts distributions? Who provides basis records and entity financials? Who gives written directions, approves a trade, votes shares, or engages a valuation specialist? Who coordinates with a property manager or outside counsel? Clear answers prevent a sound investment idea from failing in execution.
Baker Wealth Strategies offers in-house expertise for complete trust investment management.
Baker Wealth Strategies brings accounting, planning, legal, and investment perspectives together in-house.
- Jennifer Baker, CPA, CFP®, RICP®, brings financial planning and tax expertise to beneficiary cash flow, the family’s wider balance sheet, and the after-tax effects of decisions.
- Justin Baker, J.D., LL.M., MBA, brings legal training and experience with trusts, estate planning, closely held entities, and family governance.
- Temitope Ayoola, CFA, FRM, our Director of Investments, brings investment research, asset allocation, manager evaluation, and risk analysis.
Each professional in our firm works from a shared picture of the family, its trusts, and the related entities, and our team has served single- and multi-family offices, as well as large institutional investment firms, for high- and ultra-high-net-worth families with multiple revocable and irrevocable trusts and numerous trust-owned entities.
We have seen how a distribution from one trust, the use of a family property, or the sale of a legacy holding can affect the family across accounts and generations. That background makes us especially well equipped to weigh beneficiary needs, investment return objectives, and tax exposure together, particularly when a trust’s assets extend beyond a conventional securities portfolio.
We can discuss serving in an investment role appropriate to the document, trustee, and governing law.
That might mean managing assets under a trustee’s delegation or, where appropriate and accepted, serving in a formal directed role. The trustee remains responsible for its assigned functions, and we coordinate with the client’s tax professional, estate planning counsel, and other advisers. We can work alongside the family’s existing trustee and professional team.
Ask these questions before the handoff.
What will the manager actually manage?
List the marketable securities, cash, private investments, entity interests, and real property. A portfolio management agreement may cover securities while another person retains authority over an LLC or property. Decide who will monitor each asset and how information about the whole trust will reach the investment team.
Who decides and who implements?
Identify the trustee’s authority, any direction power under the document, the manager’s discretion, and the person who approves distributions. Confirm how instructions are documented and how an urgent cash request will be handled. A trustee’s delegation and a directed appointment have different legal consequences; counsel should review the chosen structure under the governing state’s law.
How will the plan be measured?
Ask for an investment policy tied to the trust’s purposes, distribution needs, liquidity, concentration limits, taxes, and unusual assets. Agree on the frequency of portfolio reviews and what events trigger a fresh decision. Results deserve attention, but so do the risks taken and the obligations the trust was designed to meet.
What will it cost, and who can make a change?
Consider trustee, investment management, custody, fund, transaction, valuation, and special administration costs together. Review the investment firm’s services, fees, conflicts, and disciplinary disclosures. Establish who can replace the manager or serve as a formal investment decision-maker, and what happens during a vacancy. Succession matters in trusts built to last for decades.
The first step is a conversation. We can help.
For a tax professional advising a family in this position, a useful first step is a conversation with the trustee, the drafting attorney, and the proposed investment team. Baker Wealth Strategies welcomes that conversation. We can review the trust’s assets and investment challenges, clarify the role we could accept, and help build a practical process around the trustee and the family’s existing advisers.
Justin Baker, J.D., LL.M., MBA
Advanced Estate Planning Attorney
Baker Wealth Strategies
