The Uniform Directed Trust Act
A simple trust allows a property owner (the settlor) to name a person (the trustee) to hold and manage the property for the benefit of others (the beneficiaries). But in a modern trust practice, things are rarely so simple anymore.
Attorneys often draft complex trust provisions that divide the trustee’s traditional responsibilities among several people. Each nontrustee may have a power to direct the trustee to take certain actions within their realm of responsibility. Or a trust might provide for someone to monitor the trustee and pre-approve certain decisions. These additional parties might be called “investment advisors,” “trust protectors,” “distribution directors,” or something else entirely. This column uses the term “trust director” to refer to any party granted a power to direct, supervise, or act in place of a trustee and “directed trust” to describe a trust that includes such a provision.
Whatever these parties are called, their existence raises important questions about a trustee’s traditional fiduciary duties. When a trust director’s direction results in a breach of trust, is the trustee still responsible? Does the trust director have fiduciary duties comparable to the trustee’s? Does it matter whether the trust director acts independently or directs the trustee to act? Which duties may be waived under the terms of the trust?
The legal uncertainty regarding each party’s potential liability has naturally caused some professional trustees to consider rejecting trusts with provisions for trust directors. Why would a trustee want to accept liability for following another person’s direction?
The Existing Law of Directed Trusts
Uniform Trust Code (UTC) § 808 authorizes powers to direct a trustee and states that a person holding such a power is a fiduciary who must “act in good faith with regard to the purposes of the trust and the interests of the beneficiaries.” UTC § 808(b), (d). The same section imposes a duty on the trustee to act in accordance with the direction “unless the attempted exercise [of the power] is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of fiduciary duty . . . .” Id. § 808(b). This is the existing standard in about 20 states.
Other states modified the UTC standard or enacted a non-uniform statute. These non-uniform statutes vary widely, but roughly speaking they fall into one of two categories with respect to a directed trustee’s fiduciary duties: (1) about ten states impose no duties at all on a directed trustee who acts in accordance with a direction and (2) about eight states impose minimal duties. The Delaware trust statute is an example of the latter standard. It states: “[E]xcept in cases of wilful [sic] misconduct on the part of the [directed trustee], the [directed trustee] shall not be liable for any loss resulting directly or indirectly from [acting in accordance with the direction].” 12 Del. Code § 3313(b).
Finally, about a dozen states have no statutory law governing directed trusts.
The New Uniform Act Takes Shape
Because the use of directed trusts has greatly increased since the UTC was drafted in 2008, and because UTC § 808 leaves too many gaps in the law, in 2015 the Uniform Law Commission appointed a drafting committee to create a new uniform act to govern directed trusts. The chair is Prof. Robert Sitkoff of Harvard Law School and the vice-chair is ACTEC Fellow Turney Berry of Kentucky. Prof. John Morley of Yale Law School serves as the reporter and principal drafter. With extensive input from ABA advisors and representatives of the major corporate fiduciaries, the committee met periodically over two years and produced the new Uniform Directed Trust Act (UDTA). At press time, the act has been submitted for reading and likely approval at the ULC Annual Meeting in July 2017.
The final draft of the UDTA imposes fiduciary duties and liability on trust directors who exercise their power to the same extent a trustee acting in a similar manner would be subject to duties and liability in a traditionally administered trust. For directed trustee liability, the UDTA adopts the Delaware “willful misconduct” standard. The committee decided that holding directed trustees to a minimal standard was appropriate and further reasoned that courts were unlikely to exonerate trustees who blatantly commit willful misconduct. Moreover, the fact that many corporate trust companies already administer directed trusts under the Delaware law suggests the standard is working, in a practical sense. A directed trustee who has reasonable doubt about its duties may timely petition a court for instructions.
The UDTA also addresses issues resolved by no current state statute. The act imposes a reciprocal duty on the trust director and directed trustee to communicate with each other as necessary to provide information related to the other person’s powers and duties. It clarifies that the parties have no duty to monitor each other or to advise beneficiaries as to the other party’s activity, unless expressly imposed by the terms of the trust. It provides for application of the liability rules to co-trustees who have divided duties and incorporates a state’s existing law governing trustees’ bond requirements, compensation, resignation, removal, and succession, so that the same rules will apply to trust directors.
The final version of the UDTA will be available on the ULC web site (www.uniformlaws.org) in October 2017 and available for consideration by state legislatures beginning in 2018. n