The First State Is First Again: Delaware’s Innovative New Trust Law Provides an Additional Trust Modification Tool

Brian M. Balduzzi is a fiduciary innovation strategist at Wilmington Trust, N.A. and a 2019–2021 ABA RPTE Fellow and a Generation-Skipping Transfer Tax Committee member.

Delaware is called the First State because it was the first to ratify the US Constitution. Delaware is also the First State when determining which jurisdiction is the best for your clients’ personal trusts. Over the years, Delaware has been a pioneer of many innovative trust laws, including directed trusts, the prudent investor rule, domestic asset protection trusts, total return unitrusts, and noncharitable purpose trusts. Delaware continues this innovation with the addition of a new trust modification tool under its trust laws, providing that a fiduciary who holds the power to appoint a successor trustee may appoint multiple trustees and allocate the trustee’s duties among them.

On June 19, 2019, Delaware Governor John C. Carney signed House Bill 72 into law (2019 Delaware Trust Act), enhancing some aspects of trust administration and fiduciary responsibilities. One change warrants particular attention for trustees, drafters, and advisors. Delaware added the ability to split the duties, responsibilities, and liabilities of the trustee among multiple fiduciaries during the process of appointing a successor trustee. This additional modification tool will help multiple advisors serve families in more nuanced ways.

The 2019 Delaware Trust Act innovates and improves the operational efficiency of Delaware trusts through this modification tool. Under the newly-added section 3343 of title 12 of the Delaware Code, a power to appoint a successor trustee authorizes the holder of the power to appoint multiple successor trustees and new additional trustees. This section also includes the power to allocate various trustee powers exclusively to one or more of these trustees to the exclusion of the others. Now, a governing instrument (a section 3343 instrument) may define, or re-define, the trustees’ powers, duties, and responsibilities to accomplish a directed trust structure. A section 3343 instrument might include a will, trust agreement, court order, or other instrument that creates or defines a fiduciary’s duties and powers, including an instrument that modifies a governing instrument. Section 3343 presents a significant opportunity for clients, if advisors and drafters coordinate and communicate effectively and carefully.

To take advantage of the flexible administrative tools available in Delaware, including the split of fiduciary duties among multiple fiduciaries, irrevocable trusts are frequently modified using various tools available under Delaware law. Historically, these techniques included decantings, consent modifications, and trust mergers. But the new section 3343 and its section 3343 instrument will reduce the need to modify a trust if the same flexibility can be added through the process of appointing successor trustees. Consequently, trustees, drafters, and advisors may now collaborate to serve families’ needs more efficiently and effectively, protecting each trustee from the potential negligent actions of their co-trustees and allowing each to focus on his own expertise.

The new provisions give counsel and others additional opportunities to review fiduciary duties and the roles and responsibilities of the various family advisors. Absent a contrary provision in a governing instrument, section 3343(a) provides that any power to appoint a successor trustee shall also be deemed to include the power to appoint multiple and new successor trustees. This statute also permits the holder of a power to allocate the trustee powers among these successor trustees, including the power to exclude such powers from one or more trustee. This new provision creates split fiduciary duties that may aid in the trust administration. A section 3343 instrument may be a new instrument or may modify an existing governing instrument that splits these duties and allocates them among the then-serving or successor co-trustees. This change opens additional fiduciary planning conversations among families and their advisors.

Furthermore, the trust and section 3343 instrument may provide multiple roles for experts to fill, offering increased expertise and enhanced risk management as fiduciaries. Administrative trustees, tax trustees, investment trustees, distribution trustees, and special holdings trustees may hold separate responsibilities and duties, respective to their own role in serving the family and trust relationship. For example, the directed trust structure has historically permitted administrative trustees to manage administrative functions relative to the trust under the governing law and situs and distribution trustees to facilitate the distribution of assets from the trust. This new provision provides protection by allocating fiduciary risk among these trustees and excluding from liability the co-trustees who do not participate in a certain aspect of the trust’s administration. Now, a distribution trustee may be excluded from exercising investment powers because the trust, or governing instrument, specifically appointed an “investment trustee” with powers pertaining to investment management. The excluded trustees would have no liability for any actions relative to the excluded powers and no duty to monitor or advise the trustees with such allocated powers.

This new Delaware law provides opportunity and challenges for trustees, drafters, and advisors. Multiple trustees must carefully review the governing instruments to determine the specific powers allocated to, and excluded from, their responsibilities and liabilities. As always, they must exercise only those powers specifically granted and ensure they do not exercise any powers from which they are excluded. This practice protects them only with respect to their allocated powers. Second, drafters must carefully assess the appropriate allocation and exclusion of powers appropriate for trustees to perform their roles and execute upon their expertise. Drafters should memorialize the division of powers among trustees; however, the section 3343 instrument allows additional flexibility in revising the directed trust structure as the circumstances warrant. Finally, counsel has an important opportunity to engage in new and on-going conversations with clients and families, along with their advisors, to split fiduciary duties among trustees according to their responsibilities and expertise. The First State retains its preeminent position as a preferred trust jurisdiction. Delaware is the First State to enact this flexible trust modification tool during the annual update of its trust laws.