Directed Trusts: Grantors` Desires vs. Trustees`

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Directed Trusts
Grantors’ Desires and Trustees’ Dilemmas
January 2013
Joan K. Crain, CFP®, CTFA, TEP
Senior Director, Wealth Strategist
Introduction
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
2
Background
KEY DISTINCTION
Delegation
• Trustee hires an agent to handle specific duties
Direction
• Grantor names an “agent” to handle specific duties
– Not necessarily called an “agent”
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Background
HISTORY
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?
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Trend to Go Beyond “Delegation”
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
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DE Code 3313. Advisers
TITLE 12, CHAPTER 33
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.”
6
DE Code 3313. Advisers, Continued
TITLE 12, CHAPTER 33
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.”
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Florida Progress: 2007
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
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Florida Progress: 2007, Continued
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.”
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Florida Progress: 2007, Continued
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?
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Florida Issues
POST 2007
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!
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Florida Issues
POST 2007
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
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Florida Issues
POST 2007
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”
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Florida Issues
POST 2007
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…”
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Florida Issues, Continued
POST 2007
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
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Florida Issues
POST 2007
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
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Florida Issues
POST 2007
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
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Florida’s Directed Trust Statute
FLORIDA STATUTE 736.0703(9)
“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….”
18
Florida’s Directed Trust Statute, Continued
FLORIDA STATUTE 736.0703(9)
“….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.”
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Florida’s Directed Trust Statute
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
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Florida’s Directed Trust Statute
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
21
Florida’s Directed Trust Statute: A Future Fix?
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
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Future Directions—Nationally
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
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Disclosure
This material is provided for educational purposes only. This material is not intended to constitute legal, tax, investment or financial
advice and may not be used as such. Effort has been made to assure that the material presented herein is accurate at the time of
publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax,
investment or financial options available. You should consult your lawyer or your tax professional, or your investment or financial
advisor if you want professional assurance that this material, and your interpretation of it, is accurate and appropriate for your
unique situation.
Pursuant to IRS Circular 230 we inform you that any tax information contained in this communication is not intended as tax advice
and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue
Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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Questions?
Thank You!
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