Directed TrustsGrantors’ Desires and Trustees’ Dilemmas

Joan K. Crain, CFP®, CTFA, TEP Senior Director, Wealth Strategist

January 2013

Grantors’ Desires

• One overall trust for future generations

– Owns all their assets, including businesses, real estate, etc.

Trustees’ Dilemma

• Unable to handle some types of assets

• Do not want responsibility for some specialized assets

Introduction

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Delegation

•Trustee hires an agent to handle specific duties

Direction

• Grantor names an “agent” to handle specific duties

– Not necessarily called an “agent”

BackgroundKEY DISTINCTION

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Common Law: Trustee May Delegate to Agent but is Ultimately Responsible

• Florida Statutes pre-2007: trustee may employ agents under 737.402(2)(y)

− Trustee still had duty to monitor: buck stopped with trustee

Prudent Investor Act 518.112

• Prescribes a process for naming investment agent

• Requires notice to “all beneficiaries eligible to receive distributions from the trust or estate within 20 days of the delegation—unless such notice is waived by the eligible beneficiaries entitled to receive such notice”

• Investment agent who accepts delegation

– Held to fiduciary standard

Query: To What Extent is Trustee Protected?

BackgroundHISTORY

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Directed Trust Statutes Enacted

• Delaware one of the first and still a top choice

• Other early states: South Dakota and Virginia

• Now many states have adopted similar statutes

• Case history sparse but generally favorable to trustees

Trend to Go Beyond “Delegation”

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3313. Advisers

“(b) If a governing instrument provides that a fiduciary is to follow the directions of an adviser, and the fiduciary acts in accordance with such a direction, then except in cases of willful misconduct on the part of the fiduciary so directed, the fiduciary shall not he liable for any loss resulting directly or indirectly from any such act.”

DE Code 3313. AdvisersTITLE 12, CHAPTER 33

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3313. Advisers

“ (c) If a governing instrument provides that a fiduciary is to make decisions with the consent of an adviser, then except in cases of willful misconduct or gross negligence on the part of the fiduciary, the fiduciary shall not be liable for any loss resulting directly or indirectly from any act taken or omitted as a result of such adviser’s failure to provide such consent after having been requested to do so.”

DE Code 3313. Advisers, ContinuedTITLE 12, CHAPTER 33

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Florida Trust Code: Effective July 1, 2007

• Delegation Statute 736.0807 expanded

− Tracks Prudent Investor Act 518.112

− Clarifies trustee’s options

• 736.0807(1) “A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances.”

• Trustee must “exercise reasonable care, skill and caution” in selecting and monitoring the agent

– “A trustee who complies with subsection (1) is not liable to the beneficiaries or to the trust for an action of the agent to whom the function was delegated.”

– The agent becomes a fiduciary

Florida Progress: 2007

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Same Query as with 518.112:

• Does this protect the trustee from some/any liability?

Grantor Trusts: Codified Grantor’s Providing Direction to Trustee

• 736.0808(1) “…the trustee may follow a direction of the settlor that is contrary to the terms of the trust while a trust is revocable.”

• 736.0808(2) “If the terms of a trust confer on a person other than the settlor of a revocable trust the power to direct certain actions of the trustee, the trustee shall act in accordance with the exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would cause a serious breach of fiduciary duty that the person holding the power owes to the beneficiaries of the trust.”

Florida Progress: 2007, Continued

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Still under Consideration

• How does the trustee monitor to guard against a “serious breach of fiduciary duty” on the part of the person holding “the power to direct certain actions of the trustee”?

Query: Does This Only Apply During Life of Grantor?

Florida Progress: 2007, Continued

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Co-trustees’ Dilemma

• Uncertainty in Fl Trust Code

• Could co-trustees delegate between/among themselves?

• Individual co-trustees often want to delegate investments to corporate co-trustees

Query: Was This Prohibited by F. S. 736.0702(5): “A co-trustee may not delegate to another co-trustee the performance of a function which the settlor reasonably expected the co-trustees to perform jointly.”

• Often difficult to know settlor’s intent in this regard

• Arguably, this was more restrictive than the requirements for delegating a function to a non-co-trustee agent!

Florida IssuesPOST 2007

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Growing Problems: Grantors’ Desires vs. Trustees’ Comfort Level

•Assets more complex

– Increasing demand by clients to carve out management of unusual assets

• Increased litigation

Common Practices

•Attorneys: draft extensive indemnification into trust documents

•Trustees: make business decisions (evaluate risk)

Co-trustees Regularly Ignored the Co-trustee Ambiguity

•Individual trustees often delegated the investment function to corporate trustees

Florida IssuesPOST 2007

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First Changes Came in Specialized Situations

•Special Needs Trusts: common procedures

–Employ specialists to oversee care and comply with Medicaid rules

– Extensive exculpatory language for trustees who follow advice of these specialists

•Trust Protectors: growing use– Offshore concept adopted in domestic trusts to provide for independent oversight

and flexibility

– May also be called “advisors” or an “advisory board”

Florida IssuesPOST 2007

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Further Changes in Specialized Situations

•Irrevocable Life Insurance Contracts (ILITs)

–Statutory alternatives for a trustee to divest responsibility for insurance contracts

518.112(2)(a) “…a fiduciary that administers an insurance contract on the life or lives of one or more persons may delegate without any continuing obligation to review the agent’s actions, certain investment functions with respect to any such contract as provided in subsection (3), to any one or more of the following persons as investment agents…”

Florida IssuesPOST 2007

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Potential Agents •Spouse, beneficiaries, certain family members of beneficiaries, a person chosen by the beneficiaries, or an agent chosen by the trustee

– If the trustee chooses the agent, trustee must “exercise reasonable care, judgment and caution” in selecting and establishing the scope

Florida Issues, ContinuedPOST 2007

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Fix Co-trustee Confusion in Florida Statutes

• Underlined clause added to 736.0703(5) – “A co-trustee may not delegate to another co-trustee the performance of

a function that the settlor reasonably expected the co-trustees to perform jointly, except that a co-trustee may delegate investment functions to a corporate co-trustee pursuant to and in compliance with s. F.S. 518.112.”

• Patches a hole that most individual co-trustees were not even aware of

• Useful for corporate trustees who want to do things right

• Tracks Prudent Investor Act 518.112

Florida IssuesPOST 2007

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Florida’s Directed Trust Statute 736.0703(9)

• Cooperative venture with RPPTL Section of Fl Bar

– Some compromises

• “Agent” must be a co-trustee

• Addressed concerns that an agent may not rise to the level of a fiduciary and that there may be assets or functions for which nobody was ultimately responsible

– Advantage to a co-trustee: no question re: full fiduciary duty

– Disadvantage: some clients reluctant to appoint/accept co-trustee

Florida IssuesPOST 2007

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“If the terms of a trust instrument provide for the appointment of more than one trustee but confer upon one or more of the trustees, to the exclusion of the others, the power to direct or prevent specified actions of the trustees, the excluded trustees shall act in accordance with the exercise of the power. Except in cases of willful misconduct on the part of the trustee with the authority to direct or prevent specified actions of the trustees of which the excluded trustee has actual knowledge, an excluded trustee is not liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees….”

Florida’s Directed Trust StatuteFLORIDA STATUTE 736.0703(9)

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“….The excluded trustees are relieved of any obligation to review, inquire, investigate, or make recommendations or evaluations with respect to the exercise of the power. The trustee or trustees having the power to direct or prevent actions of the trustees shall be liable to the beneficiaries with respect to the exercise of the power as if the excluded trustees were not in office and shall have the exclusive obligation to account to and to defend any action brought by the beneficiaries with respect to the exercise of the power.”

Florida’s Directed Trust Statute, ContinuedFLORIDA STATUTE 736.0703(9)

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Current Statutes in Florida

• Issues arise with F.S. 736.0703(9)

• One particularly problematic phrase– “ Except in cases of willful misconduct on the part of the trustee with the authority

to direct or prevent actions of the trustees of which the excluded trustee has actual knowledge, an excluded trustee is not liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees.”

• In-house counsel for corporate trustees interpret this as requiring ongoing monitoring

Florida’s Directed Trust Statute

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Reactions to Florida’s Directed Trust Gaps

•Some attorneys draft around the problematic clause

–It is not a mandatory provision in the Florida Trust Code–However, absent statutory protection, the draft-around language is typically long and complex

•Also, corporate trustees question effectiveness of draft-arounds

Corporate Trustees Are Already Biased to Using DE

•No problematic phrase

•Historically trustee-friendly

Florida’s Directed Trust Statute

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Possible Amendment to F. S. 746.0703(9)

• Supported by group of RPPTLs and Fl trust bankers

• Delete the problematic phrase

• Leaving the desired language:

– “An excluded trustee is not liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees.”

Further Reduce Trustee’s Duties on Irrevocable Life Insurance Trusts• Add more specific statutory procedures for relieving trustee of all responsibility

for life insurance policies on the life of the grantor or spouse

Florida’s Directed Trust Statute: A Future Fix?

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General Trends

•Increasing number of states adopting directed trust provisions

– Five more states enacted such statutes in 2012

•Draft directed trust provisions into documents

– Depending on state, this is in addition to or instead of directed trust statutes

•Require communication among trustees and agents

– e.g., New Hampshire

Future Directions—Nationally

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Disclosure

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Questions?

Thank You!