What Are the Fiduciary Duties of A Directed Trustee?

May 2, 2024

A directed trust is a trust that removes one or more powers traditionally held by a trustee and vests that power in a person who is either a special trustee, and adviser, or in some instances a trust protector. The bifurcated power can relate to investment decisions, distribution decisions, supervisory decisions or any other decision affecting the administration of the trust. 

While the directed trustee is not responsible for the discretionary decision, that is not to say that it does not remain involved in the actual actions taken. For instance, a trustee directed as to investment discretion is still involved in bank and brokerage account opening, entity formation, as to the custodian interactions, and individual transactions. In all actions, the directed trust is still subject to the same fiduciary duties as other trustees.

In this article, we will discuss what a directed trustee is responsible for in the administration of a directed trust and the fiduciary duties which govern these actions. How a trustee acts, its responsibilities to the beneficiaries, and duties do not change because of its directed nature. The directed trustee is simply not the decision-maker with regard to a select category of discretionary acts. To better understand this difference, we will break the directed trustee’s duties and responsibilities into its key functions: compliance, record keeping, reporting, and trust administration.

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Trust Compliance Services

A trustee’s compliance responsibilities extend from ensuring adherence to the trust instrument and giving effect to the settlor’s intent, to compliance with state and federal regulators, to compliance with state and federal laws, and beyond. No matter what the trustee’s role, it remains responsible for ensuring that all actions taken are done in compliance with its fiduciary duties and creating a trust administration that reflects prudent administration.

Trust Instrument Enforcement

Professional understanding and application of the trust planning techniques is central to the trustee’s administration. Key to the application of any discretionary standards established within the trust instrument is an understanding of settlor intent, as communicated through the trust instrument and measured “in light of the circumstances surrounding its creation.” 

Under Delaware law, “a trust instrument may expand, restrict, eliminate or otherwise vary any laws of general application to fiduciaries, trusts, and trust administration,” meaning that it within a settlor’s power to default statutory law by redefining terms and standards applied to fiduciaries with the trust instrument. The settlor can vary things like the timing of beneficiary notification, fiduciary appointment and removal procedures, the division of fiduciary powers and responsibilities, and the standards for fiduciary investments. 

With this level of flexibility, it is important to have a trustee who understands both the application of these provisions and how they affect the administration of the trust. Understanding when and under what circumstances a fiduciary is authorized to act, what limitations are placed on that activity, as well the settlor’s intent in creating that structure is the duty of both the trustee, whether it be directed or decision maker in the action in question. 

Regulatory Compliance

Another aspect of compliance that the directed trustee is responsible for is ensuring that its administration adheres to the appropriate regulatory agency’s recommendations for best practices. This includes a review of the trustee’s (i) initial and on-going monitoring of the trust and its key parties under OFAC, AML and BSA ( also referred to as the Office of Foreign Assets Control, Anti-Money Laundering, and Bank Secrecy Act, respectively) -standards to ensure compliance with the US Patriot Act; (ii) annual internal administrative trust reviews in compliance with the standards of the Office of the State Bank Commissioner of Delaware (the “OSBC”); and (iii) annual participation in an audit by the OSBC and/or other federal regulators for overall regulatory compliance in the administration of trusts. 

Ensuring the trust’s compliance with the local regulator also ensures the trust’s situs by ensuring that sufficient activities are occurring within the chosen state. For a directed Delaware trustee this means ensuring that it is at all times materially participating in the administration of the trust. It is the trust’s situs that allows it to avail itself of the various benefits of Delaware law such as reduced taxation, modern trust laws, and individual planning advantages.

In addition to the compliance activities performed to comply with the OSBC, the trustee is responsible for the trust’s compliance with domestic and foreign information gathering requirements. This means having a strong knowledge of reporting requirements for trusts under both FATCA and CRS (also referred to as the Foreign Account Tax Compliance Act and the Common Reporting Standard) to ensure that all filings are done in a timely manner and limit the information provided to only that which is essential. In addition, in some instances the directed trustee also serves as a FATCA sponsor to provide additional privacy to its clients.  

Legal Compliance

Compliance with the law, both Delaware state law and federal law, is also a responsibility of the trustee as it relates to actions taken in its fiduciary capacity, whether directed or discretionary. A trustee cannot be directed to do something that would be considered illegal at either a state or a federal level, such as investment in cannabis (which is currently illegal federally). Maintaining an awareness of the current status of issues such as this one enables the trust to avoid unnecessary risk.

Another area in which the trustee’s knowledge of the law is helpful to families is reflected in the on-boarding process. When working with a family to on-board a transfer trust, the trustee must have an understanding of the various methods of trust modification, in the event that the trust’s terms must be modified for administrative purposes, as well as the technical aspects of the transfer of trust property. In conjunction with outside counsel, the trustee must be certain to follow all necessary formalities in its transition of administration and beyond.

Knowledge of the law is also relevant throughout the trustee’s administration to ensure things like the proper allocation of principal and income, ensuring the timely filing of specialized elections, and flexibility in administration. Understanding the appropriate rules and regulations allow the trustee to take a solution oriented approach to trust administration, looking at transactions and beneficiary interactions by pulling from a variety of resources and experiences.

Trust Record Keeping Services

The duties of record keeping, control and safeguarding of trust property, and the duty to inform and report are all part of the directed trustee’s responsibilities. The trustee is required to maintain clear and concise records of the trust’s holdings, as well as all transactions and occurrences related to the trust’s on-going administration. 

This is why it is so important that the directed trustee be a part of trust transactions and be given all documents relevant to the trust. This includes things like distribution requests, account opening documents and on-going statements, information about the trust’s holdings and values, contracts and documents which affect those holdings, and activities within closely held entities owned as well as written direction letters related to directed activities. These items assist the trustee in performing key record keeping functions, such as those listed below, and provide beneficiaries with accurate information. Some significant record keeping functions include:

  • Maintaining principal and income accountings;
  • Maintaining the cost basis of all trust assets;
  • Maintaining trust records for tax reporting purposes and regulatory review;
  • Documenting trust transactions and retaining evidence of the same in the trust records;
  • Processing and recording investment and/or distribution directions;
  • Processing expense payments and determining the appropriate allocation between principal and income;
  • Maintaining a record of all beneficiaries, co-fiduciaries, settlors, and advisers to the trust; and
  • Where appropriate, providing accounting information to the settlor and beneficiaries of the trust.

If any piece of these materials is missing from the trust record, the trustee cannot fully perform its duties and both the beneficiaries and settlor are at risk of receiving incorrect information. This is the reason for Section 3317 of Title 12 of the Delaware Code, which specifically outlines the duty of co-fiduciaries (and non-fiduciaries) to keep the trustee informed on an on-going basis. The language of this section provides that each has “a duty upon request to keep all of the fiduciaries and non-fiduciaries for the trust reasonably informed about the administration of the trust with respect to any specific duty or function being performed by such fiduciary or non-fiduciary to the extent that providing such information to the other fiduciaries and non-fiduciaries is reasonably necessary for the fiduciary or non-fiduciary to perform their duties.” 

Maintaining accurate records is central to ensuring the trust’s prudent administration. Only by having a complete perspective can the trustee keep others aware of conflicts in the use of funds, ensure that tax reporting and similar regulatory filings are accurate, and provide accurate information about the trust and its parties to those it is required to serve. 

Trust Reporting Services

The duty to inform and report, as well as the duty of record keeping, requires the trustee to keep beneficiaries, or their representatives, reasonably informed about the trust’s administration, subject to any restrictions imposed by the trust instrument. This includes a duty to maintain accurate accounting and tax records with regard to trust assets; maintain appropriate communications with any settlor, beneficiary, or co-fiduciary of the trust; and respond appropriately to any communication received from a third party. 

As discussed, relevant to record keeping, a directed trustee’s ability to provide accurate reporting is directly linked to its ability to be a centralized hub for all information related to the trust, its transactions, and its holdings.

Beneficiary Reporting

By default, pursuant to its duty to inform and report, a trustee is obligated to inform a beneficiary of the existence of a trust that they are a beneficiary of and offer a copy of the trust instrument pursuant to the findings of the McNeil case. Despite that fact, Delaware law does allow a settlor to delay the notification of beneficiaries under the terms of the trust instrument, for a period of time. In those instances, the trustee remains responsible for providing accounting and other trust-related information to someone in lieu of the beneficiary. 

Most modern trusts include the use of a designated representative to assist in this disclosure process. The trustee may provide information such as accountings, tax information, releases, and other documents, both judicial and non-judicial in nature, to the designated representative who under Delaware law may represent and bind the beneficiary.

Tax Reporting

The Trustee is responsible for the preparation of, or arranging for the preparation of, all trust income tax documents and filings. The trustee must also maintain tax records and coordinate the receipt of tax information, including from entities owned by the trust. This includes accountings which maintain tax cost and basis information for each asset as well as a record of all transactions and sales which generate income or capital gains. 

The trustee must prepare, or arrange for the preparation of, all relevant income tax filings, estate tax filings, and informational filings both domestically and internationally. If not the preparer, the trustee is responsible for review of the returns, and ensuring the accuracy of the same. The trustee must then ensure that these returns are filed, and taxes paid in a timely manner. 

Where distributions have been made, the trustee is also responsible for providing any necessary tax information to beneficiaries. If the trust itself does not have a filing requirement, the trustee is responsible for providing grantor trust letters with the relevant tax information to the appropriate individuals for inclusion in their personal income tax filings. Where the trust is a foreign trust, the trustee may also need to reconcile withholding statements and ensure that the appropriate amounts are withheld by custodians. The trustee is also responsible for the timely filing of informational returns such as FATCA and CRS filings, forms 3520 and 3520A, FBARs, and Forms W-9, W-8BEN, W-8IMY, and W-8BENE. 

Trust Administration Services

The duty to administer the trust in good faith means ensuring that the administration of the trust is done in a manner that is fair and absent of any malicious intent. A trustee must make every effort to administer the trust in accordance with the terms of the trust instrument and in a manner that reflects the best interest of the beneficiaries, balancing individual needs with collective needs. 

A trustee is responsible for acting impartially, objectively, and efficiently. Despite being directed with regard to certain discretionary decisions, directed trustees remain significantly involved to ensure effective communication and administration.

Coordination of Fiduciaries and Custodians

Whether in giving effect to directions or in the performance of its administrative duties, there are many often overlooked aspects of a directed trustee’s administrative responsibilities. Some of these include:

Ensure that Trust Directions Comply With the Trust’s Terms

While a directed trustee may be directed by advisers (or co-trustees) with regard to matters such as distribution decisions or investment decisions; they are also responsible for ensuring that the directions they receive conform to the trust instrument, including a review to determine that the powers and authority granted to each respective adviser is consistent with the powers and authority they are attempting to exercise in the direction. For this, the trustee must be familiar with the terms of the trust instrument as well as the grantor’s intent in establishing the trust.

Coordination of Advisers to Avoid Fund Conflicts

A directed trustee, in its capacity as the primary administrator of the trust, is responsible for the coordination of the advisers to ensure that there are no competing directions which require the use of the same funds. Where there are, it is the directed trustee’s duty to communicate the conflict to the advisers and assist them in making an informed decision as to how best to proceed. 

For instance, if there is a direction received from a distribution adviser to make a distribution to a beneficiary at the same time that an investment direction is received for the same funds, the directed trustee would be responsible for alerting the advisers to the issue and helping to coordinate the execution of both directions in a timely manner.

Review Opening Documents and Coordinate Funding of Accounts

When opening accounts, it is the directed trustee who is responsible for reviewing and signing the account opening documents, as well as coordinating the funding of the accounts pursuant to the adviser’s direction. Likewise, when distributions are made or subsequent investments of trust funds made, the directed trustee is responsible for communicating the need to raise cash and coordinate the transfer of funds with the custodian.

Execution of Legal Documents

While the investment adviser is responsible for reviewing each investment and legal document from the perspective of prudence and investment soundness, the directed trustee remains responsible for the execution of all legal documents which bind the trust for administrative purposes. This administrative review typically includes a review of the terms of the trust as well as the document it is signing to ensure that the documents are both accurate and aligned with the directions received. In addition, the trustee’s review ensures alignment with its internal policies and procedures. 

Defense of the Trust in Lawsuits or Litigation

The directed trustee retains the responsibility to defend the trust in the event of a lawsuit or litigation involving the trust, its trustees, or its beneficiaries. This means arranging for the trust’s legal representation, review of documents received, safeguarding of the relevant trust records, and disclosure of the relevant records (where appropriate) to the necessary parties, regardless of the actions or issues prompting the suit.

Consolidation and Organization of All Records

The directed trustee is responsible for consolidating the records of the trust in one location to ensure that complete records of the trust’s administration are located in one place, kept in an organized and accurate manner, and available upon request of those authorized under the trust instrument or necessary third parties. In addition, the directed trustee is responsible for ensuring that the bifurcation of duties does not result in an uncoordinated trust administration by centralizing information and formalizing documentation.

Objective and Practical Support of the Trust’s Objectives

The corporate trustee is typically engaged because of its expertise in the trust field and independence from the grantor and his or her family. It is for this reason that even a directed trustee is looked upon to add to the family’s existing team of advisers by providing practical knowledge of alternatives, professional contacts, and overall industry expertise. 

In addition, as an independent party to the trust, the directed trustee also provides objectivity when dealing with family dynamics such as beneficiaries with spendthrift tendencies. The longevity of the directed trustee and its understanding of the family and its goals also ensure the implementation of the family’s planning strategies for multiple generations.

Managing Distributions in the Best Interest of the Trust

Where the directed trustee is responsible for distribution decisions, it is responsible for receipt of requests, review of the terms of the trust instrument, the gathering of relevant information and the application of this information to make an informed decision with regard to what is in the best interest of the individual beneficiary and the beneficiaries as a whole.

Payment of Mandatory Distributions

Even where a distribution adviser is serving, a directed trustee remains responsible for the payment of any mandatory distributions provided under the trust instrument such as annual net income distributions and the exercise of 5×5 withdrawal rights. In these instances, the direction adviser has no authority to direct the trustee and it is the directed trustee who is responsible for calculations and payment of the required distributions.

Communication with Third Parties

Part of the administration of the trust is also the communication with parties outside of the trust’s structure, such as the IRS and other regulators, third parties attempting to obtain information about the trust such as a spouse involved in a divorce or a creditor, and other individuals. It is the responsibility of the trustee to protect the confidential information and disclose only that which is necessary under the law balanced with the appropriate level or responsiveness. 


In the end, whether a directed trustee or a full-service trustee, the fiduciary duties owed to the beneficiaries remain the same. What changes is simply a matter of the degree of involvement. In many ways, directed trust administration is more difficult than standard administration. While not being responsible for all decisions of the trust’s administration, the directed trustee remains responsible for the recording and coordination of all trust activity. Instead of relying upon itself for this information, the directed trustee is reliant upon others making open and transparent communication the key to effective administration. 

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.