Can My Financial Advisor Manage My Trust?

  • March 4, 2019

BY: DAVID RUSSELL, CFP®, CSA®
Vice President & Trust Officer
(615) 385-2345  |  drussell@argenttrust.com 

David Russell

David Russell, CFP®

One of the most uncomfortable calls one can get as a trust professional is the one from an attorney that goes something like “My client has died, and your company is named as trustee of his estate, so I’d like you to come to my office and meet the family.” Talk about an awkward meeting! It goes over about as good as saying “Congratulations on your marriage, allow me to introduce you to your groom.”  In fact, trusts have been described as prearranged marriages where families are too often introduced at a most inopportune time to trustees who will control their purse strings long into the future.

Scenes like this, as well as the much broader dispensation of wealth management advice over the past 50 years, have resulted in an evolution in the law of trusteeship to accommodate not just the single fiduciary office of trustee, but several fiduciary roles that together form the structure of what are defined as directed trusts. Put simply, directed trusts allow trust creators (settlors) to delegate specific powers normally reserved for trustees to other parties in non-trustee roles, known in industry parlance as “bifurcation of duties.” The main appeal of directed trusts is that they can empower entities or individuals familiar to the family to handle some aspects of trust management without appointing them as trustees.

For example, a settlor may want his personal investment advisor to manage the investments left in trust for his heirs. Or he may want a committee of friends or extended family to determine when and how his heirs have a right to trust distributions. Historically, the law of trusteeship vested this responsibility (and liability) only in the named trustee. While statutory trustee powers have also evolved to permit trustees to hire agents and other delegates in the carrying out of trustee duties, trustees were not absolved of their liability for the actions of these delegates. If a rogue broker for a trust churned an account or invested trust assets too aggressively, the trustee who hired the broker faced liability and potential damages — not the broker.

Several states have adopted directed trust statutes, and in 2017, the Uniform Law Commission released the Uniform Directed Trust Act (UDTA), which offers much clearer direction for settlors who want to divide specific powers between trustees and other non-trustee fiduciaries. These powers place full weight of responsibility — and liability — on the holder of the power (the director) while shielding the trustee from liability claims against the director in most cases. However, it is incumbent on settlors, their attorneys, and the holders of these powers to be mindful of some of the implications of directed trusts.

1. No escaping the fiduciary label.

Under the UDTA, a director bears the same fiduciary duties as a trustee “in a like position and under similar circumstances.”[i] While recent developments in the investment and financial advisory space have led to these industries embracing a fiduciary standard, there is a much broader application of the standard as it pertains to trustees. In fact, firms who adhere to a fiduciary standard with regards to the investment advice provided by their advisors are often unwilling for their advisors to be named as directors in a directed trust because of the greater liability to which these firms are exposed. It is important to confirm that the financial planner, broker or investment advisor is permitted by their firm to be named as a director before granting a power of direction to them.

2. A director by any other name is still a director.

The definition of director under the UDTA is “a person that is granted a power of direction by the terms of a trust to the extent the power is exercisable while the person is not serving as a trustee.”[ii] This definition is functional rather than formal, meaning that even if the individual is not identified in the trust document as a director, they will be treated as one under the UDTA if they satisfy the functional definition of a director.

3. Statutory Certainty.

As Morley and Sitkoff state, “The UDTA expressly confirms the validity of a trust with a power of direction, and therefore the validity of a directed trust with a trust director and a directed trustee. Section 6(a) provides that ‘the terms of a trust may grant a power of direction to a trust director.’ Thus, although a trust with a power of direction would almost certainly be valid under common law, the UDTA resolves any doubt with statutory certainty.”[iii]

4. Clear drafting is key.

The UDTA is referred to as an enabling act that closely follows the Delaware-directed trust statute. Other states use an off-the-rack model, dividing directors into categories with certain default powers assigned to each category, such as protector, distribution advisor or investment advisor. This has proven to be problematic, requiring careful drafting around conflicting definitions.[iv] As an enabling act, no default powers are conferred onto directors under the UDTA; rather, the explicit terms of the trust specify the powers and their extent or limitation. As a result, it is imperative to have a knowledgeable drafting attorney to incorporate or exclude language in order to grant powers settlors want their director to have without including others they clearly do not want them to have.

5. Fees won’t necessarily be less.

Some mistakenly believe that trustee fees should be less in a directed trust. This is an easy presumption – the duties are the same, just divided among more people, some of whom may not charge a fee at all. However, the administrative trustee is not likely to see their job as any easier just because they are not managing the trust’s investments or making discretionary distribution decisions. In fact, it is often more labor intensive to administer a trust where assets are managed by a third party than if they are managed by the trustee. Trading, settlements, principal and income accounting, disbursements, tax reporting, etc., can be more complicated when a third-party manager is involved, unless these administrative powers are also delegated to the investment director, in which case that director’s fees are likely to be raised to compensate for the additional work. The adage of the more people involved, the higher the cost, is generally true. Of course some powers, such as those traditionally given to trust protectors, are held by uncompensated individuals.

6. State statutes vary.

As mentioned earlier, several states have enacted directed trustee statutes, including Delaware, Alaska, South Dakota, Tennessee and Mississippi. The UDTA is an attempt to unify state laws around a single definition of directed trusts. As of this writing, only three states (Michigan, Georgia and New Mexico)[v] have adopted the UDTA, none of them being states that have their own statute. Notwithstanding Morley and Sitkoff’s belief that “a trust with a power of direction would almost certainly be valid under common law,”[vi] it may not be wise to test this by including directed trust language in a trust governed by the laws of a state that has neither adopted the UDTA nor has their own statute. On the other hand, careful understanding of the nuances between a Delaware-directed trust and a Tennessee-directed trust is important before deciding to use one state’s version or the other.

7. Not everyone will want to play.

Even if directed trusts are validated by the UDTA, this does not mean that all corporate trustees will accept them. No trustee is obligated to accept the appointment without first considering the risks, individuals and assets involved. Institutional trustees may view the involvement of directors as a nuisance or hindrance to their well-established policies and procedures and will simply refuse to serve. With estate litigation on the rise, some will avoid directed trusts even if they are shielded from the liability of other directors simply due to higher litigation risk. Every trustee who has ever been taken to court knows that even prevailing in a cause of action brought against them can be expensive. Others whose business model is based on managing investment assets will resist the notion of having a competitor direct what they perceive is their bailiwick. Finally, some may refuse due to regulatory worries, despite clear statutory authority to stand on.

The team approach to trust management is an irreversible trend that the UDTA attempts to bring greater uniformity and guidance to, and that institutional trustees should be prepared for as the trust industry continues to evolve. At Argent, we consider directed trusts on a case-by-case basis. As a Tennessee-chartered trust company, Argent can take advantage of Tennessee’s favorable directed trust statute, which offers clear bifurcation of duties. Once it is determined that a collaborative relationship with a family’s advisor team and Argent is a good fit and the powers delegated to the parties are clearly delineated in the trust document, an effective team approach to managing a client’s trust can create a win-win-win for all involved.

[i] UDTA §8(a).
[ii] UDTA §2(5)
[iii]  Morley, John D. and Sitkoff, Robert H., Making Directed Trusts Work: The Uniform Directed Trust Act (September 28, 2018). 44 ACTEC Law Journal 1 (2018, Forthcoming); Yale Law & Economics Research Paper No. 601. Available at SSRN: https://ssrn.com/abstract=3256987
[iv] ibid
[v] http://www.uniformlaws.org
[vi] Morley, John D. and Sitkoff, Robert H., Making Directed Trusts Work: The Uniform Directed Trust Act (September 28, 2018). 44 ACTEC Law Journal 1 (2018, Forthcoming); Yale Law & Economics Research Paper No. 601. Available at SSRN: https://ssrn.com/abstract=3256987

To access the final draft of the Directed Trust Act, click here.

David Russell is Vice President and Trust Officer with Argent Trust in Ridgeland, Mississippi. He has over 34 years of experience advising individuals and families as a Certified Financial Planner. In 2017, David earned his Certified Senior Advisor designation in order to better serve families facing age transitions.