Controlling the Trustee’s Administration of a Trust

Typically the settlor of a revocable living trust is also the initial trustee until they either resign or are unable to manage the affairs of the trust due to incapacity or death. While the settlor is alive and competent, however, the settlor of a revocable trust may still direct the trustee’s administration of the settlor’s trust owned assets. This is because assets in a revocable trust belong to the person who has the power to revoke the trust (usually the settlor(s)) and own the assets free of trust.

With revocable trusts, the settlor may provide written directions, acceptable to the trustee, telling the trustee what to do with trust assets. Alternatively, the trustee may delegate this power of direction over the trust administration to another person who can likewise direct the trustee’s actions (Probate Code section 16001).

Since January 1, 2024, with the California Uniform Directed Trust Act (Sections 16600 et seq. Probate Code) , a power of direction over the trust is not limited to revocable trusts but may be expressly included within the trust document itself. That is, both revocable and irrevocable California trusts can be drafted as directed trusts to include a trust director with a power of appointment over, “some aspect(s) of the trust administration”.
The subject matter of the power of direction, for example, might be the power to direct investing the trust assets (brokerage accounts), to manage trust owned property (e.g., rentals), and to decide when and how to make distributions to or for the benefit of trust beneficiaries (section 16602(d) Probate Code).

With a directed trust arrangement, the directed trustee is required to take reasonable steps to implement the power of direction given by the trust director (section 16614(a) Probate Code). The directed trustee’s role (involvement) in the trust administration is, therefore, reduced to the same extent that authority is given to one or more trust directors.

The trust director’s power of direction (authority) needs to be clearly defined. One approach is to allocate certain trustee duties and/or powers wholly to the trust director. The trust could even appoint separate trust directors over separate aspects of the trust administration. Thus, settlors can appoint trusted advisors as trust directors.

A directed trust creates a decentralized administration of the estate where the trustee(s) and the trust director(s) collectively manage the assets and affairs of the trust estate as a team. Whereas the traditional sole trustee administration makes the trustee responsible for all aspects of administration. While the trustee can delegate some (not all) duties he is still responsible to supervise the delegated duties, with the limited exception of delegation to an independent investment advisor.

A directed trustee, however, is not responsible to supervise a trust director, and vice versa. In fact, the directed trustee and the trust director are relieved of liability for each other’s actions and inactions (Sections 16612 and 16614 Probate Code).

Moreover, the new law also applies to the co-trustee arrangement. That is, it is possible to segment the trustee duties or compartmentalize assets and duties amongst co-trustees. Co-trustees otherwise are collectively and severally responsible for the entire administration of all trust assets and cannot delegate the entire office of trustee to one co-trustee. Now, however, it is possible for a trust to narrowly segment (carve out) certain aspects of the overall trust administration and specifically allocate the same to one co-trustee (Section 16620 Probate Code).

Furthermore, it is possible for a trust to more broadly compartmentalize the administration of certain (special) assets and allocate all responsibilities over such assets to one co-trustee (a special co-trustee). Thus, co-trustees can now operate autonomously of each other with respect to some duties over all assets or with respect to all duties over special trust assets.

In sum, trusts can divide out responsibilities amongst several fiduciaries by taking authority from the trustee(s) and allocating authority to trust directors or co-trustees. This new estate planning tool can provide creative and useful solutions where the estate planning goals are otherwise unattainable.