Under present California trust law, trustees are the only fiduciaries (i.e., legally appointed representatives) with the duty, authority and power to administer a trust’s assets, liabilities and financial and legal affairs. The trustee’s primary duty is to carry out the terms of the trust for the benefit of the beneficiaries.

Effective January 1, 2024, however, the Uniform Directed Trust Act (“UDTA”) becomes law. The UDTA adds new sections 16600 – 16632 to the Probate Code to allow Directed Trusts to exist in California.

The UDTA allows for an additional type of fiduciary, called a Trust Director, to participate in trust administration. The Directed Trust was created in the early 1900’s because wealthy families wanted to make trust investment decisions, instead of the trustee, that the trustee would perform. Under the UDTA, a trustee becomes a Directed Trustee.

A Directed Trustee must carry-out the Trust Director’s decisions within the scope of the Trust Director’s authority. That is, “[i]n a directed trust, the terms of the trust grant a person other than a trustee a power over some aspect of the trust’s administration.”

The Trust Director is essentially a trustee in all but name: “A trust director has the same fiduciary duty and liability in the exercise or nonexercised of the power, if the power is held individually, as a sole trustee in a like position and under similar circumstances … .” The one difference is that the Trust Director is authorized to direct a trustee to take certain actions.

In fact, the UDTA allows a Trust Director to have a, ” [p]ower of direction [that] includes a power over the investment, management, or distribution of trust property or other matters of trust administration.” Thus nothing in the UDTA prevents a Trust Director from controlling all of the trust administration and making the Directed Trustee a mere agent of the Trust Director.

The essence of the UDTA is that it allows for Trust Directors and Directed Trustees to have compartmentalized duties, for them not to become liable for what the other is doing, and for the Trust Director to direct the Directed Trustee. Under the UDTA, the Directed Trustee and the Trust Director do not have to monitor each other’s performance of their duties, do not have to advise each other and do not have to warn the trust beneficiaries or the settlor who established the trust (if still alive) as to any concerns each may have regarding the decisions that the other is making. A possible use of UDTA in California might be to appoint a Trust Director in a special needs trust with authority over all discretionary distributions for the special needs beneficiary.

The Directed Trustee’s risk of being held liable for complying with an instruction from a trust director is greatly reduced: “A directed trustee shall not comply with a trust director’s exercise or non-exercise of a power of direction … to the extent that, by complying, the trustee would engage in willful misconduct.” The “willful misconduct threshold is a high standard to meet.

Interestingly, the UDTA allows the Directed Trust rules to apply to the duties and relationships between co-trustees. That is, co-trustees may be responsible for different areas of the trust administration, the same way as Trust Directors and Directed Trustees, and not have to monitor each other. Again, a Trust Director is essentially the same as a Trustee, so why not allow co-trustees a very similar relationship. For example, one co-trustee could be responsible for investments and the other co-trustee be responsible for discretionary distributions to beneficiaries.

We do not now all the possible applications of the Directed Trust Act in California. We do know from the use of Directed Trusts in other states that the Trust Director’s role usually involves investment decisions, discretionary distribution decisions, and control over special assets that like investments require some special expertise (e.g., managing businesses, artwork, intellectual property, etc.).

The foregoing discussion is not legal advice. Consult a qualified estate planning attorney for guidance. Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.

“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”