Directed Trusts Vs. Delegated Trusts: What is the Difference?

June 4, 2024

Delaware trust laws allow for both directed and delegated trusts for beneficiaries. However, the legal framework for both can be complicated, especially when trying to decide which trust best suits your particular needs. Here, we’ll go over what directed trusts and delegated trusts are, their benefits, and which are best suited for a Delaware filing.

What is a Directed Trust?

A directed trust is a specialized type of trust arrangement where responsibilities are divided between multiple parties, primarily a directed trustee and a trust advisor. The directed trustee handles administrative duties such as record-keeping, accounting, and tax filings, while not being involved in investment or distribution decisions. 

These decisions are instead made by the trust advisor (also known as the investment advisor), appointed by the settlor (the owner of the trust) and can be an investment professional, attorney, financial advisor, or simply a trusted individual. The trust advisor manages the trust assets and makes all investment decisions in accordance with the trust’s terms and goals.

Benefits of a Directed Trust

Directed trusts offer numerous benefits, primarily characterized by enhanced control and flexibility in trust administration. 

Flexibility

Directed trusts are designed to be flexible. This flexibility allows the trust’s creator (settlor) to tailor the trust to their specific needs and goals. They can appoint trusted advisors with specific expertise to manage the trust’s assets, ensuring that the trust caters to the unique needs of the beneficiaries. This is especially important for individuals with wealth concentrated in a specific area, such as a family business or real estate, as directed trusts permit a more flexible approach to investment diversification. 

Expertise

Moreover, directed trusts bring a high level of expertise to asset management and trust administration. Trust Advisors, often investment professionals, offer informed investment strategies and effective management. The directed trustee, focused on administrative tasks, ensures that the trust operates efficiently and in line with legal standards. 

Accountability

This structure provides a system of checks and balances, with each party accountable for their specific roles, ensuring the trust operates in the best interest of the beneficiaries. In Delaware, directed trustees are further overseen by regulatory bodies, adding an additional layer of accountability and compliance assurance.

What is a Delegated Trust?

With a delegated trust, the trustee delegates the responsibility of managing the trust’s assets to the trust advisor. This is different from a directed trust, where the settlor choses the trust advisor.

These trusts often lack the specific language in their original drafting that would allow for the division (bifurcation) of trustee duties and indemnification. 

As a result, the trustee cannot separate their duties and is therefore responsible for several critical tasks. These include conducting due diligence on the chosen investment advisor, overseeing and monitoring the advisor’s investment performance, and managing the distribution of trust assets in accordance with the trust document’s terms. This structure places a significant responsibility on the trustee to actively manage and supervise the investment process, ensuring that it aligns with the trust’s objectives.

Examples of situations in which a delegated trust would be preferable include generation-skipping trusts, charitable trusts, and special needs trusts.

Benefits of a Delegated Trust

Delegated trusts, by encompassing asset investment, beneficiary distributions, tax filing, and providing accountings, offer several benefits to the trustee. 

Privacy

Delegated trusts offer a significant degree of privacy not commonly found in other methods. Unlike wills, which are public documents and must be filed in court after the grantor’s death, the details of a trust typically remain private. This confidentiality extends to the trust’s assets, terms, and beneficiaries.

Avoidance of Probate

When assets are transferred into a delegated trust during the grantor’s lifetime, they can be directly distributed to beneficiaries after the grantor’s death, eliminating the need for probate court proceedings. This not only saves time and money for the beneficiaries but also maintains privacy since probate proceedings are public.

Asset Protection

Assets within a delegated irrevocable trust are typically not counted as part of the grantor’s personal estate, safeguarding them from creditors, legal challenges, and estate taxes. This feature is especially beneficial for individuals with considerable wealth or those in professions with higher risks. However, the extent of asset protection depends on the trust’s specific type and the laws and regulations of the jurisdiction where the trust is established.

Differences Between Directed Trusts and Delegated Trusts

Directed trusts and delegated trusts each offer unique advantages and potential drawbacks. For directed trusts, the division of responsibilities can lead to more tailored management of the trust’s assets and potentially better outcomes for the beneficiaries. However, the complexity of managing multiple advisors and the need for clear communication between parties can be challenging.

The structure of delegated trusts, on the other hand, can simplify the administration of the trust and provide a more streamlined approach to asset management. However, the trustee in a delegated trust assumes greater liability and responsibility for the actions of the delegated advisor, which can lead to higher fees for the increased oversight required.

Both types of trusts offer privacy and asset protection benefits, but the choice between a directed and delegated trust depends on the specific needs and preferences of the settlor and the beneficiaries. 
With the benefits that both directed trusts and delegated trusts provide, it’s no wonder that they are both becoming increasingly more common filings. This is especially true in the state of Delaware, where directed trust laws are among the most beneficial. If you or a client are looking to establish a directed trust, or have questions about what might be best for your legacy, get in touch with us on our contact page.

Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.