Directed Trusts in the Context of SNTs

Transcription

1 2018 National Conference on Special Needs Planning and Special Needs Trusts Stetson University College of Law Thursday, October 18, :15 2:05 p.m. Directed Trusts in the Context of SNTs William D. Lucius, Es q. Shirley B. Whitenack, Esq. Vice President & Senior Trust Officer Partner Raymond James Trust, N.A. Schenck, Price, Smith & King 880 Carillon Parkway 220 Park Ave., #220 St. Petersburg, Florida Florham Park, NJ

2 I. INTRODUCTION Two s Company? The provision of legal services in the fields of elder law and disability rights has expanded over the past decade into a client-focused, holistic, and collaborative approach. 1 Consequently, this developing philosophy has permeated into the estate plans and trust instruments related to these fields, such as special needs trusts ( SNT ) 2 and settlement preservation trusts, 3 wherein the selection of an appropriate fiduciary is no longer an either-or proposition between one or several individual or corporate trustee(s). Multi-participant trust agreements 4 are becoming more commonplace when compared to the single-fiduciary traditional approach, in which the powerholders 5 may be a potpourri of trustees, co-trustees, distribution directors, investment advisors, trust committees, and trust protectors. 6 Consider the case of Nathaniel. 7 Like most four year-olds Nathaniel was curious and adventurous in equal measure. Due to the alleged negligence of a daycare employee Nathaniel left his daycare facility through an opened gate and wandered unsupervised in an adjacent parking lot. Nathaniel attempted to climb through a half-opened car window when his head became stuck and he could no longer support his weight. The near-strangulation caused a significant and irreversible traumatic brain injury. Now at age eight, Nathaniel is incapacitated, 1 Rebecca C. Morgan, Elder Law in the United States: The Intersection of the Practice and Demographics, Stetson L. Rev., 103, 106 (2007). 2 Special Needs Trusts are commonly referred to as either being first-party or third-party SNTs depending on the source of funds used to establish the trust. A first-party SNT is created pursuant to 42 U.S.C. 1396p(d)(4)(a); a third-party SNT is largely a creature of state law. For purposes of this survey SNT will be used interchangeably as the distinction does not bear heavily on this topic. The authors assume the reader has independent knowledge of the definitions and types of special needs trusts. 3 A settlement preservation trust ( SPT ) is a type of irrevocable, discretionary trust commonly used in special needs planning. SPTs do not have a federal authorizing statute, do not protect the beneficiary s ability to receive meanstested benefits such as Supplemental Security Income or Medicaid, and therefore do not need to comply with the Medicaid payback requirements of 42 U.S.C. 1396p(d)(4)(a). SPTs are excellent planning tools for beneficiaries with incapacity or those susceptible to undue influence, as well as affords a certain level of creditor and spendthrift protection. 4 A multi-participant trust, unlike the traditional single-fiduciary trust arrangement, employs a team of multiple trustees or advisors with very specific roles and responsibilities. See, John P.C. Duncan and Anita M. Sarafa, Achieve the Promise-and Limit the Risk-of Multi-Participant Trusts, 36 ACTEC L.J. 769, 772 (2011). 5 Powerholders will be loosely defined throughout this survey to include trustees, co-trustees, trust directors, trust advisors, trust protectors, trust committees, and other parties with the power to direct another fiduciary over some aspect of the trust instrument. 6 Duncan, supra n. 4, at Nathaniel s story is loosely based on the real events of a beneficiary of a SNT administered by one of the authors. Although Nathaniel s guardian has provided permission to share his story, Nathaniel s name and certain substantive facts have been changed to further protect Nathaniel s privacy.

3 without gait strength or swallowing reflexes, has frequent seizures, and requires 24-hour supervised care. Nathaniel s parents sued the daycare provider and its insurance carrier securing an $8,000,000 cash settlement, with a 40-year guaranteed structured annuity payment of $4,500 per month adjusted 3 percent annually. The court approving the settlement ordered the settlement proceeds be placed in a SNT that included, in part, the following language: Art Trust Company, N.A. shall serve as the initial Corporate Trustee. Distribution Directors, Inc. shall serve as the initial Distribution Director under this Agreement. Each of the entities shall serve as fiduciaries but shall only be responsible for the decisions that fall within their respective authorities as defined hereunder. Both may rely conclusively on the other if that instruction relates to a matter under the other s purview and neither shall have a duty nor obligation to review the underlying actions of the other. Art. 1.2 During the lifetime of Nathaniel, Distribution Director may direct Corporate Trustee to distribute from income, principal, or both, of this Trust, such amounts as the Distribution Director, in its sole, absolute and unfettered discretion, may from time to time deem advisable or reasonable for Nathaniel s special needs. Art. 9.1 Nathaniel s mother is appointed as Trust Protector. The Trust Protector shall not be entitled to compensation for services rendered, but shall be entitled to reimbursement of reasonable expenses in the exercise of her services. The Trust Protector is authorized, in her sole and absolute discretion, to remove from office, without Court approval, any Corporate Trustee or Distribution Director appointed herein, with or without cause and for any reason whatsoever, and may replace such Corporate Trustee or Distribution Director with another Corporate Trustee or Distribution Director who is not related to or subordinate to the Beneficiary (within the meaning of Internal Revenue Code 672(c)) to act in place of the Corporate Trustee or Distribution Director so removed In Nathaniel s case, by ordering a trust with bifurcated duties among various parties the court followed the advice of the guardian ad litem who recommended a multi-participant trust arrangement to best address the investment management and discretionary-decision making complexities that would likely last the length of the trust s administration. A directed trust, similar to Nathaniel s SNT, includes a person(s) or entity (hereinafter referred to as a powerholder or trust director ), other than the trustee, who has a power to direct the trustee over some aspect of the trust, such as investment management, administration, or distribution decisions; powers historically reserved to the trustee. 8 Although the reference to a powerholder is inconsistent, powerholders are most commonly referred to as trust protectors, trust advisors, trust 8 Unif. Directed Trust Act (2)-(5), (9) (2017).

4 committees, or trust directors. 9 To better understand a directed trust arrangement, however, contrast this structure with the concept of delegation. Delegation transfers to the delegate the trustee s authority for the function delegated. 10 Trustee delegation rules generally limit trustees from delegating any function that a trustee could be reasonably expected to perform personally, including investment management. 11 Moreover, trustees are generally required to rely on any special skills they have in the administration of a trust especially where those skills were relied upon by the settlor in the trustee s selection. 12 The Uniform Prudent Investor Act, Restatement (Third) of Trusts, and the Uniform Trust Code, have since changed course and now encourages trustees to evaluate whether they are competent to perform the obligations and duties imposed by the governing instrument, and if not, whether and to whom they should delegate this authority. 13 The two-fold dilemma with delegation is that the trustee often has an ongoing statutory duty to exercise reasonable care, skill and caution in selecting the agent, establishing the scope of the agent s authority, and reviewing the agent s actions, 14 whereas the settlor may not want the selected trustee to have complete autonomy in outsourcing key components of the trust administration and investment management process. 15 Rather than the top-down approach that accompanies delegation, directed trusts separates assigned trust functions ab initio and pursuant to the settlor s intent. 16 Directed trusts are a response to the always-evolving era of sophisticated estate planning that has been impacted by a renewed focus on achieving the settlor s objectives, 17 an increase in regulatory and litigious activity impacting fiduciaries, complex dispositive provisions and the consequence for improper distributions, and portfolios that now may contain concentrated positions in assets that are not traditional marketable securities. 18 With proper planning a directed 9 Unif. Directed Trust Act Prefatory Note. 10 Unif. Trust Code 807(a). 11 Restatement (Second) of Trusts 171, cmt. (h) (1959). 12 Unif. Trust Code 806 (2010). 13 See Unif. Prudent Investor Act 9 (1994), Restatement (Third) of Trusts 171 (2003), and Unif. Trust Code Unif. Trust Code 807(a)(1)-(3). 15 David A. Diamond and Todd A. Flubacher, The Trustee s Role in Directed Trusts, 149 J. of Wealth Management Trust & Estates, 769, (2010). 16 Todd A. Flubacher, Directed Trusts: Panacea or Plague? (Sept. 2015). 17 For example, Florida Senate Bill 478 was introduced in 2017 to amend the Florida Trust code to ensure, in part, that the settlor s intent is paramount in trust interpretation, and delegating statutory language regarding benefiting the beneficiaries. 18 Diamond, supra n. 15.

5 trust may be used to direct a trustee to hold a concentrated position, invest in special assets including entities, real estate, timber, and oil and gas interests, structure and manage the portfolio, provide asset valuation, remove and appoint trustees, and even compel distributions from a special needs trust. 19 Directed trusts are not without limitations, though, as states remain scattered in the duties, protections, and liabilities imposed on the directed trustee and powerholder with limited judicial guidance. Query will a bifurcated, multi-participant trust really benefit Nathaniel? Are the additional layer of fees and costs by removing traditional trustee functions, like the exercise of discretion, and transferring them to a distribution director reasonable? What protections, if any, are afforded the directed trustee, the directing party, and beneficiary? This brief survey on directed trusts in the context of special needs planning will attempt to answer these questions by providing a broad summary of the legislative evolution of directed trusts, the various approaches states take in addressing the duties and liabilities imposed on a directed trustee, and drafting considerations that clearly delineate the duties among the various parties while keeping the best interest of the beneficiary at the forefront. II. EVOLUTION OF DIRECTED TRUST LAW A. Restatement (Second) of Trusts and Restatement (Third) of Trusts Published in 1959, the Restatement (Second) of Trusts first addresses directed trusts in Section 185, which states in pertinent part the following: 20 If under the terms of the trust a person has power to control the action of the trustee in certain respects, the trustee is under a duty to act in accordance with the exercise of such power, unless the attempted exercise of the power violates the terms of the trust or is a violation of a fiduciary duty to which such person is subject in the exercise of the power. The premise of the first part of Section 185 is that a trustee has a general duty to act in accordance with the directions of a powerholder. This duty is not absolute, however, given the trustee s obligation to ensure the direction given does not violate the terms of the trust or a fiduciary duty of the powerholder. Pursuant to the comments to Section 185 the level of inquiry by the trustee depends on whether the exercise of direction was in favor of the powerholder, or alternatively, if the powerholder exercised her power of direction in a fiduciary capacity for the 19 Id. 20 Restatement (Second) of Trusts, 185.

6 benefit of the beneficiaries. 21 If the exercise of the power of direction was in favor of the powerholder only, the trustee s inquiry is limited to confirming whether the direction is consistent with the terms of the governing instrument. 22 But if the powerholder was acting in a fiduciary capacity by exercising her power in favor of others, the trustee must determine whether any applicable fiduciary duty was violated. 23 Should the trustee have doubt, or knowledge of a breach of duty by the powerholder, the trustee should not follow the disputed direction and petition the court for instructions. 24 Although the Restatement (Third) of Trusts likewise opined on directed trusts nearly a half-century later, as evidenced by the following excerpt the trustee s analysis when weighing the appropriateness of the direction provided by the powerholder remained largely unchanged:...if the terms of a trust reserve to the settlor or confer upon another a power to direct or otherwise control certain conduct of the trustee, the trustee has a duty to act in accordance with the requirements of the trust provision reserving or conferring the power and to comply with any exercise of that power, unless the attempted exercise is contrary to the terms of the trust or power or the trustee knows or has reason to believe that the attempted exercise violates a fiduciary duty that the power holder owes to the beneficiaries. 25 [Emphasis added] The most noticeable deviation from Section 185 pertains to the trustee s review of a powerholder s direction that was exercised in a fiduciary capacity. In such instances the trustee must refuse to comply with the direction if she knows, or has reason to suspect, the powerholder is violating a fiduciary duty. This is a less exacting standard than Section 185 which does not take into account the trustee s knowledge, or lack of knowledge, as to whether the powerholder was in breach. B. Uniform Trust Code The Uniform Trust Code ( UTC ), considered the first national codification of trust law, was promulgated by the National Conference of Commissioners on Uniform State Laws 21 Restatement (Second) of Trusts 185, cmts. (b)-(f). See also, 18 th Annual Real Property and Estate Planning Symposia, Richard W. Nenno, Directed Trusts: Can Directed Trustees Limit Their Liability, ABA Real Prop., Prob. & Trust L. (April 26, 2007). 22 Restatement (Second) of Trusts 185, cmts. (c)-(d). 23 Restatement (Second) of Trusts 185, cmts. (c), (e). 24 Restatement (Second) of Trusts 185, cmt. (f). 25 Restatement (Third) of Trusts, 75.

7 ( NCCUSL ) in 2000 and was last amended in According to the Prefatory Note, there was a realization that, given the greatly expanded use of trusts in recent years, trust law was thin and fragmentary in many states. The UTC was drafted to provide a comprehensive guide on trust law issues. The UTC was modeled on California s trust statute in close coordination with Restatement (Third) of Trusts. The UTC formerly contained Section 808, which was titled Power to Direct. It stated, in pertinent part: (b) If the terms of a trust confer upon a person other than the settlor of a revocable trust power to direct certain actions of the trustee, the trustee shall act in accordance with an 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 constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust. (c) The terms of a trust may confer upon a trustee or other person a power to direct the modification or termination of the trust. (d) A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty. The comment to Section 808 noted that [s]ubsections (b)-(d) ratify the use of trust protectors and advisers. Subsections (b) and (d) are based in part on Restatement (Second) of Trusts 185 (1959). Subsection (c) is similar to Restatement (Third) of Trusts 64(2) (Tentative Draft No. 3, approved 2001). The comment noted that [a]dvisers have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. The comment further clarified that the holder of a power to direct investments is presumptively acting in a fiduciary capacity with respect to the powers granted and can be held liable if the holder s conduct constitutes a breach of trust, whether through action or inaction. Section 808 was removed when the UTC was amended in A legislative note was added stating that a state that has enacted the Uniform Directed Trust Act (UDTA) should 26 Nat l Conference of Commissioners on Unif. State Laws, Law Comm n, Unif. Trust Code, (accessed September, 2018).

8 repeal Section 808 and revise certain other provisions of the UTC as indicated in the legislative notes to the UDTA. (Emphasis in original). Former Section 808 was vague regarding the power to direct. Accordingly, some states, such as New Jersey, added specific provisions dealing with the power to direct to their versions of the UTC. 27 C. Uniform Directed Trust Act In the ongoing statutory evolution of multi-participant trusts and in an effort to corral the various approaches states take on directed trusts as outlined in Section III below, the NCCUSL commissioned the Uniform Directed Trust Act ( UDTA ) committee to draft proposed legislation. 28 According to the UDTA s Prefatory Note the committee was charged with designing a uniform act that married a settlor s value for freedom of disposition, with 27 See, e.g., N.J.S.A. 3B:31-62, which states: a. When one or more persons are given authority by the terms of a governing instrument to direct, consent to or disapprove a fiduciary's actual or proposed investment decisions, such persons shall be considered to be investment advisers and fiduciaries when exercising such authority unless the governing instrument otherwise provides. b. If a governing instrument provides that a fiduciary is to follow the direction of an investment adviser, and the fiduciary acts in accordance with such a direction, then except in cases of willful misconduct or gross negligence on the part of the fiduciary so directed, the fiduciary shall not be liable for any loss resulting directly or indirectly from any such act. c. If a governing instrument provides that a fiduciary is to make decisions with the consent of an investment 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 investment adviser's failure to provide such consent after having been requested to do so by the fiduciary. d. For purposes of this section, "investment decision" means with respect to any investment, the retention, purchase, sale, exchange, tender or other transaction affecting the ownership thereof or rights therein and with respect to nonpublicly traded investments, the valuation thereof, and an adviser with authority with respect to such decisions is an investment adviser. e. Whenever a governing instrument provides that a fiduciary is to follow the direction of an investment adviser with respect to investment decisions, then, except to the extent that the governing instrument provides otherwise, the fiduciary shall have no duty to: (1) Monitor the conduct of the investment adviser; (2) Provide advice to the investment adviser or consult with the investment adviser; or (3) Communicate with or warn or apprise any beneficiary or third party concerning instances in which the fiduciary would or might have exercised the fiduciary's own discretion in a manner different from the manner directed by the investment adviser. Absent clear and convincing evidence to the contrary, the actions of the fiduciary pertaining to matters within the scope of the investment adviser's authority, such as confirming that the investment adviser's directions have been carried out and recording and reporting actions taken at the investment adviser's direction, shall be presumed to be administrative actions taken by the fiduciary solely to allow the fiduciary to perform those duties assigned to the fiduciary under the governing instrument. Such administrative actions shall not be deemed to constitute an undertaking by the fiduciary to monitor the investment adviser or otherwise participate in actions within the scope of the investment adviser's authority. 28 Nat l Conference of Commissioners on Unif. State Laws, Law Comm n, Unif. Directed Trust Act, (accessed September, 2018).

9 increasingly conservative trustees who seek limited liability in following the direction of a third party, while at the same time imposing mandatory minimum fiduciary duties on both the directed trustee and the powerholder in order to protect the beneficiary(s). The committee s efforts culminated with the final adoption of the UDTA during the July 2017 annual conference of the Commissioners. The UDTA contains twenty sections; yet the integral part of the UDTA lies in Sections Six through Eight which outlines the duties, powers, limitations, and liability of both the powerholder and directed trustee. The remainder of the UDTA considers ancillary technical issues between the interaction of the UDTA with existing state law, as well as drafting considerations that are often overlooked. 29 Of relevance to this survey, much like the Restatements and UTC, Section 9 of the UDTA requires a directed trustee to comply with a powerholder s exercise (or nonexercise) of a power of direction and is not liable in doing so. 30 Unlike the Restatements and UTC, though, the trustee may not follow the direction of a powerholder if the exercise (or nonexercise) of a power of direction would require the trustee to engage in willful misconduct. 31 No longer is the trustee required to look at the duties of the powerholder in determining whether to follow direction, but rather must look at herself to ensure the direction provided would not cause the directed trustee to engage in misconduct. As between the powerholder and trustee, both are required to share information necessary to fulfill their duties, 32 but under the UDTA a trustee does not have a duty to monitor the powerholder or inform and advise the settlor or beneficiary concerning an instance where the trustee may have acted differently than the powerholder. 33 It is in these two provisions that a directed trust through the lens of a directed trustee becomes more palatable than delegation as discussed earlier in Section I. With regards to the powers and duties of the powerholder, while the trust instrument may confer a broad power of direction to the powerholder, absent contrary language in the document Section 8 imposes on the powerholder the same fiduciary duty and liability in the exercise (or nonexercise) of a power of direction as a trustee in a like position and under similar 29 Id. 30 Unif. Directed Trust Act 9(a). 31 Unif. Directed Trust Act 9(b). 32 Unif. Directed Trust Act 10(a). 33 Unif. Directed Trust Act 11(1).

10 circumstances. 34 The drafters believed that because the powerholder acts much like a fiduciary in a traditional trust the powerholder should have the same corresponding duties as a similarlysituated trustee, and the directed trustee s duties with respect to the powerholder s power should be reduced accordingly. 35 Therefore, a powerholder with the power of direction over discretionary distributions in a SNT would have the same fiduciary responsibility in exercising its discretion as a sole trustee under a similar trust. By way of example, the UDTA specifically subjects a powerholder to the same rules as a trustee in a like position regarding Medicaid payback provisions necessary to comply with the requirements of 42 U.S.C. 1396p(d)(4)(a). 36 States are beginning to view the UDTA as a model to follow at the same time and pace as the special needs, estate planning, and fiduciary communities start to view multi-participant trusts as comprehensive, beneficiary-centered, holistic planning tools. 37 Unfortunately, to-date states largely remain divided on directed trusts and the level of trustee oversight and attendant liability to afford; therefore, drafters must be cautious when employing a directed trust and be familiar with the governing law where the trust is situated. III. STATE APPROACHES AND OTHER CONSIDERATIONS A. State Approaches to Directed Trustee Liability In today s regulatory and litigious environment most fiduciaries are keenly aware that when held to account a court will impose upon the fiduciary an exacting standard that as Justice Cardozo eloquently described is not honesty alone, but the punctilio of an honor the most sensitive. 38 It follows, then, that in the context of directed trusts a directed trustee would be hesitant to serve in such capacity if the trustee were responsible for the acts of the powerholder. Directed trusts tend to be preferable arrangements-at least from the directed trustee s perspective-only when state law imposes a lesser standard on a trustee when acting at the powerholder s direction Unif. Directed Trust Act 8(a)(1)(a). 35 Unif. Directed Trust Act Prefatory Note. 36 Unif. Directed Trust Act 7(1). 37 Currently New Mexico and Georgia have enacted the UDTA. Enacting legislation was introduced in 2018 in Connecticut (SB 397) and Michigan (HB 6130). 38 Meinhard v. Salmon, 164 N.E. 545, pg. 465 (N.Y. 1928). 39 Diamond, supra n. 15, 26.

11 Apart from the eight states that do not have a directed trust statute on point, 40 nineteen states follow the UTC 808 approach, 41 two follow Restatement (Second) of Trusts 185, 42 and twenty-one have statutes that are protective of directed trustees- 43 two of which have enacted the UDTA and two with pending legislation to adopt the UDTA. 44 Those states that employ either the Restatement or UTC effectively gut the bifurcated arrangement, 45 insofar as both approaches require the trustee to affirmatively monitor the powerholder to ensure the exercise of the power of direction is not 1) inconsistent with the terms of the trust; 46 2) manifestly contrary to the terms of the trust, 47 or 3) would constitute a serious breach of fiduciary duty that the powerholder owes to the beneficiaries. 48 Imposing on a directed trustee a continued obligation to monitor a third party s action, with the potential for liability in the event of a breach by the third party, does not distinguish this arrangement from that of traditional delegation. While directed trustees clearly have an advantage in states that have protective statutes it is important for the parties to have a working knowledge of the relevant statutes nevertheless as these protective states present a broad spectrum of afforded protection. 49 Several states completely limit a directed trustee s liability for complying with a powerholder under the idea that duty should follow power. 50 Other protective states, consistent with the UDTA approach, 40 Those states are California, Connecticut, Hawaii, Louisiana, Minnesota, New Jersey (directed trust statute limited to investment advisors), New York, and Rhode Island. 41 Ala. Code 19-3B-808(b), Ark. Code Ann (b), D.C. Code Ann (b), Fla. Stat (2), Kan. Stat. Ann. 58a-808(b), Me. Rev. Stat. Ann. tit. 18-B-808(2), MD Code, Estates and Trusts, (b)(1)(ii)(1), Mass. Gen. L. ch. 203E, 808(b), Mich. Comp. Laws (4) (while Michigan largely adopted the UTC, 808 was not adopted and Michigan created its own directed trust statute. Legislation is currently pending to adopt the UDTA), MCA , Neb. Rev. Stat (b), N.M. Stat. Ann. 46A-8-808(B) (repealed eff. 1/1/19; state implemented UDTA), N.D. Cent. Code (2) (repealed eff. 8/1/17), Or. Rev. Stat. tit. 13, (2), 20 Pa. Cons. Stat. 7778(b), S.C. Code Ann (b), Vt. Stat. Ann. tit. 14A, 808(b), Va. Code Ann (b) (hybrid), and W. Va. Code 44D-8-808(b). 42 Ind. Code Ann (b) and Iowa Code Ann. 633A.4207(2). 43 Ariz. Rev. Stat. Ann (b), Colo. Rev. Stat (repealed eff. 8/6/14), Del. Code Ann. tit. 12, 3313, Fla. Stat (9) (if powerholder is a co-trustee), Ga. Code Ann , Idaho Code (2), (5), 760 I.L.C.S (f)(1), Ky. Rev. Stat. Ann , Mo. Ann. Stat (8), Nev. Rev. Stat , N.H. Rev. Stat. Ann. 564-B:8-808(b), N.C. Gen. Stat. 36C-7-703, 32-72(d)(2)(a), and 36C- 8A-4(a), Ohio Rev. Code Ann (b) and (b), Okla. Stat. Ann. tit. 60, (b), S.D. Codified Laws Ann. 55-1B-2(1) and 55-1B-5, Tenn. Code Ann (b), (e), and , Utah Code Ann (4), RCW 11.98A , Wis. Stat. Ann , Wyo. Stat (b), , , and , Tex. Prop. Code Ann. tit. 9, (b), and Miss. Code Ann Supra n Diamond, supra n. 15, Restatement (Second) of Trusts Unif. Trust Code 808(b). 48 Restatement (Second) of Trusts 185 and Unif. Trust Code 808(b). 49 Unif. Directed Trust Act 9, cmts. 50 Id.

12 applies a willful or intentional misconduct standard premised on the idea that the trustee a pinnacle of the trust relationship bears some modicum of duty to the beneficiary(s) simply by virtue of the fact that the settlor chose not to make the powerholder the sole trustee. 51 It is important to note that this last approach does not limit the scope of recourse a beneficiary has in the event of a breach. 52 The beneficiary may bring an action against the powerholder for breach of duty and the trustee for any willful misconduct the liability does not shift among the parties. Interestingly, the UDTA committee decided to use the willful misconduct standard among the others, with Delaware as an example, based on findings that states who have updated their directed trust statutes are abandoning the UTC approach in favor of legislation more protective of the trustee. 53 This should underscore the fact that the statutory landscape of directed trusts is changing and adapting thereby requiring increased due diligence by drafters and fiduciaries of such arrangements. B. Planning Considerations When engaging in planning that will utilize a directed trust, the threshold consideration for the drafting attorney should be whether the respective jurisdiction authorizes such an arrangement. 54 Moreover, assuming the jurisdiction has a directed trust statute, the practitioner should determine what approach the state takes in addressing trustee liability as this could impact finding certain fiduciaries willing to serve under the instrument. Should the state employ the more restrictive approaches of the UTC and Restatement, or simply have no statute at all, the drafting attorney will need to review the choice-of-law principles of the trust s home state to determine whether a state with more favorable directed trust statutes may be selected as the governing law. 55 In those instances where a trust is already in existence and the parties then seek to add directed trust provisions, counsel must undertake the more arduous process of determining whether the trust may be amended, modified (either by a judicial or non-judicial modification 51 Id. 52 Id. 53 Id. Note that Delaware s directed trust statute was tested in Duemler v. Wilmington Trust Company, C.A (Del. Ch. Oct. 28, 2004)(unpublished). The chancery court found a corporate fiduciary did not engage in willful misconduct by not overseeing or providing information to an investment advisor, who had the power to direct the trustee as to investment management decisions, and upheld the trustee s statutory defense under Del. Code Ann. tit. 12, Nenno, supra n Id.

13 where available), or decanted into a trust that includes the preferred directed trust language. 56 Of course, there are significant tax and governmental benefits eligibility issues that are beyond the scope of this summary, but must be fully explored by counsel before attempting to modify, amend, or relocate the situs of an SNT. Once the choice-of-law analysis has been performed, the drafting attorney s attention should move to the specific document language that will be employed with respect to the powerholder and trustee s powers, duties, and liability. The UDTA, for example, simply provides a powerholder those powers granted under the terms of the trust. 57 By affording a broad grant of power the Drafting Committee attempted to validate a powerholder s power by deferring to the terms of the trust (and therefore the settlor s intent) rather than by providing statutory default powers. 58 The Committee contemplated that a trust may confer to a powerholder a broad breadth of powers to include directing investments, modify, reform, terminate or decant the trust, change situs or governing law, determine the capacity of a settlor, beneficiary, or trustee, set fiduciary compensation, grant permission or direct a trustee in the exercise of a power reserved to the trustee, and release the trustee or another director from liability. 59 In order to best structure the powerholder s power of direction under the governing instrument the parties must decide in what capacity the powerholder will serve, such as a trust protector, distribution director, or trust advisory committee, as that will impact the specific powers that should be bestowed. When drafting powerholder language it is important to be as detailed and comprehensive as possible, while limiting the trustee and powerholder s powers to only those that the settlor intends each to have. 60 The powerholder and trustee s respective powers under the governing instrument must be clearly delineated to avoid confusion, ineffective administration, or more importantly, the overlapping of powers which could give rise to additional trustee liability. 61 For example, an aggrieved beneficiary could argue that although the trustee acted at the powerholder s direction, the trustee possessed a similar but independent trust 56 Diamond, supra n. 15, Unif. Directed Trust Act 6(a). 58 Unif. Directed Trust Act 6(a), cmt Id. 60 Diamond, supra n. 15, Id.

14 power under the document, which if exercised prudently, could have mitigated the loss caused by the powerholder s exercise of direction. 62 While a settlor has wide latitude in shaping a directed trust, the practitioner should consider whether the governing document should deviate from any statutory minimum default provisions. Such drafting considerations should include, at a minimum, 1) whether the powerholder should be held to a fiduciary standard under the governing document; 2) that the trustee not have a continuing duty to monitor the powerholder s actions; and 3) when available, the trustee s liability is limited only to willful or intentional misconduct or gross negligence. 63 As an aside, careful attention should be given to the inclusion of exculpatory clauses within the governing instrument and whether such a clause is consistent with and enforceable under state law. Terms under a governing document that seek to completely relieve a directed trustee or powerholder of liability, rather than simply reduce the trustee or powerholder s standard of care, may be unenforceable. 64 In fact, the UDTA applies the same rules as the UTC and Restatement (Third) of Trusts to the extent that if a directed trust fully exonerates the powerholder from liability the powerholder would nevertheless have the same liability as a trustee under a similar exculpatory clause. 65 Should there be concern among the parties on the impact of mutual liability between a directed trustee and powerholder based on the acts of the other practitioners may consider the use of indemnification provisions similar to the below paragraph, where appropriate, rather than complete exculpation: Art Indemnification of Trustee. Trust Company, N.A., and each of its agents, employees, heirs, successors, and assigns, are hereby indemnified by Distribution Director, Inc., against all claims, liabilities, fines, or penalties, and against all costs and expenses, including attorneys fees and disbursements, imposed upon, asserted against or reasonably incurred thereby in connection with or arising out of any claim, demand, action, suit, or proceeding in which he, she, or it may be involved by reason of being or having been the Trustee or affiliated with the Trustee as set forth above, whether or not he, she, or it shall have: continued to serve as such at the time of incurring such claims, liabilities, fines, penalties, costs, or expenses or at the time of being subjected to the same. However, Trust Company, N.A. and each of its, agents, employees, heirs, successors, assigns, shall not be indemnified with respect to matters as to which he, she, 62 Flubacher, supra n Nenno, supra n. 21. For example, in Arizona, and under the UTC, unless the governing instrument provides otherwise a powerholder is only presumptively a fiduciary. See Ariz. Rev. Stat. Ann (d). 64 See, e.g., Fla. Stat. Ann (1), Unif. Trust Code 1008, and Restatement (Third) of Trusts 96, which state a term of a trust relieving the trustee of liability for breach of trust is unenforceable to the extent it relieves a trustee of liability for acts committed in bad faith or reckless indifference. 65 Unif. Directed Trust Act 14, cmt.

15 or it shall be finally determined to have been guilty of willful misconduct in the performance of any duty by a court of competent jurisdiction. This right of indemnification shall not be exclusive of, or prejudicial to, other rights to which Trust Company, N.A., and each of its agents, employees, heirs, successors, and assigns, and may be entitled as a matter of law or otherwise. Lastly, fiduciary compensation must be addressed when recommending or drafting a directed trust. Multi-participant trusts can impact the overall fees assessed to a particular trust, which can be off-putting to fee-sensitive settlors, beneficiaries, or judges regardless of whether a multi-participant arrangement is appropriate under the circumstances. Unless the trust specifies otherwise, a fiduciary is only entitled to compensation that is reasonable. 66 Even if the trust states the compensation to be provided a court may allow more or less if the duties are substantially different than those contemplated or if the compensation specified under the agreement would be unreasonably high or low. 67 Although the UDTA adopted the UTC and Restatement (Third) of Trusts reasonable compensation standards as it applies to powerholders, 68 the drafting committee understood that fees in a multi-participant arrangement may be higher yet reasonable nonetheless. 69 In order to best mitigate fee disputes the compensation of the powerholder should clearly align with the services provided and the directed trustee should reduce its fee accordingly for those powers removed from the directed trustee s purview. C. Best Interest Standard vs. Settlor Autonomy University of Iowa professor Thomas Gallanis posited: 70 In navigating between the extremes of settlor control and beneficiary control, the law of trusts has at times taken a position more favorable to the settlor, and at other times, a position more favorable to the beneficiaries American trust law, after decades of favoring the settlor, is moving in a new direction, with a reassertion of the interests and rights of the beneficiaries. It is true that certain states are shifting back to a focus on the settlor s intent. 71 Even the UDTA was drafted with the goal of achieving maximum settlor autonomy consistent with fiduciary 66 Unif. Trust Code 708(a). 67 Unif. Trust Code 708(b)(1)-(2). 68 Unif. Directed Trust Act 16(3). 69 Unif. Directed Trust Act, 16, cmts. 70 Thomas P. Gallanis, The New Direction of American Trust Law, 97 Iowa L. Rev. 215, 216 (2010). 71 Supra n. 17.

16 minimums. 72 But for those practitioners who operate in the special needs space and are accustomed to trust language that admonishes a trustee to administer the trust for the sole benefit of the beneficiary and in such a way as to enrich the beneficiary s life and make it more enjoyable, it becomes clear that the foundational structure of a SNT is hyper-focused toward the beneficiary and the impact that the trust administration process will have on the beneficiary s quality of life. Therefore, when discussing with a client the advantages and consequences of a multi-participant SNT that presumably will be drafted because the settlor wishes to control the downstream actors who will be involved in the trust s administration, the burden is on the practitioner to design a trust that while mindful of the settlor s intent and a fiduciary s desire to limit liability will further the beneficial interest above all. For all fiduciaries under a trust instrument are bound by the un-waivable duties of loyalty, 73 impartiality, 74 and prudent administration. 75 Thus, one should be cautious adding third parties or creating a structure that will only serve to impede a fiduciary s ability to achieve these foundational duties. To that end however, creating a directed SNT, for example, that has a trustee with investment management prowess and back-office capabilities (i.e., fiduciary tax preparation, accountings, statements, check issuance, etc.), a distribution director who can provide a concierge-level of service for a beneficiary with catastrophic needs due to their geographic proximity, a trust advisory committee attuned to the beneficiary s daily medical, social, governmental benefits, and therapeutic needs, or a trust protector related (or not) to the beneficiary with the power to remove a powerholder to ensure an effective administration process, are all relatively new planning tools that should be considered as this industry continues to advance in a more collaborative and holistic direction while serving the best interest of the most vulnerable of the population. IV. CONCLUSION What is in Nathaniel s Best Interest? The memory Nathaniel s mother has of the time surrounding the settlement process is one of profoundly confusing and complex long-term decisions that were to be made in short 72 Unif. Directed Trust Act Prefatory Note. 73 Unif. Trust Code Unif. Trust Code Unif. Trust Code 801.

17 order. With assistance of counsel she walked through a myriad of state and federal law and regulations concerning both benefits eligibility and trust creation and administration issues. She arrived at a comprehensive special needs trust that she believed focused on Nathaniel s best interest, the preservation of his eligibility for much-needed governmental assistance benefits, and the protection and growth of the overall trust estate. Even as a layperson, when developing Nathaniel s SNT his mother knew that her time was better served focusing on Nathaniel s daily needs rather than serve as a co-trustee; however, she wanted to maintain some level of review and control of the trustee s actions nevertheless. She further understood Nathaniel would likely never receive income earned through employment wages and the corpus of his trust, while significant, represented the sum total of all available funds throughout his life, which underscored the need to select a reputable trustee with proven investment management capabilities. And lastly, she wanted a person or entity involved in the day-to-day coordination and management of Nathaniel s 24-hour skilled care, housing, social, recreational, therapeutic, and benefits eligibility needs. Counsel advised that a single-fiduciary trust would not likely achieve the creativity that the mother was seeking and encouraged her to consider taking a team approach by implementing a multi-participant SNT. Nathaniel s trust had a Texas situs. Texas is protective of trustees insofar as a trustee who acts in accordance with the direction of another as provided for by the terms of the trust is relieved from liability except in cases of the trustee s willful misconduct. 76 Consequently, a corporate fiduciary with national recognition for investment management and special needs planning was comfortable serving as sole trustee alongside a distribution director appointed under the document charged with the task of directing the trustee as to all matters pertaining to discretionary distributions. Nathaniel s mother was selected as trust protector to satisfy her goal of fiduciary oversight, and was vested with the authority under the trust and Texas law to remove and appoint trustees, advisors, and other protectors. 77 The above should not be construed as an endorsement to implementing multi-participant directed SNTs under all circumstances. There are many occasions in which a single-fiduciary or other arrangement is more appropriate, or a directed trust unavailable. While exploring when to implement a directed trust in the context of special needs planning, the practitioner should 1) 76 Tex. Prop. Code Ann. tit. 9, (e). 77 Tex. Prop. Code Ann. tit. 9, (d)(1).

18 consider whether a trustee s power to delegate, rather than a bifurcated arrangement, may achieve the settlor s stated goals; 2) know what approach to directed trustee liability the state with jurisdiction over the trust employs; 3) draft the instrument to clearly define the powers, duties, and liabilities of all trustees and powerholders; and 4) be comfortable that the trust and all related parties have the best interest of the beneficiary at the forefront.