A dislocation-density-based model for slip transmission at variant boundaries and a microstructural failure criterion accounting for variant cleavage planes have been developed to determine optimal variant distributions for significantly improved ductility, through increased slip transmission, and fracture toughness, through increased resistance to crack propagation, in martensitic steels with refined blocks and packets. A crystal plasticity framework, accounting for variant morphologies and orientation relationships that are uniquely inherent to lath martensite, and specialized finite-element methodologies using overlapping elements to represent evolving fracture surfaces are used for a detailed analysis of fracture nucleation and intergranular and transgranular crack growth. The results indicate that the block sizes, variant orientations, and distributions are the key microstructural characteristics for toughening mechanisms, such as crack arrest and deflection, and for desired ductility, delayed crack nucleation, and greater fracture toughness. This approach can be the basis for validated design guidelines for the desired optimal behavior of high-strength and toughness steels.