The California Uniform Directed Trust Act took effect at the beginning of 2024. It amends the state Probate Code, adding sections 16600-16632, which now permits the formation of directed trusts.
Directed trusts provide a measure of flexibility that would otherwise be impossible to obtain. By permitting a division of responsibilities between trust directors and appointed trustees, directed trusts provide families with a powerful new means to forge legacies with unparalleled protection.
The Law Firm of Kavesh, Minor & Otis, Inc. has spent decades helping families across Los Angeles and Orange County find estate planning solutions that afford peace of mind. Our experienced estate planning attorney team could help you or a loved one explore the benefits of a directed trust and reap the rewards of an estate plan free from uncertainty.
Understanding the Purpose of a Directed Trust
A directed trust, like all other types of trusts, is a fiduciary arrangement. It can own, manage, and receive a wide range of different assets, from motor vehicles to real property. Since every trust is a distinct legal entity administered by a trustee or an appointed panel of trustees, its holdings are not typically subject to the authority of a probate court.
People have long relied on trusts to confer inheritances and disburse charity with minimal risk of challenge. In many cases, trusts can even reduce estate taxes, making it easier to pass wealth from one generation to the next.
However, directed trusts differ from other popular types of trusts in several key respects. In the context of a conventional revocable or irrevocable trust, a successor trustee is responsible for honoring the trust’s terms and managing its assets. If beneficiaries disagree with the trustee’s decisions, they must either negotiate a compromise with the trustee or petition a court for the trustee’s removal. In clear-cut cases of abuse, this process can be fairly straightforward.
Nonetheless, trustees are entitled to exercise significant discretion in the management of trust assets. Although they are bound by a fiduciary duty to administer assets in accordance with the trust’s conditions, beneficiaries do not always have ample opportunity to ask questions or raise objections. Such limitations can be quite beneficial in preventing interference, but they could prove problematic for trust assets that are highly profitable or require regular and engaged administration.
In a directed trust, the trustor—the person who forms the trust—reserves the right to allocate directorial powers to a person other than the trustee. This person may be termed “trust director” whose role is advising trustees on the best use of certain trust resources.
Trust directors have their own broad authority, separate from that of the trustee, which is often useful in adjudicating disputes and making informed decisions about complex assets.
The Role of a Trust Director in California Directed Trust Administration
Directed trusts may be new to California, but they have a decades-long history in other parts of the country. The first directed trusts were proposed by well-to-do families who wanted to reap the rewards of probate avoidance without ceding control over investments and business administration. Legislation like the California Uniform Directed Trust Act offers some resolution to this apparent conflict.
In California’s rendition of the law, the terms of a directed trust “grant a person other than a trustee a power over some aspect of the trust’s administration.” In other words, the trust director—while not necessarily any more powerful than the trustee—is often given the final say in whatever matters fall under their purview. If they believe that an investment should be made or the terms of a distribution altered, the trust director may exercise a “power of direction [that] includes a power over the investment, management, or distribution of trust property or other matters of trust administration.”
Depending on how a directed trust is structured, it is possible that a director could play a much more active role in trust administration than the trustee. This is especially true with respect to smaller trusts or trusts that serve a very particular and narrow purpose.
A Trust Director’s Authority
Although delegating such authority to trust directors could pose its own risk, directors are bound by the same fiduciary duty as trustees. Directors who abuse this position, whether through poor practices or intentional mismanagement, may be held personally liable for any resulting damages.
Furthermore, the California Uniform Directed Trust Act details situations in which trustees may refuse to follow the direction of their directors. A directed trustee, for instance, “shall not comply with a trust director’s exercise or non-exercise of a power of discretion […] to the extent that, by complying, the trustee would engage in willful misconduct.”
Lastly, this legislation lets trustors condition the relationship between trustees, too. Even without the appointment of any trust director or directors, a trustor can assign certain responsibilities to certain co-trustees. If these responsibilities do not intersect, trustees can make informed decisions without first obtaining unanimous consent from their fellows.
The Benefits and Potential Uses of a Directed Trust
Directed trusts may have once been the purview of the extraordinarily wealthy, but they can offer significant advantages to any family whose estate plan necessitates a more rigorous separation of responsibilities.
A directed trust could prove beneficial to anyone who wishes to establish a trust for the purpose of the following:
Managing a Family Business
Family-run businesses can be profitable enterprises that ensure a life’s labor affords advantages to future generations. Ceding control of a business to a trust or transferring the owner’s shares could guarantee that beneficiaries receive regular dividends without having to be involved in the day-to-day administration of a company.
However, conventional trusts are not always equipped for the impartial and effective management of a commercial enterprise. This is especially true if the trustee does not have the experience needed to approve loans or authorize transactions without consulting an attorney or soliciting feedback from the business’s board of directors.
With a directed trust, grantors can appoint experienced directors who already understand the industry and are capable of making informed decisions.
Ensuring the Competent Administration of Complex Assets
Trusts can hold a variety of different assets. These could include, but are not limited to, the following:
- Motor vehicles
- Art collections
- Real properties
- Cash accounts
- Investment portfolios
In many cases, a trustor may not doubt the successor trustee’s ability to keep safe a home or maintain a collection of antique firearms. However, some grantors prefer that their investments remain under the management of a long-time financial adviser or other trusted entity.
Since directed trusts enable a division of responsibilities, a reliable adviser can be allocated narrow powers of directorial authority over certain trust assets.
Providing for a Loved One With Special Needs
Special needs trusts can be considered a type of government-approved compromise: they let a trustor establish a fund to provide for a loved one’s daily living expenses and caregiving without risking the beneficiary’s eligibility for Supplemental Security Income and other public assistance programs.
In California, a directed trust could be used to appoint a director with authority over discretionary distributions. So, if a special needs beneficiary’s circumstances change in a way that the trust was not designed to accommodate, the director can instruct the successor trustee to make additional allocations without violating the terms of the trust or having to file a petition in court.