Directed Trusts: Customizing Control

Trusts have long been a cornerstone of estate planning, offering a way to manage and protect assets for beneficiaries. Traditionally, a single trustee handled all aspects of trust administration—investments, distributions, record keeping and compliance. That model still works in many cases, but in complex family situations or when dealing with unique assets, giving one person complete control may not be ideal. Enter the directed trust. This modern approach allows the settlor to assign specific powers to different individuals or entities, tailoring the trust to suit the family’s needs and the assets involved. With more states adopting directed trust statutes, particularly versions of the Uniform Directed Trust Act (UDTA), demand for these flexible arrangements is growing.

What Makes a Trust “Directed”?

In a traditional trust, the trustee manages assets and carries out all fiduciary duties. A directed trust allows the settlor to divide powers among trust directors (sometimes called advisors or protectors) who instruct the trustee on specific matters. The trustee remains responsible for administrative tasks such as holding title to assets, record keeping and tax filings, but decisions about investments or distributions can be made by those better suited to the job.

Roles and Responsibilities

A directed trust may appoint an investment director with sole authority to direct the trustee on how to invest trust assets. This person might be a financial advisor or family member with investment expertise. The trust can also name a distribution director who decides when and how much to distribute to beneficiaries, leaving the trustee to simply execute those instructions. Additionally, a trust protector may be appointed with powers such as removing and replacing trustees or directors, terminating the trust if it becomes uneconomical, amending the trust to improve tax efficiency, or resolving ambiguities in the trust terms.

The trustee must comply with the directions given by these directors but retains responsibility for ministerial duties, including safe custody of the assets and filing tax returns. This division allows each role to play to its strengths, with directors making substantive decisions and the trustee handling administration.

Why Use a Directed Trust?

Directed trusts offer several benefits over traditional structures. They allow families to select people most qualified for each role. A financially savvy friend can serve as investment director, while a relative who understands family dynamics can be the distribution director.

Corporate or professional trustees may be more willing to accept the limited role of directed trustee when dealing with illiquid or hard‑to‑manage assets, such as real estate, private business interests or artwork. By giving beneficiaries a say in distributions without granting them full control, directed trusts can empower the next generation while maintaining oversight.

Legal Framework and State Variations

Not all states treat directed trusts the same way. Many have enacted statutes that define the powers and liabilities of trustees and directors; others rely on general trust law, which may not provide clear protection when duties are divided. California and Virginia adopted comprehensive statutes modeled on the UDTA, which generally allows fiduciary responsibilities to be split and limits liability for trustees following directions. In states with robust directed trust statutes, a trustee has limited duty to monitor or second‑guess the director’s decisions, although willful misconduct or gross negligence can still trigger liability. Other jurisdictions, like Washington D.C., provide less liability protection, creating potential exposure for trustees who take direction.

The California Uniform Directed Trust Act (CUDTA)

California was one of the more recent states to enact a directed trust statute. CUDTA, effective January 1 2024, allows a trust instrument to grant a power of direction to a trust director. It clarifies that a trust director is a fiduciary subject to the same duties as a trustee unless the power falls under specific exceptions, such as a power to appoint or remove a trustee. The statute adopts a willful misconduct standard: a directed trustee must follow a director’s instruction unless doing so would constitute willful misconduct. It also relieves trustees and directors from monitoring each other’s actions, simplifying administration and reducing duplication of effort. This statutory clarity offers greater protection to trustees than prior law, which prohibited exculpation for acts of gross negligence.

Drafting Considerations and Best Practices

While directed trusts can be powerful tools, they must be drafted carefully. Here are some key considerations:

• Choice of Directors: Selecting the right individuals is critical. Directors should have the expertise and integrity to fulfil their roles. Think about succession planning if a director becomes unable or unwilling to serve.

• Clear Scope of Authority: The trust document should delineate each director’s powers and limitations. Ambiguity can lead to disputes and litigation.

• Coordination Across States: If the trust owns property in states that do not recognize directed trusts, the trustee might need to handle those assets differently. Always consult lawyers licensed in each relevant state.

• Liability Shielding: Even with statutory protection, trustees and directors should consider liability insurance to cover any potential claims.

• Communication and Record Keeping: Directed trusts involve multiple actors; documenting directives and trustee compliance is essential to demonstrate adherence to fiduciary duties.

A Hypothetical Example

Suppose a tech entrepreneur funds a trust with a mix of public company stock, shares in a start‑up and rental properties. She knows the start‑up will require specialized knowledge to manage and values input from her brother, an experienced venture capitalist. Meanwhile, she wants distributions to her children to reflect their differing needs. To achieve these goals, she establishes a directed trust. Her brother becomes the investment director with authority over the start‑up shares, a close family friend serves as distribution director, and a professional corporate trustee handles administration. Because the trust is governed by CUDTA, the trustee is obligated to follow the directors’ instructions unless doing so constitutes willful misconduct. The trust protector is empowered to resolve disputes among the directors and replace them if necessary. This structure allows each person to do what they do best, aligning professional expertise with the trust’s complex assets and family dynamics.

Conclusion: Flexibility with Safeguards

Directed trusts reflect a broader trend toward customization in estate planning. They offer families the opportunity to bring in experts and distribute decision‑making responsibilities, which can be invaluable for large estates with complex assets. However, with that flexibility comes the need for careful drafting, thoughtful selection of directors and awareness of state laws. When properly designed and administered, directed trusts can balance control, expertise and protection, ensuring that the settlor’s intentions are carried out while minimizing the risk of fiduciary liability.