In today’s evolving trust landscape, directed trusts are increasingly used to tailor fiduciary roles, centralize expertise, and offer specialized administration. Yet despite their growing popularity, there remains confusion about what a directed trustee actually is responsible for — and what falls outside their scope. Clarifying this distinction is essential for grantors, trustees, and advisors alike.
What Is a Directed Trust?
A directed trust is a trust structure in which the settlor (grantor) allocates traditionally trustee-held powers to one or more directors (often investment advisors, distribution advisors, trust tax advisor, or trust protectors) while a directed trustee retains administrative responsibilities. In this model, the trustee must act on written directions from these appointed parties for specific functions like investment or distribution decisions.
Unlike a traditional trust, where the trustee retains broad discretionary authority over investments, distributions, and administration, a directed trust bifurcates these duties. This separation allows specialists — for example, investment advisors experienced in illiquid assets — to make high-level decisions while the trustee focuses on fiduciary administration.
Trustee Responsibilities in a Directed Trust
Although a directed trustee’s authority can be narrower than in a traditional trust, their duties and legal obligations remain substantial and fiduciary in nature.
1. Fiduciary Duty Still Applies
A common misconception is that a directed trustee “doesn’t have fiduciary duties.” That’s not accurate. A directed trustee still owes fiduciary obligations to beneficiaries — including duty of loyalty, duty of care, duty of impartiality, and duty to administer in accordance with the trust terms. These duties remain regardless of the trust’s directed structure.
Where responsibilities are delegated (for example, investment decisions), the directed trustee typically is not liable for losses resulting from following a properly directed advisor’s instructions, as long as they act according to the trust terms and applicable law. Many states have adopted statutes based on the Uniform Directed Trust Act that explicitly recognize these liability limitations.
2. Administrative and Compliance Duties
Even when certain powers are delegated, the directed trustee still performs the core functions associated with trust administration:
- Record-keeping and accounting, including maintaining accurate books and transaction documentation.
- Regulatory and legal compliance, including applicable tax filings and internal administrative reviews.
- Tax reporting, including preparation or coordination of required federal and state filings.
- Execution of legal documents required to implement directed decisions.
- Coordination among fiduciaries, advisors, custodians, and beneficiaries to ensure consistent administration.
Through these functions, the directed trustee acts as the central administrative hub, consolidating the output of various fiduciaries and ensuring consistent application of trust terms.
3. Beneficiary Communication and Reporting
Directed trustees are also responsible for beneficiary communication and reporting obligations. This typically includes:
- Notifying beneficiaries of their interest (unless properly delayed under the trust terms).
- Providing accountings and trust reports as required by law or the governing instrument.
- Responding to beneficiary inquiries while safeguarding confidential information.
These responsibilities underscore that a directed trustee’s role, while structured, is not passive.
What Trustees Are Not Responsible For
A directed trustee does not make discretionary decisions in areas that have been expressly delegated to other parties in the trust instrument.
Investment Decisions: If an investment advisor is appointed and given authority over asset allocation and selection, the directed trustee executes the advisor’s instructions but does not independently choose or manage investments.
Distribution Discretion: Similarly, when a separate distribution advisor determines whether and how much to distribute, the trustee’s role is to implement these directives but not to determine the distribution strategy.
By clearly delineating these powers in the trust document, grantors can leverage specialized expertise and shift decision-making responsibility while maintaining administrative integrity.
Why This Distinction Matters
Understanding these boundaries protects trustees from unintended liability and informs grantors how best to structure their trusts. For professional trustees and corporate fiduciaries like LITCO, the directed trust model offers a way to collaborate with external fiduciaries, such as investment professionals, while preserving compliance, risk management, and robust record-keeping.
Read More: The Best Solution for Managing Directed Trusts
However, this model demands clarity in drafting, strong communication among fiduciaries, and a full understanding of statutory and common-law obligations. When implemented correctly, a directed trust can provide tailored expertise without sacrificing fiduciary accountability.
LITCO can help your clients get the most benefit out of their Directed Trusts as corporate trustee. Our team of trust experts are trained to work effortlessly with outside advisors and can create a partnership with the named investment advisor. LITCO can manage the trust administration while ensuring that the investment direction provides the beneficiaries with the maximum value of the trust asset. To learn more about how we serve as co-trustee in situations like this, request a consultation.
