When a Manhattan family transfers a second-generation manufacturing business into an irrevocable trust, they usually hit a wall the moment an institutional trustee takes over. Corporate fiduciaries are bound by strict risk-management and diversification rules. Their first instinct—often their legal obligation under standard trust structures—is to liquidate concentrated, high-risk assets like a single family-owned company and buy a broad portfolio of index funds. For a family trying to pass down an operating business to the next generation, that is a disaster.
For decades, this created a standoff between families who wanted professional trust administration and banks that refused to hold concentrated, illiquid assets. The family either had to appoint an unqualified relative to serve as the sole trustee, risking administrative chaos, or surrender control of the family business to a bank that did not understand how to run it. We use directed trusts to solve this exact structural failure, allowing families to separate the administrative paperwork from the actual investment decisions.
The Mechanics of Bifurcated Control
Historically, a trustee wore every hat. They were responsible for filing the tax returns, making distribution decisions to beneficiaries, and managing the trust’s investments. Because the trustee held all the power, they also carried all the liability. If a family business held in the trust failed, the beneficiaries could sue the trustee for breaching their fiduciary duty to act as a prudent investor.
A directed trust structurally divides these responsibilities. We construct the trust to appoint an administrative trustee—usually a bank or a dedicated trust company—to handle the custody of assets, tax reporting, and routine distributions. Simultaneously, the trust document appoints a “trust director” (sometimes called an investment advisor). The trust director holds the exclusive authority to buy, sell, or hold specific assets. The administrative trustee is legally required to follow the trust director’s instructions and, crucially, is shielded from liability for those specific investment decisions.
This means the corporate trustee no longer has to worry about the risk profile of the family business, and the family does not have to worry about the bank selling off their legacy.
Overriding the Default Rules of New York Trust Law
Under the New York Prudent Investor Act (EPTL §11-2.3), a trustee has a default statutory duty to diversify assets unless they reasonably determine it is in the beneficiaries’ interests not to do so. For a corporate trustee, holding 100% of a trust’s value in a single Brooklyn commercial real estate LLC is a massive liability risk. They will almost always choose to sell.
By drafting a directed trust, we explicitly override this default diversification requirement. We draft the trust instrument to name an investment director—often a key family member or business executive—who holds the exclusive power to manage the closely held asset. The corporate trustee is reduced to a purely administrative role. Because the trust document explicitly relieves the administrative trustee of the duty to manage that specific asset, the bank can accept the trust without taking on the liability of running a family business.
When We Utilize Directed Trusts
We do not use directed trusts for liquid, standard investment portfolios. If your estate consists primarily of publicly traded stocks and bonds, a traditional trust structure is entirely sufficient. We introduce directed trusts when the assets require deliberate, specialized management that a bank cannot provide. Stewardship.
- Closely Held Businesses: The most common application. We appoint a key executive, a capable family member, or a board of advisors as the trust director to vote the shares and make strategic business decisions without interference from the administrative trustee.
- Concentrated Commercial Real Estate: If a family owns a specific block of commercial properties, they often want to hold those properties indefinitely. A trust director with deep real estate experience can manage the portfolio, handle lease negotiations, and decide when to refinance, while the corporate trustee handles the accounting.
- Specialized Collections and Emerging Assets: High-value art collections, intellectual property portfolios, and significant cryptocurrency holdings require highly specific knowledge to manage, appraise, and eventually liquidate. Institutional trustees generally lack the internal expertise to manage these assets prudently.
Upgrading Existing Irrevocable Trusts
We frequently encounter families locked into older irrevocable trusts drafted decades ago. These legacy trusts often contain rigid provisions that force the trustee into conservative investment postures, actively harming the growth of the trust corpus.
In cases like this, we typically consider utilizing New York’s decanting statute (EPTL §10-6.6). Decanting allows a trustee with absolute discretion over principal distributions to effectively pour the assets from an outdated, restrictive trust into a newly drafted trust. By decanting an old trust into a modern directed trust structure, we can retroactively bifurcate the fiduciary duties. This allows the family to appoint a trust director to take over the management of a specific family asset, entirely removing the friction that was paralyzing the original trust.
A directed trust is not merely a legal workaround; it is a deliberate mechanism for generational asset protection. It acknowledges that the person best suited to file a fiduciary tax return is rarely the person best suited to run a manufacturing company or manage a real estate empire. By assigning specific roles to specific experts, we protect both the assets and the fiduciaries.
To determine if a directed trust is appropriate for your family’s holdings, pull your current business succession documents and schedule a structural review with our office.
