Directed Trust

In a directed trust, the trust document carves responsibilities into distinct roles. A distribution committee or distribution advisor holds authority over when and how much to pay beneficiaries. An investment advisor or investment committee controls the trust's portfolio. The institutional trustee, typically a bank or trust company, handles administration, recordkeeping, tax filings, and custody, but follows the direction of these named parties rather than making independent investment or distribution judgments. Statutes in a growing number of states formally authorize this division of responsibility and clarify each party's liability.

Directed trusts appeal to families who want to retain a trusted family advisor, family office, or outside investment manager within the trust structure without appointing that advisor as sole trustee with full fiduciary exposure. A hypothetical family whose long-standing investment advisor manages a complex portfolio across private markets and public securities might use a directed trust so that advisor continues managing assets according to the family's investment policy statement, while a regulated trust company handles compliance and administration.

A frequent misconception is that the directed trustee bears no responsibility for following clearly improper directions. Most directed trust statutes still impose some duty on the administrative trustee to refuse patently unlawful instructions. The precise boundaries of each party's liability depend heavily on the state statute governing the trust. Families evaluating this structure should have a qualified attorney explain the liability framework for every role before the trust is drafted and funded.