What is a Directed Trust?

 A directed trust generally utilizes the unique statutes of a state such as South Dakota to trifurcate the traditional role of a trustee into three distinct functions: 1. an investment committee, advisor or trustee, which is responsible for selecting outside investment advisors and managers to direct the trust's investments; 2. a distribution committee, advisor or trustee, which is responsible for determining when  and how distributions should be made; and 3. an administrative trustee, which receives contributions, handles day to day responsibilities and the administration of the trust and is directed by the committees/trustees to make investments and distributions

The Investment Advisor/Trustee/Committee:

The Investment Advisor Trustee or Committee is typically comprised of the client's family members and/or advisors.  The investment committee generally hires experts in the fields of: Investment Management, Insurance, Art, FLPs, LLCs, Real Estate, Closely-Held Stock for the purpose of maintaining trust assets.  The expertise, experience and diverseness of this group of experts provides exceptional investment advice and asset diversification to the investment committee, which in turn directs the administrative trustee on how the trust will be invested, pursuant to the trust document and an Investment Policy Statement (IPS). The IPS is generally drafted taking into account the investment provisions in the trust document and the family's goals.

The Distribution Advisor/Trustee/Committee:

The Distribution Trustee or Committee determines how and whentrust distributions should be made.  Typically, family members serve on this committee and determine all distributions of income and principal for "health, education, maintenance and support" (HEMS).  Additional distributions are generally considered tax sensitive and therefore require an independent trustee, advisor or committee comprised of one or more of the following: a CPA, an Attorney, or another independent third party.  Alternatively, SDTC can serve this function alone.

The Administrative Trustee:

SDTC usually assumes the role of Administrative Trustee.  The Administrative Trustee's duties may include taking title and ownership of the trust assets, establishing and maintaining a trust bank account, preparing or signing the trust tax returns, preparing and sending trust statements, and making distributions and receiving contributions.  The administrative trustee is also responsible for ensuring that the trust document is followed with respect to distributions, investment policy and administration.  Typically, the Administrative Trustee can fill in for the any of the committee functions of the Distribution Advisor/Trustee/Committee and the Investment Advisor/Trustee/Committee, if desired.

The Trust Protector:

South Dakota statutes allow for the position of trust protector, which is fairly common in offshore jurisdictions.  The Trust Protector has the power to remove or replace trustees, veto or direct trust distributions and investment decisions, add or remove beneficiaries, change the situs and the governing law of the trust, and even terminate the trust.  As result of the trust protector's enormous responsibility to the trust, typically the position is held by a person well-acquainted with the grantor's family as well as the long term personal and financial goals.  The trust protector allows a trust flexibility in both drafting decisions and in future circumstances. Not all states have trust protector statutes.

 The following chart outlines a typical modern directed trust utilizing a trust protector:

Please see the Directed vs. Delegated portion of this website for a comparison of the two trust structures.