Directed Trustees: Flexibility, Accountability, and Teamwork

In 1994, I sent my father what I thought was a compelling three-page letter, urging him to name my employer—a bank trust department—as his executor and trustee. I boasted of our depth of expertise, the permanence of our institution, and the solid values at our core. Today, those “local experts” are retired, work elsewhere, or are housed in another city. The bank itself was deemed insolvent during the Great Financial Crisis and had to be rescued by another bank—one that has since faced questions about its own integrity and oversight.

Dad likes to pull the letter out on occasion, praise my early “professional” writing, and chuckle at the content. Lecture implied. My three promises of the bank’s virtues were empty, and the entire episode is a reminder of the importance of retaining the power to remove and replace a poorly performing trustee. In the 25 years since, the trust industry has evolved toward greater flexibility and accountability. One structure that embodies both is the directed trust.

What is a Directed Trustee?

Traditionally, a trust names a single “full trustee”—perhaps a relative, family friend, or corporate fiduciary, such as a bank trust department. While this approach can work, it can also ask too much of one person or institution in terms of skills and abilities, concentrate too much power in one place, create relationship friction, and limit flexibility as circumstances change.

By contrast, a directed trust divides responsibilities among specialists. The trust creator (grantor) can direct the trustee to rely on another party—such as an investment advisor, distribution advisor, or special asset manager—for certain decisions. For example, a trustee may be directed to rely on a professional ranch manager for the operation of a ranch owned by the trust. The trustee remains responsible for the administration, reporting, taxes, and distributions, but is not liable for the ranch manager’s decisions, provided the trustee acts in good faith and follows the terms of the trust.

In our opinion, pairing a directed trustee with an appointed independent investment advisor, both of whom are removable and replaceable by individuals named in the trust, delivers better results for families.

Why Dividing Trust Duties Works

Division of labor yields better results

A trustee already has their hands full without having to manage investments. They must administer the trust, communicate with beneficiaries, file tax returns, and make discretionary distribution decisions. Meanwhile, an investment advisor, especially one who understands a family’s broader financial picture, is better equipped to manage assets inside and outside the trust. Dividing those duties allows both professionals to focus on what they do best.

Flexibility = empowerment

A well-drafted trust allows for the replacement of an underperforming investment advisor or trustee without upending the trust structure. The power to remove and replace may be held by the beneficiary, an independent trust protector, or another party designated in the trust. This flexibility empowers the beneficiary in a relationship that, too often, has a “my way or the highway” dynamic.

Cost efficiency

Fees for a directed trustee are typically 30-60% less than for a traditional corporate trustee because liability is limited to the areas the trustee controls. Corporate-directed trustees for large trusts with liquid assets may begin their fee schedules around 20 basis points on trust assets exceeding a threshold—typically $10 million to $20 million, depending on the institution—and decline from there. In addition, when one investment advisor manages both trust and non-trust assets for a beneficiary, clients often benefit from reduced blended fees due to asset aggregation.

Teamwork improves outcomes

When professionals from different disciplines—trust administration, investment management, tax, and law—collaborate, families receive better service and fewer surprises. A competent team can offer support and encouragement to an individual trustee and the trust’s beneficiaries in the face of overwhelming jargon, legalities, and tax matters.

A full trustee serving alone may feel besieged by the trust’s beneficiaries and assume a defensive posture. Beneficiaries may perceive a full trustee as making arbitrary and unsupported investment or distribution decisions, breeding distrust. If instead, professionals with different perspectives and allegiances are at the table, resentment and distrust are less likely to arise. A directed structure invites transparency and shared accountability.

Members of the National Association of Estate Planning & Councils (NAEPC) commit to this collaborative, multidisciplinary approach to serving clients. Bragg Financial is affiliated with the organization and several of our advisors are members.

Legal Protections and State Variation

Most modern directed-trust statutes (such as those in Delaware, South Dakota, Tennessee, and Texas) protect a directed trustee from liability except in cases of willful misconduct or bad faith. This means that if a trustee follows a lawful direction from a designated advisor, they are not responsible for the outcome of that decision.

Not all states have adopted the same standards, and importantly, a trust’s governing law is not necessarily tied to the grantor’s state of residence. With thoughtful structuring, a trust can be established or later administered under the laws of a state with more favorable directed-trust statutes, regardless of where the trust creator (grantor) or beneficiaries live. For this reason, families should work with experienced estate-planning counsel to ensure that the trust is drafted with flexibility and as intended.

Closing Thoughts

Seek good advice.

A thoughtful estate-planning attorney will guide you through these important fiduciary appointments, helping to decide when and how duties should be divided. In some cases, the power to make decisions about discretionary distributions may be granted to a third party who knows a beneficiary’s personal circumstances best. Other trusts may include trust protectors who can adjust the terms of the trust as circumstances change.

Several members of the Bragg advisory team have spent time in major bank trust departments. We also have Accredited Estate Planners who value the team approach to serving families. We frequently partner with directed corporate trustees, directed individual trustees, and individuals who are serving with full trustee responsibilities. In all three scenarios, we bring the planning and investment expertise to the relationship in concert with external tax and legal advice. If we—and the other advisors at the table—don’t continue to earn the trust’s business, we will lose it. That reality keeps everyone performing, just as it should.

Let us know if you need to review your fiduciary appointments.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.