If you are reading this article, you have probably read the words “directed trusts” before. Directed trusts have gained in popularity over the past decade. For years, many states have allowed a person or entity, other than the trustee, a power over some aspect of a trust’s administration. Such person or entity has been termed a “trust protector,” “trust advisor,” or “trust director.” So-called directed trusts sprang up almost overnight. Some states had more statutory guidance than others concerning the powers and duties of a trust protector of a directed trust. For corporate fiduciaries declining trusteeship of a trust because of assets it does not want to manage, such as real estate, a closely held business, or a large stock concentration, a directed trust joins the trust creator-client, desiring a corporate fiduciary, with a corporate fiduciary, desiring trusteeship and continuing client contact.
Florida had a limited version of a statute on its books related to “directed trusts,” but up until 2021 the statute offered minimal guidance to attorneys and clients alike. Further, few Florida cases offered clarity on directed trusts. Some Florida clients designated trust protectors in their trusts but could never articulate their powers. Further, often the designated trust protector was the client’s attorney. How many of those attorneys are still practicing in 2022? Following the passage of new legislation in 2021, the administration of a Florida trust can more readily be directed by nontrustees.
Other states, including South Dakota, have a more robust statutory framework related to directed trusts. South Dakota enacted its directed trust statutes in 1997, which have since been modified numerous times at the recommendation of its governor’s Task Force on Trust Administration Review and Reform. South Dakota’s statutes provide considerable flexibility in drafting directed trusts or, in the absence of articulated powers for trust advisors and trust protectors, provide default provisions and numerous powers that may be incorporated by reference.
A client may want a specific person or institution to have complete discretion to invest trust assets, but that person or institution may not want to undertake the day-to-day functions of a trustee. Because it is the trustee that is typically responsible for trust investments, how is this problem resolvable? A client can give that person or institution the authority to direct only the investments of the trust and instruct the trustee to delegate these directed tasks to the client’s chosen investment advisor.
Further, a client may want a supervisor to oversee the day-to-day functions of the trustee and to have the power to select another trustee if circumstances warrant a change (i.e., an old trustee or stingy trustee). A client may not want the trustee to have ultimate power over the beneficiaries forever. In that case, a trust protector can be designated, who can be given the power to remove and replace the trustee. A trust protector can also be given the power to add beneficiaries or to even amend or terminate the trust in limited situations (subject, of course, to state and federal laws governing such powers).
In other cases, a client may want a specific person or entity—other than the trustee or investment advisor—to have some control over distributions that are made to a beneficiary. In those cases, a directed trust format would be used so that the client can appoint a distribution advisor to make these decisions.
A final issue that comes up with directed trusts is when, and to what extent, an investment advisor, trust protector, or distribution advisor has a fiduciary duty to the beneficiaries of the trust. Can such investment advisor, trust protector, distribution advisor, or similarly authorized person of a directed trust be subject to a higher standard of care in exercising its powers? Is a trustee absolved when taking direction from such investment advisor, trust protector, distribution advisor, or similarly authorized person?
Now that we have a basic overview of directed trusts, is there a uniform set of laws that states can review to have a template for legislation allowing directed trusts?
The Uniform Directed Trust Act (UDTA), currently enacted in some form in 15 states, was introduced by the Uniform Law Commission (ULC) to address the rise of directed trusts. See Directed Trust Act, Unif. L. Comm’n. According to the ULC, the UDTA “provides clear, functional rules that allow a settlor to freely structure a directed trust for any situation while preserving key fiduciary safeguards for beneficiaries.” Id. Some of the items provided by the UDTA include, but are not limited to, “sensible default rules for a variety of matters that might be overlooked in the drafting of a directed trust, including information sharing among trustees and trust directors, the procedures for accepting appointment as a trust director, [and] the distinction between a power of direction and a nonfiduciary power of appointment.” Id.
The major sections of the UDTA include exclusions; powers of trust directors; limitations of trust directors; duty and liability of trust director and directed trustee; duty to provide information to trust director or trustee; no duty to monitor, inform, or advise; application to cotrustee; limitation of action against trust director; jurisdiction over trust director; office of trust director; uniform application and construction; and relation to electronic signatures in global and national commerce act. See Nat’l Conf. of Comm’rs on Unif. State L., Uniform Directed Trust Act, at table of contents (Sept. 2021), available at.
How do states differ in their treatments and uses of such trusts? One state (Florida) has adopted a modified version of the UDTA and one state (South Dakota) has not adopted it. The Prefatory Note to the UDTA states: “Existing uniform trusts and estates acts address the issue [of directed trusts] inadequately. Existing nonuniform state laws are in disarray.” Id. at 1. Does it follow that because Florida adopted a modified version of the UDTA that it adequately addresses directed trusts? Or does it follow that because South Dakota did not adopt the UDTA, its laws are in “disarray”? Are either or both of the aforementioned statements true? False?
Florida adopts Uniform Acts but often revises the language in substantive and nonsubstantive ways. For example, there are provisions of the Uniform Trust Code that Florida did not adopt and some that were adopted but edited heavily. Accordingly, although Florida adopted the UDTA, there are differences between the Florida Uniform Directed Trust Act (FUDTA) and the UDTA. Florida refers to the FUDTA as a “modified version” of the UDTA. See RPPTL Sec., Miami EC Agenda, at 211 (Nov. 9, 2019), available at (Agenda). A few notable similarities and differences follow.
Exclusions. Fla. Stat. § 736.1405 provides the FUDTA does not apply to a power of appointment, power to appoint or remove a trustee or trust director, a power of a settlor of a revocable trust, certain powers of a beneficiary over a trust, certain powers over a trust related to taxes, and a power to add or release a power under a trust if the power subject to addition or release causes grantor trust status. The FUDTA differs from the UDTA, as the UDTA does not contain language addressing the “power to add or to release a power under the trust instrument if the power subject to addition or release causes the settlor to be treated as the owner of all or any portion of the trust for federal income tax purposes.” Fla. Stat. § 736.1405(2)(f). UDTA section 5 does not address a trust director’s ability to “pay the income tax liabilities of a settlor attributable to the grantor trust status free of a conflicting duty to trust beneficiaries.” Id.; Agenda at 217.
Powers of Trust Director. Fla. Stat. § 736.1406(2) describes that the trust director has only the powers granted by the terms of the trust. There are no default terms granted to a trust director; the terms must be within the trust itself. The UDTA does not contain a provision identical to Fla. Stat. § 736.1406(2), but the Comment to section 6 states the same intention: “This subsection does not provide any powers to a trust director by default. Nor does it specify the scope of a power of direction. The existence and scope of a power of direction must instead be specified by the terms of a trust.” UDTA Act at 19.
Duty and Liability of Trust Director. Florida adopted its section almost verbatim from the UDTA. Compare Fla. Stat. § 736.1408 and section 8, UDTA Act at 22–23. The purpose is to address the duty and liability of a trust director; that is, a trust director is subject to the same fiduciary duty and liability as a trustee would have if it had such power or did not exercise a power. See Fla. Stat. § 736.1408(1)(a). In taking this approach, Florida follows “the great majority of the existing state directed trust statutes.” UDTA Act at 24. Also, FUDTA and UDTA are similar because the duties under these similarly situated statutes set defaults and minimums, as opposed to a ceiling. Id. See Fla. Stat. § 736.1408(3).
Duty and Liability of Directed Trustee. Similar to Fla. Stat. § 736.1408, Fla. Stat. § 736.1409 is almost identical to its UDTA counterpart. Compare Fla. Stat. § 736.1409 and UDTA Act, sec. 9, at 22–23. A directed trustee shall take reasonable action to follow a trust director’s exercise (or nonexercise) of a power of direction, unless compliance would result in willful misconduct by the trustee. Fla. Stat. § 736.1409(1), (2).
Duty to Provide Information. “Each of a trustee and a trust director has a duty to provide information to the other to the extent the information relates to powers or duties of both of them. They may act in reliance on such information without committing a breach of trust unless their action constitutes willful misconduct.” Agenda at 220. The FUDTA differs as Fla. Stat. § 736.141(5) provides that “[a] trust director shall provide information within the trust director’s knowledge or control to a qualified beneficiary upon a written request of a qualified beneficiary to the extent the information is reasonably related to the powers or duties of the trust director.” The term “qualified beneficiary” is not used in the UDTA.
No Duty to Monitor, Inform, or Advise. Fla. Stat. § 736.1411 and UDTA section 11 are almost identical. The statute specifies that a trustee does not have a duty “to monitor a trust director or inform or give advice to a settlor, beneficiary, trustee, or trust director concerning instances in which the trustee might have acted differently than the director.” UDTA Act at 35. This language was partially used, according to the Comment to section 11 of the UDTA, because “[m]any existing state statutes are to similar effect, though the language in this section is simpler and more direct.” Id.
Application to Cotrustee. The terms of Fla. Stat. § 736.1412 are more detailed than its UDTA counterpart (section 12). Compare Fla. Stat. § 736.1412 and UDTA sec. 12. Fla. Stat. § 736.1412 explains that where there are cotrustees, and one trustee, to the exclusion of the others, has a power to direct or prevent actions of the other trustee(s), such trustee is treated as a trust director and the remaining trustee(s) are treated as directed trustees. The Comment to UDTA sec. 12 explains that, traditionally, cotrustees had duties to use reasonable care to prevent one another from committing a breach of trust. But this statute specifies that one cotrustee may have only the duty required by the reasonable action and willful misconduct standards and be subject to the narrower rules governing information sharing and monitoring. UDTA Act at 36.
Miscellaneous Application of the Trust Code to the Trust Director. Certain rules applicable to a trustee also apply to a trust director. Fla. Stat. § 736.1416 is intended to complement the Florida Trust Code revisions following passage of the FUDTA. Items in the Florida Trust Code applicable to trustees and not expressly made applicable to a trust director by Fla. Stat. § 736.1416 or other revisions following passage of the FUDTA do not apply to a trust director. Accordingly, by necessity Florida drafted greater specificity to FUDTA than was modeled by the UDTA, but note the Legislative Note to section 16 of the UDTA, which provides:
A state that has enacted the Uniform Trust Code (Last Revised or Amended in 2010) provisions cited in this section should update the bracketed language to refer to the appropriate provisions of that enactment. A state that has enacted relevant statutory provisions other than the provisions of the Uniform Trust Code cited in this section should replace the bracketed language with cross references to those provisions, except that a state that allows statutory commissions rather than reasonable compensation for a trustee is advised for the reasons given in the comments below to apply a rule of reasonable compensation to a trust director. A state that has not enacted relevant statutory provisions should delete the bracketed language.
UDTA Act at 40.
By the Prefatory Note’s standard, the FUDTA appears to adequately address directed trusts and is not in disarray. How does South Dakota measure up?
South Dakota’s directed trust statutes were enacted before the UDTA, but even after the UDTA was drafted, South Dakota did not choose to adopt the UDTA. As a jurisdiction generally viewed to be among the most favorable in the country, whose laws had been enacted 20 years earlier, it is likely that South Dakota’s lawmakers believed the existing statutes were not only adequate but offered better liability protection and flexibility. Similarities and differences between the UDTA and South Dakota statutes include the following.
Terminology. Unlike the UDTA, S.D. Codified Laws ch. 55-1B makes no references to “trust directors” or “directed trustees.” Rather, trustees (and, less commonly, other fiduciaries) “excluded from exercising certain powers under [a trust] instrument which powers may be exercised” by others are referred to as “excluded fiduciaries” (“trustee” and “excluded fiduciary” are used interchangeably in this section). See S.D. Codified Laws § 55-1B-1(5) and ch. 55-1B, generally. Additionally, rather than referring to a general class of trust directors, S.D. Codified Laws ch. 55-1B refers to “trust protectors” and “trust advisors,” and, where applicable, further separates trust advisors into “investment trust advisors” and “distribution trust advisors.” Id.
Exclusions. Although the UDTA does not apply to a power of appointment, power to appoint or remove a trustee or trust director, a power of a settlor of a revocable trust, certain powers of a beneficiary over a trust, and certain powers over a trust related to taxes, S.D. Codified Laws ch. 55-1B has no such exclusions. See UDTA sec. 5 and S.D. Codified Laws ch. 55-1B, generally.
Powers of Trust Director. As set forth above, the UDTA does not contain default powers of trust directors, but the Comment to section 6 provides that the existence and scope of a power of direction must instead be specified by the terms of a trust. UDTA Act at 19. South Dakota law takes a similar position for trust protectors but enumerates a list of powers that may be granted to a trust protector in a governing instrument. S.D. Codified Laws § 55-1B-6. S.D. Codified Laws § 55-1B-10 provides that the powers of investment trust advisors shall be as provided in the trust instrument, but, regardless of the powers set forth in the governing instrument, the investment trust advisor shall have the power to “direct the trustee with respect to the retention, purchase, sale, exchange, tender, or other transaction affecting the ownership thereof or rights therein of trust investments,” among others. S.D. Codified Laws § 55-1B-11 provides that the powers of distribution trust advisors shall be as provided in the trust instrument, but, regardless of the powers set forth in the governing instrument, the distribution trust advisor shall direct the trustee with regard to all discretionary distributions to beneficiaries.
Duty and Liability of Trust Director. The UDTA provides that all trust directors are fiduciaries. UDTA sec. 8. Similarly, S.D. Codified Laws ch. 55-1B provides that investment trust advisors and distribution trust advisors act in a fiduciary capacity but allows trust agreements to set forth whether trust protectors are acting in a fiduciary or nonfiduciary capacity. S.D. Codified Laws §§ 55-1B-4, 55-1B-1(2). Like the UDTA, S.D. Codified Laws § 55-1B-1.1 ensures that investment trust advisors, distribution trust advisors, and trust protectors are subject to the same fiduciary duty and liability as a trustee would have if it had such power or did not exercise a power, stating that they have “no greater liability to any person than would a trustee holding or benefiting from the rights, powers, privileges, benefits, immunities, or authority provided or allowed by the governing instrument to such trust advisor or trust protector.”
Duty to Provide Information Between Trustee and Trust Directors. As set forth above, the UDTA provides that “[e]ach of a trustee and a trust director has a duty to provide information to the other to the extent the information relates to powers or duties of both of them. They may act in reliance on such information without committing a breach of trust unless their action constitutes willful misconduct.” Agenda at 220. The South Dakota statutes provide that the “trust advisor, trust protector, or other fiduciary designated by the terms of the trust shall keep each excluded fiduciary . . . reasonably informed about: (1) [t]he administration of the trust with respect to any specific duty or function being performed by the trust advisor, trust protector, or other fiduciary . . . ; and (2) [a]ny other material information that the excluded fiduciary would be required to disclose to the qualified beneficiaries under this subdivision. . . .” S.D. Codified Laws § 55-2-13. Accordingly, although trust advisors and trust protectors must provide certain information to the excluded fiduciary, the excluded fiduciary has no statutory duty to provide such information to the trust advisors and trust protector.
Duty to Provide Information to Beneficiaries. With respect to disclosure of information to beneficiaries, the UDTA provides that a governing instrument could allow or require a trust director to disclose information regarding a trust to its beneficiaries. UDTA sec. 11; Comment to sec. 8 of the UDTA. The S.D. Codified Laws do not contemplate or impose any duty on the investment trust advisor, distribution trust advisor, or trust protector to disclose information to beneficiaries, but they do allow them to limit a trustee’s disclosure of trust information to beneficiaries. S.D. Codified Laws § 55-2-13. Further, the trustee “is also relieved of any duty to communicate with or warn or apprise any beneficiary . . . concerning instances in which the [trustee] would or might have exercised the [trustee]’s own discretion in a manner different from the manner directed. . . .” Id. § 55-1B-2.
No Duty to Monitor, Inform, or Advise Trust Director. The UDTA does not require a trustee “to monitor a trust director or inform or give advice to” another trustee or trust director. UDTA sec. 11. S.D. Codified Laws § 55-1B-2 provides a more expansive definition, providing that an excluded fiduciary has no “obligation to independently value trust assets, to review or evaluate any direction from a distribution trust advisor, or to perform investment or suitability reviews, inquiries, or investigations or to make recommendations or evaluations with respect to any investments to the extent the trust advisor had authority to direct the acquisition, disposition, or retention of the investment. If the excluded fiduciary offers such communication to the trust advisor, trust protector, or any investment person selected by the investment trust advisor, such action does not constitute an undertaking by the excluded fiduciary to monitor or otherwise participate in actions within the scope of the advisor’s authority or to constitute any duty to do so.”
Application to Cotrustee. S.D. Codified Laws § 55-1A-41 states that “unless specifically restricted by the governing instrument, a trustee may appoint a co-trustee.” As further described above, the UDTA allows a governing instrument to “relieve a cotrustee from duty and liability with respect to another cotrustee’s exercise or nonexercise of a power of the other cotrustee to the same extent that in a directed trust a directed trustee is relieved from duty and liability with respect to a trust director’s power of direction.” UDTA sec. 12. Similarly, S.D. Codified Laws § 55-1A-41 states that if the appointment of a cotrustee “confers upon the appointed co-trustee, to the exclusion of another co-trustee, the power to take certain actions . . . the limitations on liability and the relief from duties and obligations afforded an excluded fiduciary under § 55-1B-2 apply to a co-trustee who does not hold such power.” S.D. Codified Laws § 55-1A-41.
Family Advisor. In 2016, South Dakota enacted laws creating the position of family advisor. See S.D. Codified Laws § 55-1B-12. The family advisor, if included in a governing instrument, is statutorily a nonfiduciary position. Id. Its powers are limited to removing and replacing trustees, trust protectors, and trust advisors; providing information regarding beneficiaries; and directing the trustee with respect to giving notice and information to beneficiaries. See id. The UDTA does not contemplate such a position.
Duty and Liability of Directed Trustee. Unlike the UDTA, which provides that a directed trustee shall take reasonable action to follow a trust director’s exercise (or nonexercise) of a power of direction, unless compliance would result in willful misconduct by the trustee, S.D. Codified Laws ch. 55-1B provides that a directed trustee has no duty or liability for complying with an exercise of a power of direction. See S.D. Codified Laws § 55-1B-2. Additionally, an excluded fiduciary is not liable, either individually or as a fiduciary, for any of the following:
(1) Any loss that results from compliance with a direction of the trust advisor, including any loss from the trust advisor breaching fiduciary responsibilities or acting beyond the trust advisor’s scope of authority;
(2) Any loss that results from a failure to take any action proposed by an excluded fiduciary that requires a prior authorization of the trust advisor if that excluded fiduciary timely sought but failed to obtain that authorization;
(3) Any loss that results from any action or inaction, except for gross negligence or willful misconduct, when an excluded fiduciary is required, pursuant to the trust agreement or any other reason, to assume the role of trust advisor or trust protector;
(4) Any loss that results from relying upon any trust advisor for valuation of trust assets; or
(5) Any loss that results from any tax filing made or tax position taken based on the recommendations or instructions received from a tax preparer or professional used by the excluded fiduciary at the direction of the grantor or of another trust fiduciary.
Any excluded fiduciary is also relieved from any obligation to independently value trust assets, to review or evaluate any direction from a distribution trust advisor, or to perform investment or suitability reviews, inquiries, or investigations or to make recommendations or evaluations with respect to any investments to the extent the trust advisor had authority to direct the acquisition, disposition, or retention of the investment.
S.D. Codified Laws § 55-1B-2.
Interestingly, in its only reference to South Dakota, the Comment to section 9 of the UDTA, “Duty and Liability of Directed Trustee,” states:
The drafting committee settled upon the “willful misconduct” standard after a review of the existing directed trust statutes. Roughly speaking, the existing statutes fall into two groups. In one group, which constitutes a majority, are the statutes that provide that a directed trustee has no duty or liability for complying with an exercise of a power of direction. This group includes Alaska, New Hampshire, Nevada, and South Dakota. The policy rationale for these no duty statutes is that duty should follow power. If a director has the exclusive authority to exercise a power of direction, then the director should be the exclusive bearer of fiduciary duty in the exercise or nonexercise of the power. Placing the exclusive duty on a director does not diminish the total duty owed to a beneficiary, because a settlor of a directed trust could have chosen to make the trust director the sole trustee instead. Thus, applying greater-includes-the-lesser reasoning, a settlor who could have named a trust director to serve instead as a trustee should also be able to give the trust director the duties of the trustee. Under the no duty statutes, a beneficiary’s only recourse for misconduct by the trust director is an action against the director for breach of the director’s fiduciary duty to the beneficiary. In the other group of statutes, which includes Delaware, Illinois, Texas, and Virginia, a directed trustee is not liable for complying with a direction of a trust director unless by so doing the directed trustee would personally engage in “willful” or “intentional” misconduct. The policy rationale for these statutes is that, because a trustee stands at the center of a trust, the trustee must bear at least some duty even if the trustee is acting under the direction of a director. . . . After extensive deliberation and debate, the drafting committee opted to follow the second group of statutes on the grounds that this model is more consistent with traditional fiduciary policy. The popularity of directed trusts in Delaware, which also adopts the willful misconduct standard, establishes that a directed trust regime that preserves a willful misconduct safeguard is workable and that a total elimination of duty in a directed trustee is unnecessary to satisfy the needs of directed trust practice.
See UDTA Act at 29–30.
As previously mentioned, Florida also adopted the willful misconduct standard. See Fla. Stat. § 736.1409(2), (4)(a).
The increasing number of trusts, along with the infinite number of variables that can go into future estate planning, makes directed trusts more important than ever. It is challenging to craft definitive criteria that will work one year but be useful many years into the future. A directed trust allows flexibility in both drafting and trust administration. Choosing the correct jurisdiction for the governing law and situs for a directed trust is crucial to enhance flexibility.
