What Is a Directed Trust

Directed trusts allow the trust creator (grantor) to separate trustee powers by assigning responsibility for managing some or all of the trust assets to parties other than the trustee. In traditional trusts under common law, the trustee would manage all trust assets and distribute them to beneficiaries. However, modern directed trusts can divide these duties. For instance, individuals may want a specific advisor or family member to manage unique assets, such as shares of a family business, using a directed trust while the trustee retains other responsibilities.

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How Responsibilities Can Be Split in a Directed Trust

Directed trusts distribute the following responsibilities among various parties to limit trustee risk and allow independent investment management:

Investment Responsibilities

If a trust is “directed” for investments, an investment committee, trust investment advisor, or trust protector named in the trust document selects external investment advisors and managers to direct the trust’s investment. The trustee is not responsible for monitoring the performance of these external investment managers.

Distribution Responsibilities

If the trust is “Directed” for distributions, a distribution committee, trust distribution advisor, or trust protector named in the trust document directs the trustee when distributions are to be made, usually through a “Letter of Direction,” regarding to whom and how much should be distributed.

Administrative Responsibilities

The directed trustee manages the following administrative responsibilities:

• Contributions
• Follows directions regarding distributions
• Manages tax returns
• Maintains trust records
• Provides any required accounting to beneficiaries
• Other regular administrative functions, acting upon the direction of the investment and distribution advisors.

It is essential to define the trust advisor’s role for each set of responsibilities in the trust document and the grantor’s intentions in these cases, as the advisor’s role may not be subject to the common law and fiduciary rules that govern the directed trustee. States like Alaska and Nevada have established statutes that specify clear guidelines around the relationship and responsibilities of trust advisors and trustees of directed trusts.

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Separated Trustee Roles (Bifurcate or Trifurcate Trustee Duties)

Similar to directed trusts, some trusts can bifurcate or trifurcate the trustee’s duties between multiple trustees, assigning specific responsibilities to each trustee in the trust document. Under a separated trustee structure, each trustee will be a fiduciary position, and conversely, each trustee will be responsible (and liable) only for actions within the scope of their specific trustee role and responsibilities.

A trust where trustee duties are “separated” (bifurcated or trifurcated) assigns the following duties to a combination of various trustee roles:

Investment Trustee

This trustee has the responsibility to make day-to-day decisions regarding the investment and management of trust assets.

Distribution Trustee

This trustee has the authority to make distributions to or for the benefit of the beneficiaries. For irrevocable trusts, where creditor protection or tax planning are critical goals, it may be necessary for this position to be held by someone other than the grantor or beneficiary.

Administrative Trustee

This trustee holds the duties that are required by law to ensure that the trust qualifies for the desired governing law or situs. The exact requirements vary between jurisdictions, but often include: maintaining some assets in the state, maintaining some of the trust records in the state, filing or arranging for the filing of tax returns for the trust, and providing for a portion of the administration to occur in the state.

Why the Trust Jurisdiction Matters

Directed trust statutes vary by state. Certain jurisdictions have established clearer rules around the relationship between trust advisors and trustees, including how directions are given and how responsibilities are allocated.

Peak Trust Company supports directed trust administration in leading trust jurisdictions:

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Related Resources

• Directed Trust vs. Delegated Trust: What’s the Difference?
• Understanding Directed Trusts

Directed Trust FAQs

What is a directed trust?

A directed trust is a type of trust structure that separates certain trustee responsibilities by assigning them to other designated parties. In a traditional trust, the trustee typically manages investments, distributions, and administration. In a directed trust, however, the grantor can appoint advisors, such as investment advisors or distribution committees, to direct specific aspects of the trust, while the trustee handles administrative duties.

How are responsibilities divided in a directed trust?

Directed trusts divide responsibilities among different parties to allow specialized oversight. For example, an investment advisor may direct investment decisions, a distribution advisor may determine when beneficiaries receive funds, and the trustee handles administrative tasks such as recordkeeping, tax filings, and executing directions from the advisors. This structure helps ensure each role is managed by someone with the appropriate expertise.

Why do people choose a directed trust instead of a traditional trust?

Many individuals choose directed trusts because they allow them to maintain trusted relationships with financial advisors or family members who are familiar with specific assets, such as a family business or specialized investments. By separating investment management from administrative responsibilities, directed trusts can align the roles of advisors and trustees while reducing conflicts and improving flexibility in managing the trust.

What role does the trustee play in a directed trust?

In a directed trust, the trustee typically focuses on administrative functions rather than making investment or distribution decisions. These responsibilities may include managing contributions, maintaining trust records, preparing tax filings, and ensuring compliance with the trust document. The trustee acts on instructions from the designated advisors who have authority over investments or distributions.

Who can serve as an advisor in a directed trust?

A directed trust allows the grantor to appoint trusted professionals or individuals to serve as advisors. This may include investment advisors, wealth managers, family office professionals, attorneys, or other specialists who have expertise with the trust’s assets. By naming advisors directly in the trust structure, the grantor can ensure decisions are made by people who understand the investments, family dynamics, or long-term objectives involved.

What types of assets work well in a directed trust?

Directed trusts are particularly useful for holding complex or specialized assets. These may include closely held businesses, private equity, real estate holdings, concentrated stock positions, or unique investment strategies. Because investment authority can remain with a designated advisor who understands these assets, a directed trust allows them to be managed appropriately while the trustee focuses on administration and compliance.

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Note: The information provided here is for general educational and informational purposes only. It is not legal advice and should not be interpreted as such. For a thorough understanding of these topics relevant to your specific circumstances, we recommend consulting a qualified estate planning attorney. Peak Trust Company cannot provide legal advice; however, we can serve as an informational resource and provide referrals to highly skilled attorneys who can offer legal and tax guidance tailored to your specific needs.