How directed trusts divide authority and accountability

Start your review with three questions: Who holds each power? What must the trustee do with a direction? What information should pass between the people involved? The examples below separate those questions so you can discuss the actual provisions with your attorney.

How the Minnesota example assigns authority

In Minnesota, for example, the instrument may allocate investment, distribution and protector powers to directing parties. Specified directed powers belong to the directing party, and the excluded fiduciary cannot exercise those powers. Other states differ.

The instrument determines the specified powers and whether action requires direction or consent. The excluded fiduciary must follow the instrument and take reasonable steps to comply with the directing party's exercise of granted powers.

Unless the instrument provides otherwise, the excluded fiduciary has no duty to monitor, review, inquire, investigate, recommend, evaluate or warn about the directing party's exercise or nonexercise of granted powers.

For your document review, list investment decisions, distribution decisions and protector powers separately. Beside each, record the named power holder and the provision you want your attorney to explain.

Information duties in the Minnesota example

In Minnesota, for example, directing parties must keep excluded fiduciaries and other directing parties reasonably informed about functions normally performed by the excluded fiduciary, or when information is reasonably necessary for the recipient's duties. Other states differ.

Excluded fiduciaries must keep directing parties reasonably informed about functions they perform when the information is reasonably necessary for the directing parties' duties. Both sides must provide information reasonably requested by the other specified roles.

Performing or failing to perform these information duties does not change the statutory liability allocation between the directing party and excluded fiduciary.

For your next discussion, identify who holds investment valuations, distribution records and direction correspondence. Ask how the people involved will request and exchange those records.

Delaware separates directions from consent

In Delaware, people granted authority by the instrument to direct, consent to or disapprove actual or proposed investment, distribution or other fiduciary decisions are advisers and fiduciaries when exercising that authority. Other states differ.

The instrument may provide that an adviser, including a protector, acts in a nonfiduciary capacity.

When the instrument requires following an adviser's directions or prohibits specified actions without direction, a fiduciary complying with a direction is protected from resulting loss, except for its own wilful misconduct.

When the instrument requires adviser consent, protection covers losses resulting from the adviser's objection or failure to give requested consent. That protection excepts both the fiduciary's wilful misconduct and gross negligence.

For a Delaware document review, mark provisions requiring a direction separately from provisions requiring consent. Ask your attorney which standard applies to each proposed action.

Delaware monitoring duties and administrative actions

In Delaware, the following monitoring limits apply when the instrument requires following an adviser's directions or prohibits specified actions without direction. Other states differ.

Unless the instrument provides otherwise, the fiduciary has no duty to monitor the adviser, provide advice to the adviser or consult with the adviser.

Under that same default, the fiduciary need not warn beneficiaries or third parties about instances in which its own discretion would or might differ from the adviser's direction.

Absent clear and convincing contrary evidence, confirming execution, recording and reporting within the adviser's authority are presumed administrative actions solely supporting the fiduciary's assigned duties. Those actions do not constitute undertaking to monitor the adviser or participate in its decisions.

This administrative presumption does not establish a universal exemption from beneficiary information duties.

A New York decision about one trust

In New York's Matter of Rivas, the court construed a charitable trust's advisory committee and trustee as sharing investment management responsibility consistent with the settlor's purpose. Other states differ.

The committee held broad authority under that agreement, and the court treated it as a de facto cotrustee. This was a decision about that particular trust, rather than a nationwide directed trust standard.

Common questions

What if a Minnesota directing party does not give requested consent?

In Minnesota, for example, an excluded fiduciary is protected from resulting loss when the instrument requires consent and the directing party fails to give it after a request, subject to statutory and instrument exceptions and willful misconduct. Other states differ.

Is a Wisconsin directing party accountable for its own breach?

Yes. In Wisconsin, a directing party is a fiduciary required to act in good faith regarding the trust terms and beneficiary interests, and is liable for losses resulting from its fiduciary breach. Other states differ.

A settlor through the instrument, a court through an instrument or order, or interested persons through a nonjudicial settlement agreement may appoint a directing party for investment or distribution decisions.

Is a Wisconsin trustee protected when no direction arrives?

Yes, except for its own willful misconduct. In Wisconsin, a trustee following a directing party's direction, or failing to act because no direction was given, is protected from losses resulting directly or indirectly from that action or omission. Other states differ.