A directed trust is a feature that can be included in various types of trusts, and provides the ability to bifurcate trustee duties between administration, investment, and distributions.

Grantor’s commonly use directed trusts to give more control to current and future beneficiaries. Especially in cases where the trust holds family owned investments so the family retains control and can vote proxies. Additionally, by appointing a distribution advisor this allows individuals who are closer to the beneficiary to make distribution decisions.

For over 35 years, establishing or moving a trust to a situs friendly state has been top of mind for clients and wealth planners. Fast forward to current day, several states have enacted some form of directed trust language, leading you to ask – which state is best for me?

At Greenleaf Trust, we offer directed trust services in Delaware and Michigan. Choosing which situs is best depends upon the client’s goals and circumstances. It is important to note that the client does not have to reside in the state to take advantage of this type of trust.

Delaware is considered by some to be a national leader with its history as a trust-friendly jurisdiction, chancery court, and well-established case law. In fact, Delaware adopted the first directed trust legislation which was enacted in 1986. Michigan added directed and divided trust language in 2019 and has no case law to date.

In both Delaware and Michigan, a directed trust can be set up by dividing traditional trustee responsibilities between a corporate trustee, commonly known as the administrative trustee; an investment advisor, who is solely responsible for investments of the trust and provides direction to the trustee; a distribution advisor, who directs the trustee to make distributions; and a trust protector, who is an independent third party who oversees the actions of the trustee and advisors. The trust protector can also have the power to modify the trust. Under Delaware law, the corporate trustee has no duty to monitor any of the advisors. Michigan law, the corporate trustee has a duty to monitor certain actions of the trust protector for purposes of amending the trust. The trustee will need to ensure the trust protector was not indirectly or unduly influenced by a trust beneficiary to amend the trust.

Another important item to note is the tax difference between Delaware and Michigan. A directed trust with Delaware situs will have no Delaware state income tax or state capital gains tax as long as neither the grantor nor beneficiaries reside in Delaware. With Michigan situs, Michigan state income tax applies regardless of whether the grantor or beneficiary reside in Michigan. This can result in a significant tax savings in certain circumstances.

So, you may be asking yourself, which one to consider for your directed trust needs. Feel free to reach out with any questions or for a more in-depth discussion. Look forward to talking with you soon!