Generally, a trustee is responsible for all aspects of a trust’s administration and asset management. Depending on a client’s particular circumstances, however, a single individual or corporate trustee may not be the ideal fiduciary to administer that client’s closely held business interests, investment real estate, vacation homes, and personal financial portfolio while also managing the beneficiaries’ expectations and desires regarding trust distributions. In these cases, the ability to divide a trust’s administration and asset management responsibilities among several people and/or institutions with differing skills or expertise may prove beneficial.

Clients can achieve this division using a “directed” trusteeship, which allows the client to appoint one or more third parties to direct the trustee in carrying out certain trust duties. For example, a client can name a business partner to serve as a Business Advisor to direct the (directed) trustee regarding the management of the trust’s business interests or appoint his or her financial advisor to serve as an Investment Advisor to provide directions regarding trust investments. While the directed trustee generally remains responsible for administrative and ministerial trust functions (e.g., preparing trust income tax returns and accountings, third party communications, executing documents for the trust, etc.), the directed trusteeship allows third parties trusted by the client to provide input on the management of the family business or other significant trust assets.

A client may find it desirable to name a directed trustee if one or more of the following circumstances exist:

• The client selects a corporate trustee in a jurisdiction different from his or her state of residence (for example, to take advantage of that state’s favorable trust or tax laws) but prefers that someone more familiar with the client and his or her family make investment and distribution decisions.
• A corporate trustee should be named to promote continuity in a dynasty trust that will last multiple generations; however, the client owns a closely held business and prefers that an individual involved with the business provide guidance regarding management of the trust’s business interests.
• The client prefers to appoint a trusted financial advisor to make decisions regarding the investment of trust assets.
• The client creates a trust that carries out specific and unique investment objectives that may conflict with the trustee’s fiduciary duties, such as the duty to diversify trust assets, so the trustee is unwilling to serve unless another individual is named to oversee the trust’s investment decisions.
• There is a notable price differential in a potential trustee’s fees if he or she serves as a directed trustee rather than as a trustee who will manage real estate and closely held business interests.
• Many corporate trustees are unwilling to serve as trustee of an insurance trust until after the insured’s death – once the trust has liquid assets that can be managed and invested. However, corporate trustees are more willing to serve during the insured’s lifetime if appointed as a directed trustee with minimal responsibilities. This enables the insurance trust to be placed in a jurisdiction with favorable trust or tax laws, while an individual trustee or trust advisor will be responsible for selecting insurance policies, paying insurance premiums and/or sending notices to the beneficiaries of their withdrawal rights with respect to annual gifts to the insurance trust.
• The client wishes to be involved in, or have his family or close advisors involved in the governance of the trust. By utilizing a directed trustee, an “open architecture” for trust governance and carefully defining each party’s role and fiduciary responsibilities, such individuals can participate in different aspects of trust management based upon each individual’s interests and strengths while taking into consideration any restrictions that may be placed on any one individual’s involvement under applicable trust or tax laws.

As the above examples illustrate, there are a variety of situations in which a directed trustee may assist in implementing a trust structure that best serves a client’s legacy plan. Ultimately, the decision to appoint a directed trustee, and the extent of the direction, will depend on each client’s unique circumstances.