Legal Definitions - directed trust

A directed trust is a modern legal arrangement that allows the person creating the trust (often called the "settlor" or "grantor") to divide the responsibilities for managing the trust's assets and making decisions. Traditionally, a single trustee would manage all aspects of the trust, from investing assets to distributing funds to beneficiaries.

However, with a directed trust, the settlor can appoint a separate individual or entity—often referred to as a "trust advisor," "investment director," or "trust protector"—to oversee specific aspects or assets of the trust. This specialized advisor provides instructions or "directions" to the primary trustee regarding their designated area of responsibility. The primary trustee then carries out these directions while continuing to manage other trust assets and handle administrative duties, such as record-keeping, tax filings, and making distributions according to the trust document. This structure is particularly useful when a trust involves unique assets, complex investment strategies, or requires specialized expertise that a general trustee might not possess.

Here are some examples illustrating how a directed trust works:

• Specialized Real Estate Management: Imagine a property developer who wants to place their extensive portfolio of commercial real estate into a trust for their children. This portfolio requires ongoing active management, including leasing, property maintenance, and strategic development decisions. Instead of burdening a general corporate trustee with these specialized tasks, the developer can establish a directed trust. They appoint a trusted real estate management company as the "property director" for the trust's real estate holdings. This company directs all decisions related to the properties, while a professional bank or trust company serves as the primary trustee, managing other diversified financial assets within the trust and handling all administrative and distribution responsibilities. This setup ensures the real estate assets benefit from expert, hands-on management without requiring the primary trustee to have that specific expertise.

• Complex Investment Strategy: Consider an individual with a substantial fortune invested in a highly diversified and complex portfolio, including private equity funds, hedge funds, and international equities, managed by a specific wealth management firm. When creating a trust for their heirs, they want to ensure this particular firm continues to manage these specialized investments. They can set up a directed trust, naming their preferred wealth management firm as the "investment advisor" for the trust's investment portfolio. The investment advisor provides all investment directions to the primary trustee, who then executes those trades and holds the assets. The primary trustee, typically a trust company, focuses on the administrative duties of the trust, such as accounting, tax reporting, and making distributions to beneficiaries as directed by the trust document, effectively separating the specialized investment decisions from the general trust administration.

• Philanthropic Mission Oversight: A philanthropist establishes a charitable trust to fund specific scientific research initiatives. They have a deep understanding of the scientific field and want to ensure the trust's funds are allocated to projects that align with their precise vision and have the highest potential impact. They can create a directed trust, appointing a "grant advisory committee" (composed of leading scientists and experts) to direct which research projects receive funding and to monitor their progress. The primary trustee, a financial institution, manages the trust's endowment, handles all financial administration, and disburses funds to the approved research projects only upon the specific direction of the grant advisory committee. This allows for expert oversight of the charitable mission while the trustee manages the financial and legal aspects.