A directed trust under the UDTA is a trust whose instrument splits management authority between a trust director, who holds decision-making power over specific matters, and a directed trustee, who holds legal title to the assets and carries out the director’s instructions. The Uniform Directed Trust Act, now enacted in roughly 20 states, supplies the default rules for how that split works: what the director owes the beneficiaries, when the trustee must comply, and when the trustee is protected from liability for doing so.
How the Split of Authority Works
Everything starts with the trust document. It must explicitly divide responsibilities, naming a trust director with authority over defined areas and a directed trustee who holds the property and follows the director’s instructions within those areas. Without that language, you have a traditional trust and the trustee calls every shot.
The director does not hold title to any assets. Their job is to issue binding instructions to the trustee on whatever the trust document places under their control. That might be investment decisions for a concentrated stock position, distribution calls for beneficiaries, or management of a family business held in trust. Some trusts appoint an advisory committee rather than a single person, which is common when the assets involve commercial real estate or closely held companies.
The directed trustee’s role narrows considerably. Instead of researching investments and making independent judgments, the trustee focuses on execution and compliance: following the director’s orders, keeping records, handling tax filings, and running the administrative machinery.
Fiduciary Duties of the Trust Director
Section 8 of the UDTA puts the director on the same fiduciary footing as a trustee in a comparable position. A director holding power individually is held to the standard of a sole trustee under similar circumstances. A director sharing power jointly is held to the standard of a co-trustee.1Kentucky Legislative Research Commission. Uniform Directed Trust Act – Section 8 The director must act in good faith and in the best interests of the beneficiaries when exercising any granted power.
The scope of the duty tracks the scope of the power. A director responsible only for investments owes no fiduciary duty over distributions, and vice versa. Within their assigned lane, though, the full weight of fiduciary law applies. An investment director must follow prudent investor principles. A distribution director must exercise discretion with the care expected of any fiduciary.
The trust document can modify these default duties, the same way it could modify a trustee’s duties, and it can also add duties beyond what the Act requires.1Kentucky Legislative Research Commission. Uniform Directed Trust Act – Section 8 A director who falls short faces the standard fiduciary consequences: removal, personal liability for losses, and litigation by beneficiaries. One narrow carve-out: a trust director who is a licensed health care provider acting in that professional capacity owes no duty or liability under the Act for those actions.
How Far the Trustee’s Liability Shield Reaches
Section 9 is where the UDTA does its heaviest lifting. The directed trustee must take reasonable action to comply with the director’s instructions, and the trustee is not liable for doing so.2Kentucky Legislative Research Commission. Uniform Directed Trust Act – Section 9 The one exception: the trustee must refuse to comply if following the instruction would constitute willful misconduct. The trustee is not expected to second-guess strategy or run independent research on whether a given investment makes sense.
Willful misconduct means a conscious disregard of a known duty or reckless indifference to the consequences of an action. A director telling the trustee to buy a risky asset does not clear that bar, even if the investment craters. A director ordering the trustee to move trust funds into the director’s personal account almost certainly does. The line sits at intentional wrongdoing or blatant disregard of the trust terms, not poor judgment.
When a trustee genuinely cannot tell whether a direction crosses the line, Section 9 gives them an escape valve: the trustee can petition the court for instructions.3Delaware Bankers Association. Uniform Directed Trust Act – Section 9 That matters more than it sounds. Without it, a trustee caught between a questionable direction and potential liability would be stuck. The petition shifts the decision to a judge.
No Duty to Monitor the Director
Section 11 reinforces the shield by eliminating any obligation to watch over the director. Unless the trust document says otherwise, the directed trustee has no duty to monitor the director’s performance, inform beneficiaries about the director’s decisions, or advise the director that the trustee would have acted differently.4Kentucky Legislative Research Commission. Uniform Directed Trust Act – Section 11 And the subtle piece: even if a trustee voluntarily monitors the director or offers advice, the trustee does not take on an ongoing duty to keep doing so. Helping once does not create a legal obligation to help forever.
This is a real departure from traditional trust law, where trustees were generally expected to oversee every aspect of administration.
Limits on Liability Releases
The UDTA also blocks gamesmanship with releases. If a director has power to release a trustee or another director from liability for a breach, the release does not work when the breach involved willful misconduct, when the release was obtained through improper conduct, or when the director did not know the material facts about the breach at the time.3Delaware Bankers Association. Uniform Directed Trust Act – Section 9 A director and trustee cannot use their positions to paper over each other’s misconduct.
When Multiple Directors Disagree
Some trusts appoint more than one director with joint authority over the same area. Under Section 6, the default rule is majority decision.5Delaware Bankers Association. Uniform Directed Trust Act – Section 6 The trust document can change this, for instance by requiring unanimity, but absent specific language, majority rules.
Deadlock is the obvious risk, especially when only two people share the power. A court can step in to direct how the power should be exercised or take other action to break the tie, much as courts handle disputes between co-trustees. A well-drafted trust heads this off with a tiebreaker or a resolution process, but many drafters miss it.
Powers the UDTA Does Not Reach
Section 5 carves several categories out of the Act. A power of appointment, which lets someone designate who receives trust property, is excluded. So is a settlor’s power to revoke or amend their own trust. A beneficiary’s power that affects only their own beneficial interest, or the interest of someone they represent, is also excluded.6Delaware Bankers Association. Uniform Directed Trust Act – Section 5 A beneficiary who can withdraw funds for their own use is exercising a personal right, not directing a trustee on behalf of others.
One exclusion carries planning weight: a power held in a nonfiduciary capacity falls outside the Act if the trust document says so and the power must be nonfiduciary to achieve the settlor’s tax objectives under the Internal Revenue Code.6Delaware Bankers Association. Uniform Directed Trust Act – Section 5 When the trust’s tax structure depends on a power being nonfiduciary, the UDTA deliberately stays out of the way.
Directed Trusts Compared to Delegated Trusts
A delegated trust runs through a different chain of authority. The trustee retains full power from the start and voluntarily hires an outside agent to handle specific functions, typically investment management. The legal framework comes from the Uniform Prudent Investor Act, not the UDTA.
Under UPIA Section 9, a trustee can delegate investment and management functions that a prudent trustee of comparable skills could properly delegate. The trustee stays on the hook, though. To avoid liability for the agent’s decisions, the trustee has to meet three requirements: reasonable care in selecting the agent, scope and terms consistent with the trust’s purposes, and periodic review of the agent’s performance and compliance with those terms.7Municipality of Anchorage. Uniform Prudent Investor Act – Section 9 A trustee who meets all three is not liable for the agent’s decisions. Skip any one and the trustee owns the result.
The practical difference is who bears the risk. In a directed trust, the director carries fiduciary responsibility for the decisions they control, and the directed trustee is largely shielded. In a delegated trust, the trustee keeps ultimate responsibility and must actively supervise the agent. If the goal is keeping investment control with a trusted advisor and minimizing institutional interference, directed is usually the better fit. If a trustee simply needs specialized help, delegation is simpler.
Tax Risk in Choosing a Director
Who serves as director can trigger unintended tax consequences. Under Internal Revenue Code Section 674, a trust is treated as a grantor trust, with all income taxable to the grantor, if beneficial enjoyment of the income or principal is subject to a power of disposition held by the grantor or a nonadverse party, without the consent of an adverse party.8Office of the Law Revision Counsel. 26 US Code 674 – Power to Control Beneficial Enjoyment A nonadverse party is anyone without a substantial beneficial interest in the trust that would be affected by how the power is used.
Trust directors often hold exactly the kind of power Section 674 targets: discretion over distributions, investments, or both. If the director is the grantor or a nonadverse party, and no adverse party must approve, the trust can be classified as a grantor trust. Sometimes that is the intended result. Often it is not.
Two exceptions can preserve non-grantor status. First, if the power is held solely by independent trustees, none of whom is the grantor and no more than half of whom are related or subordinate to the grantor, the grantor trust rules generally do not apply. Second, if a distribution power is limited by a reasonably definite external standard written into the trust, such as health, education, maintenance, and support, the general rule also does not apply when the power is held by a non-grantor trustee.8Office of the Law Revision Counsel. 26 US Code 674 – Power to Control Beneficial Enjoyment Both exceptions fail, however, if anyone can add new beneficiaries to the trust, other than after-born or after-adopted children.
Getting this wrong is expensive and difficult to fix after the fact. The trust needs to be drafted with the director’s tax status in mind from the start, not retrofitted when someone realizes the income is landing on the grantor’s personal return.
When This Structure Fits
Directed trusts solve a specific problem: the family wants professional custody and administration but does not want the institution making investment or distribution calls. The classic case involves a family business or a concentrated stock position. A corporate trustee may refuse to hold an undiversified position under the prudent investor rule, or may push to sell it. A directed trust removes that friction by giving an investment director, often a family member or trusted advisor, authority to retain the asset while the corporate trustee handles administration.
The structure also works when different experts should handle different decisions. One director manages investments; another, perhaps a family member who knows the beneficiaries, handles distributions. The trustee sits in the middle, executing instructions from both and keeping the books.
The tradeoff is complexity and cost. Directed trusts run more expensive than traditional trusts because you are paying a trustee and one or more directors. The document has to be drafted with precision to avoid gaps or overlaps in authority. And if the director and trustee relationship breaks down, administration can stall until the conflict is resolved through the trust’s own mechanisms or in court.