Trustee Liability for Investments: A Review of the Current State of …content.aba.com/briefings/3015255.pdf · American Bankers Association Briefing/Webinar Thursday, April 6, 2017

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Trustee Liability for Investments: A Review of the Current State of the

Prudent Investor Rule; Delegation; and Direction

2017 Trust and Estate Planning Series

Thursday, April 6, 2017

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American Bankers Association Trust and Estate Planning Briefing Series Trustee Liability for Investments – A Review of the Current State of the Prudent Investor Rule; Delegation; and Direction Thursday, April 6, 2017 • 1:00 – 3:00 p.m. ET

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Table of Contents

TABLE OF CONTENTS ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II

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CONTINUING EDUCATION CREDITS INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . . . V

CPA SIGN-IN SHEET & CERTIFICATE OF COMPLETION REQUEST ... . . . . VI

CFP SIGN-IN SHEET & CERTIFICATE OF COMPLETION REQUEST ... . . . VII

INSTRUCTIONS FOR REQUESTING CERTIFICATE OF COMPLETION . VIII

PROGRAM INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ENCLOSED

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Speakers Thomas W. Abendroth Partner Schiff Hardin LLP 233 South Wacker Drive Chicago, IL 60606 (312) 258-5500 [email protected] Charles “Skip” D. Fox, IV Partner McGuireWoods LLP Court Square Building 310 Fourth Street, NE, Suite 300 Charlottesville, VA 22902 (434) 977-2500 [email protected]

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PROGRAM OUTLINE TIMES SESSION AND SPEAKERS

12:45 – 1:00 p.m. ET

Pre-Seminar Countdown

1:00 – 1:05 p.m.

Welcome and Introduction 1Source International

1:05 – 1:30 p.m.

Introduction Changes in Trust Entities Uniform Prudent Investor Act and the Prudent Investor Rule Skip Fox McGuireWoods LLP

1:30 – 1:55 p.m.

Uniform Prudent Investor Act (continued) Tom Abendroth Schiff Hardin LLP

1:55 – 2:05 p.m.

Questions and Answers

2:05 – 2:30 p.m.

Slicing and Dicing Trustee Duties and Responsibilities Skip Fox McGuireWoods LLP

2:30 – 2:55 p.m.

Directed Trustees Tom Abendroth Schiff Hardin LLP

2:55 – 3:00 p.m.

Questions and Answers Wrap-up


V

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Trustee Liability for Investments – A Review of the Current State of the Prudent Investor Rule;

Delegation; and Direction2017 Trust and Estate Planning Briefing Series

American Bankers Association Briefing/WebinarThursday, April 6, 20171:00 – 3:00 p.m. ET


Disclaimer

This Briefing will be recorded with permission and isfurnished for informational use only. Neither the speakers,contributors nor ABA is engaged in rendering legal norother expert professional services, for which outsidecompetent professionals should be sought. All statementsand opinions contained herein are the sole opinion of thespeakers and subject to change without notice. Receipt ofthis information constitutes your acceptance of these termsand conditions.

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Presenters

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• Thomas W. Abendroth, Partner, Schiff Hardin LLP

• Charles D. Fox IV, Partner, McGuireWoods, LLP


Agenda

• Introduction

• Changes in Trust Entities

• Uniform Prudent Investor Act and the Prudent Investor Rule

• Slicing and Dicing Trustee Duties and Responsibilities

• Directed Trustees

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Introduction

• In administering an estate or trust, the fiduciary and his or her advisors must balance the investment of assets in order to:– Minimize risk– Maximize return– Serve the needs of current beneficiaries– Maintain or grow the assets for remainder beneficiaries, and– Take account of particular preferences of the settlor and

beneficiaries• In recent years, the global and domestic stock market has

been volatile – demonstrating the risks a fiduciary undertakes when investing the assets of an estate or a trust

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Page 1


Introduction

• In 1999, the Social Welfare Research Institute at Boston College released the report Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy– Intergenerational wealth transfer reported at $41 trillion from

1998-2052 (in 1998 dollars)

• In 2014, the Center on Wealth and Philanthropy at Boston College released A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy Technical Report– Estimated wealth transfer is $59 trillion from 2007-2061

http://www.bc.edu/research/swri/features/wealth

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Page 1

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Introduction

• Transfer of wealth represents a tremendous opportunity for the personal trust business as well as a challenge

• Adoption of the Uniform Prudent Investor Act (“UPIA”) promulgated in 1994 and subsequent revisions to applicable law

• Proper understanding of UPIA and related common-law doctrines can be the key to:– minimizing fiduciary risk– Carrying out settlor intent– Avoiding disputes with beneficiaries

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Page 2


Changes in Traditional Trust Entities

• Shifts in the Market of Trust Entities

• Trust Business as Asset Management Business

• Changes in Manner of Handling Trust Investments

• Trust Clients More Sophisticated in Investment Matters

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Page 2 – 5

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The Uniform Prudent Investor Act and Prudent Investor Rule

• Introduction: Development of Investment Standards for Trusts

• The Prudent Person Rule

• The Prudent Investor Rule– Developed as a response to criticism of the

Prudent Person Rule– Formally adopted in the Third Reinstatement of Trusts– Five “principles of prudence”

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Page 5 – 9


The Uniform Prudent Investor Act and Prudent Investor Rule

• The Uniform Prudent Investor Act– Overview– Goals and Focus of the UPIA– Provisions of the UPIA

• Compliance with, and Alterations of, the Prudent Investor Rule• Prudent Investor Rule• Duty to Diversify• Duties at Inception• Duty to Delegate• Protection of Trustee in Case of Delegation• Other Duties of Trustee

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Page 9 – 15

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Alternatives to the Uniform Prudent Investor Act and Prudent Investor Rule

• Limitations of the UPIA and the Prudent Investor Rule

• Waiver of Prudent Investor Rule– UPIA provides that the Prudent Investor Rule “may be

expanded, restricted, eliminated or otherwise altered by the provisions of a trust” (Unif. Prud. Inv. Act § 1(a))

• Cases involving Waivers (or attempted Waivers) of the Rule– Wood v. U.S. Bank, 160 Ohio App. 3d 831 (2005)– W.A.K. ex rel. Karo v. Wachovia Bank, 712 F. Supp. 2d 476

(E.D. Va. 2010)

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Page 15 – 19


Alternatives to the Uniform Prudent Investor Act and Prudent Investor Rule

• Direction to Retain Assets

• Cases involving Directions to Retain Assets– Puhl v. U.S. Bank, N.A., 34 n.E.3d 530 (Ohio Ct. App. 2015)– McGinley v. Bank of America, 109 P.3d 1146 (Kan. 2005)

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Page 19 – 21

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Slicing and Dicing Trustee Duties and Responsibilities

• Introduction– Traditional Trustee Duties and Responsibilities– Purpose of Shifting Trustee Responsibilities to Non-Trustees– Shifting Trustee Investment Responsibilities—Delegation

or Directed

• Delegation of Investment Duties• Role of Delegation of Investment Authority• General Limitations and Scope of Delegation

– Delegation to, Direction by, Co-Trustee– Scope of Delegation

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Page 21 – 27



• Delegation under the Uniform Prudent Investor Act– Section 9 of the Uniform Prudent Investor Act– The Comments to the Uniform Prudent Investor Act

• Delegation under the Uniform Trust Code– Section 807—Delegation by Trustee

• Trustee’s Duties and Liabilities When Delegating Investment Authority– In delegating investment responsibilities, a trustee has several duties– If the trustee fails in any of these areas, the trustee may face liability

from the beneficiaries– Under UPIA, a delegating trustee has the duty to monitor the delegation

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Page 27 – 31

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• Trustee Fees and Costs in Delegating Investment Authority– Many institutional trustees will reduce the trustee’s standard

fees if the trustee is delegating the investment responsibility to a third party

• Drafting to Delegate Investment Authority– If a client desires to allow the trustee to delegate investment

authority to a 3rd party investment manager, it is important that the governing instrument contains certain provisions

– Section 9 (c) of the UPIA– Sample Delegation Language

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Page 31 – 34



• Directed Trustees under the Common Law and Statutes

• Restatement (Second) of Trusts Section 185

• Directed Trustees under Specific State Statutes– Protective State Statutes– The Uniform Trust Code– Other Statutory Approaches

• Trustee Duties When Directed– Liability of Directed Trustee under the Uniform Trust Code– Liability of Directed Trustee under Delaware Law

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Page 34 – 42

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• Trustee Fees and Costs When Directed– Compensation of a directed trustee should be lower than a

trustee with investment responsibility

• Drafting for the Directed Trustee– A directed trustee is still a trustee and not an agent– Certain provisions should be included in the trust instrument

in appropriate– Modification to Insert Directed Trustee Language

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Page 42 – 47



• Exculpation Clauses– Consider having the benefit of an exculpation clause for the

acts of a third party investment manager– An exculpation clause exonerates a fiduciary from liability to

the beneficiaries for the actions or inactions of the fiduciary– Restatement (Second) of Trusts– Section 1008 of the Uniform Trust Code—Exculpation of

Trustee– Communications and Ethical Issues

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Page 47 – 50

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• Nonjudicial Settlement Agreements

• Future Developments in the Law: A New Uniform Act– Overview– Provisions of Divided Trusteeship Act

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Page 50 – 53


Conclusion

• Uniform Prudent Investor Act designed to provide additional flexibility to fiduciaries and beneficiaries in the administration of trusts

• Innovative provisions have created potential uncertainty– Emphasis on diversification has made it more difficult for

settlors to rest assured that their trustees will retain certain assets of particular meaning to the settlor

– Such provisions can be properly managed to further the settlor’s intent and the smooth administration of the trust

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Conclusion

• Certain other doctrines can provide a solution to some issues created by the UPIA or the common law

• Day-to-day administrative decisions regarding trust investments can– Lead to conflict among beneficiaries– Liability on the part of the trustee

• Understanding issues and potential solutions can help the trustee– Manage fiduciary liability– Manage conflict among beneficiaries– Avoid uncertainty– Avoid disputes between beneficiaries and the trustee

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The 2017 Trust Series

Briefing Date Briefing Topic

May 4, 2017 Fiduciary Litigation Roundtable

Jun 1, 2017 Planning in Illiquid Estates

Sep 7, 2017 Retirement Benefits

Oct 5, 2017 A New Look at Distribution Standards

Nov 2, 2017 Planning for the Elderly. What Can and Should Be Done for an Increasingly Aging Population?

Dec 7, 2017 Recent Developments in Estate and Trust Administration

Recording Available

Current State of Asset Protection (Feb 2, 2017)

The Section 2704 Valuation Rules and Their Effect on Advanced Estate Planning Techniques (Mar 2, 2017)

Trustee Liability for Investments: A Review of the Current State of the Prudent Investor Rule; Delegation; and Direction

25

Register Today at www.aba.com/trustbriefings.

American Bankers Association Briefing / Webinar

Trustee Liability for Investments

A Review of the Current State of the Prudent Investor Rule, Delegation, and Direction

Thursday, April 6, 2017 1:00 p.m. to 3:00 p.m. E.T.

Charles D. Fox IV McGuireWoods LLP

Court Square Building 310 Fourth Street, NE, Suite 300 Charlottesville, Virginia 22902

(434) 977-2500 [email protected]

Thomas W. Abendroth Schiff Hardin LLP

233 S. Wacker Drive, Suite 6600 Chicago, Illinois 60606

(312) 258-5501 [email protected]

Copyright © 2017 by Schiff Hardin LLP and McGuireWoods LLP

CHARLES D. (“SKIP”) FOX IV is a partner in the Charlottesville office of

McGuireWoods LLP and chair of the firm’s Tax and Employee Benefits Department. Skip

concentrates his practice in estate planning, estate administration, trust law, and charitable

organizations. Skip has been on the faculty of the American Bankers Association’s National

Trust School and National Graduate Trust School since 1987. He was an Adjunct Professor at

Northwestern University School of Law where he taught from 1983 to 2005 and has been an

Adjunct Professor at the University of Virginia School of Law since 2006. He speaks

extensively around the country on estate planning topics and is the co-presenter of the long-

running monthly teleconference series on estate planning and fiduciary law issues sponsored by

the American Bankers Association. Skip has contributed articles to numerous publications and is

a regular columnist for the ABA Trust Newsletter on tax matters. He is the author or co-author of

seven books on estate planning topics. Skip is a Fellow and President-Elect of the American

College of Trust and Estate Counsel. Skip received his A.B. from Princeton, his M.A. from

Yale, and his J.D. from the University of Virginia. Skip’s wife, Beth, is a retired trust officer and

they have two sons, Quent and Elm.

THOMAS W. ABENDROTH is a partner in the Chicago law firm of Schiff Hardin LLP

and practice group leader of the firm’s Private Clients, Trusts and Estates Group. He

concentrates his practice in the fields of estate planning, federal taxation, and business

succession planning. Tom is a 1984 graduate of Northwestern University School of Law, and

received his undergraduate degree from Ripon College, where he currently serves on the Board

of Trustees. He has co-authored a two-volume treatise entitled Illinois Estate Planning, Will

Drafting and Estate Administration, and a chapter on sophisticated value-shifting techniques in

the book, Estate and Personal Financial Planning. He is co-editor of Estate Planning Strategies

After Estate Tax Reform: Insights and Analysis (CCH 2001). Tom has contributed numerous

articles to industry publications, and served on the Editorial Advisory Board for ABA Trusts &

Investments Magazine. He is a member of Duke University Estate Planning Council. Tom is a

frequent speaker on tax and estate planning topics at banks and professional organizations. In

addition, he is a co-presenter of a monthly teleconference series on estate planning issues

presented by the American Bankers Association. Tom has taught at the American Bankers

Association National Graduate Trust School since 1990. He is a Fellow of the American College

of Trust and Estate Counsel.

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TABLE OF CONTENTS Page

I. Introduction ............................................................................................................................... 1

II. Changes in Traditional Trust Entities ...................................................................................... 2

III. Uniform Prudent Investor Act and the Prudent Investor Rule ................................................ 5

IV. Alternatives to the Uniform Prudent Investor Act and Prudent Investor Rule .................... 15

V. Slicing and Dicing Trustee Duties and Responsibilities ......................................................... 21

VI. Conclusion ........................................................................................................................... 54

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TRUSTEE LIABILITY FOR INVESTMENTS: A REVIEW OF THE CURRENT STATE OF THE PRUDENT INVESTOR RULE,

DELEGATION, AND DIRECTION1 I. Introduction

A. In administering an estate or trust, the fiduciary and his or her advisors must balance the investment of assets in order to minimize risk, maximize return, serve the needs of current beneficiaries, maintain or grow the assets for remainder beneficiaries, and take account of particular preferences of the settlor and beneficiaries.

B. In recent years, the global and domestic stock market has been volatile. In addition, specific companies which had appeared to be sound financially have reported news that caused their share prices to plummet. This general or specific volatility in stocks demonstrates the risks that a fiduciary undertakes when the fiduciary invests the assets of an estate or a trust.

C. Meanwhile, trust business will increase in both the short-term and the long-term. In the last two decades, wealthy Americans have enjoyed the most prosperous twenty years in the nation’s history. Because of the death of the present owners, this wealth will be transferred within the next ten to thirty years.2 In 1999, the Social Welfare Research Institute at Boston College released the report Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy. According to this report, there will be an intergenerational transfer of wealth during the 55-year period from 1998 through 2052 of $41 trillion (in 1998 dollars). After the decline in the financial markets in 2001 to 2003, Boston College updated the study but did not believe the $41 trillion low-growth estimate should be revised. Subsequently in 2014, the Center on Wealth and Philanthropy at Boston College released A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy Technical Report. This report estimates that the intergenerational wealth transfer for the period 2007 through 2061 will be $59 trillion.3

1 This outline is based on materials prepared by McGuireWoods LLP lawyers Charles D.

Fox IV, Benjamin S. Candland, William I. Sanderson, and Stephen W. Murphy.

2 Betsy Brill, Preparing for the Intergenerational Transfer of Wealth: Opportunities and Strategies for Advisors, Journal of Practical Estate Planning, April/May 2003. This article can be found at http://www.donorsforum.org/forms_pdf/CCH_betsybrill.pdf.

3 The Reports can be found at http://www.bc.edu/research/swri/features/wealth.

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D. This transfer of wealth represents a tremendous opportunity for the personal trust business. But, it will also present a challenge for the trust industry in determining the manner in which this wealth is invested.

E. And as economic and market theories have developed, trust law developed standards for a trustee’s management of trust assets in line with those theories.

F. This development culminated in the adoption of the Uniform Prudent Investor Act (“UPIA”), promulgated in 1994, and subsequent revisions to applicable law. Moreover, additional doctrines can also inform the actions of the fiduciary and his or her advisors regarding investments of the trust.

G. A proper understanding of the UPIA, and related common-law doctrines, can be the key to minimizing fiduciary risk, carrying out settlor intent, and avoiding disputes with beneficiaries. In addition, understanding these doctrines can also assist the estate planner in drafting an estate plan that will best carry out the testator’s or settlor’s wishes, avoid uncertainty, and prevent or minimize disputes with or among beneficiaries.

II. Changes in Traditional Trust Entities A. Shifts in the Market of Trust Entities

1. For many reasons, there has been a significant increase in the number of

different types of financial service companies that now offer personal trust services. Traditionally, only national and state banks offered trust services. Trust services are now offered by state chartered private trust companies, brokerage firms, mutual fund companies, and insurance companies. According to the LoBue Consulting Group, banks with traditional trust departments have lost more than one-half of the 65 percent market share of the trust industry that banks enjoyed as recently as 1990.

2. Between 1996 and 1999 the number of depository institutions with trust

powers and assets under management decreased 20.1 percent while the number of non-traditional trust institutions increased by 20.3 percent. Non-traditional trust institutions increased their share of total reported trust revenue to 17.8 percent during the same period. Banks have dominated the trust market, but personal trust services are now being marketed by a variety of financial institutions. As a result, banks have lost market share.

3. The following chart shows the relative market share of various categories

of financial service companies in the personal trust business.

Type of Institution Share of Personal Trust Assets Banks 42 % Other 33 %

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Trust Companies 9 % Brokerage Firms 8 % Mutual Funds 8 %

4. New institutions offering trust services have created pressure on trust

departments to expand the services offered which include being receptive to the use of third party investment managers. According to one commentator: “By providing a large, diverse group of [financial] products through a variety of distribution channels, banks can offer an array of investment products that are tailored to customers’ needs. Achieving satisfaction of today’s market-savvy consumers by providing a more competitive approach to their investment needs can help banks recover lost ground in pursuing the large, high revenue-generating assets of wealthy Americans.”

B. Trust Business as Asset Management Business

1. The traditionally conservative fiduciary business of national banks has undergone a transition to a dynamic and highly competitive asset management business. Asset management is a growing and changing business because of demographic, technological, regulatory, and global economic trends. Hallmarks of the evolution of the asset management industry include tremendous product demand from an increasingly sophisticated client.

2. Traditional trust departments face intense competition from other financial service providers, such as investment companies, insurance companies, and brokerage firms. Also, there has been an expansion of bank powers through the removal of most of the Glass-Steagall Act restrictions and other financial modernization initiatives. In addition, there has been significant industry consolidation through mergers and acquisitions. At the same time there has been a development of complex and rapidly changing product distribution and information technologies.

3. Asset management activities expose financial institutions to an

increasingly broad range of risk factors and thus reinforce the importance of maintaining sound risk management processes. Financial institutions must have the ability to effectively identify, measure, control, and monitor risks in their asset management businesses. Many financial institutions are marketing new and complex financial products and services to strengthen their competitiveness, meet growing customer demand, generate additional sources of income, and retain existing clients with escalating expectations. Asset management products and services can create additional income and are becoming a significant contributor to total revenue and the overall profitability of many national banks.

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However, asset management products and services create additional risk for financial institutions.

4. Financial institutions have made strategic acquisitions of, and alliances with, domestic and international financial services companies, such as brokerage, insurance, investment banking, and investment advisory firms. These transactions are driven by a need to expand or fill product lines, extend distribution channels and market penetration, improve cost efficiency, and acquire additional expertise, talent, and technology.

5. As asset managers without a history of fiduciary experience enter the trust

business, mistakes will be made, which can lead to dissatisfaction by beneficiaries, tax and other liability, and, ultimately, litigation.

C. Changes in Manner of Handling Trust Investments

1. In recent years, there have been many changes in the manner in which a fiduciary handles trust investments.

2. Some of the causes of these changes include: clients have become more sophisticated in investment matters; client advisors have become more creative in “slicing and dicing” trustee duties and responsibilities; and there have been significant changes in the laws governing a fiduciary’s duties and trust investments which allow a grantor or a trustee to shift one or more responsibilities (such as investment responsibility) from the trustee to a third party.

3. These factors create opportunity as well as challenges for professional fiduciaries.

D. Trust Clients More Sophisticated in Investment Matters

1. For many reasons, trust clients in recent years have become more sophisticated in investment matters. Clients have access to a significant amount of investment information from numerous sources. Because of the increasing amount of investable wealth, financial institutions have flooded the media with information concerning investments and investment strategies. In addition, clients are using the internet to obtain investment information. In these days, most everyone perceives themselves as experts on investments.

2. Because of the increased information available, clients understand these

important investment concepts: the significance of a written investment policy; the development of an investment horizon; the importance of diversification by asset class, geography, and investment type; and the importance of asset allocation.

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3. A sophisticated client will expect a trustee to understand these concepts

and be able to accommodate the client's needs. If the trustee does not have the particular expertise in a particular asset class (such as international equities), the trustee may need to obtain the investment expertise from others. One approach to obtain the needed expertise is through delegating the responsibility to an investment provider who has that expertise.

III. The Uniform Prudent Investor Act and the Prudent Investor Rule

A. Introduction: Development of Investment Standards for Trusts4

1. Over the past two hundred years, as economic and market theories have developed, trust law has responded, although slowly at first, to develop standards for a trustee’s management of trust assets in line with those theories.

2. This development culminated in the adoption of the UPIA, promulgated in 1994, and subsequent revisions to applicable law.

B. The Prudent Person Rule

1. Under the common law beginning in the early nineteenth century, trustees were bound by the standard of the “prudent man” or “prudent person.” This rule was first discussed in the seminal case of Harvard College v. Amory:

All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.5

2. The Second Restatement adopted this standard, and it provided that trustees are to “make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived.”6

4 See Slicing and Dicing Responsibilities and Duties of Trustees, Dennis I. Belcher (43rd

annual Philip E. Heckerling Institute on Estate Planning, January 2009).

5 Harvard College v. Amory, 26 Mass. 454, 461 (1830).

6 Restatement (Second) of Trusts § 227.

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3. In theory, the prudent person rule was contemplated as flexible. However,

as this theory was put into practice by courts interpreting this rule, the prudent person rule led to the development of strict categories of investments that were “prudent” and “imprudent.” The following examples illustrate how this meaning of the rule was put into place: a. Commentary in the Second Restatement limited trustees’ ability to

make certain investment decisions generally allowed “proper investments,” such as government securities, first mortgages on land, or corporate bonds, were listed as proper. But certain investments were deemed improper per se, such as purchase of securities for speculation, purchase of securities in new ventures, and purchase of land for resale.

b. Courts applied the principles of care and skill on a case-by-case basis by the courts. Court opinions, and dicta, “tended to transform what had been decided as a predominantly factual issue in one case into a legal precedent for application in others.”7

c. In addition, in this analysis each investment was evaluated

separately, and each had to be appropriate as a trust investment.

d. As a result, the originally general standard of the prudent person rule was set into rules proscribing certain categories of investments as per se imprudent.

e. Courts acknowledged that such a prudent person might take on risk

in the hopes of earning a greater return, as a prudent person may “conduct their affairs with the hope of growing rich.”8 Nevertheless, investment in stocks was seen as necessarily too risky.

4. But the prudent person rule was criticized as investment theories developed.

a. For example, even if the rule was aimed at the laudable goal of preserving trust principal, critics noted that investment under the

7 Restatement (Second) of Trusts § 227 cmt. k.

8 King v. Talbot, 40 N.Y. 76 (1869).

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legal lists would not keep up with inflation, and thus the real value of the trust might actually decline over time.9

b. In addition, even the focus on preservation of trust principal focused on the benefit to future and remainder beneficiaries, rather than current and income beneficiaries.10

C. The Prudent Investor Rule

1. As a response to criticism of the prudent person rule, the “prudent investor” rule was developed, which was based in large part on the development of modern portfolio theory. The “prudent investor” rule was later formally adopted in the Third Restatement.

2. Whereas the prudent person standard was preoccupied with minimizing risk of loss through certain investments, Modern Portfolio Theory attempts to structure a portfolio to better understand sources of risk and to balance risk and return.11

3. In application, Modern Portfolio Theory brought three particular innovations to investment theory as it related to trustees’ preoccupation with risk.

a. First, rather than focus on the maintenance of principal and the earning of income, the theory looked at the “total return” of the portfolio. This return included cash flow from interest and dividends, but also appreciation in market price.

b. Second, rather than focus on the risk and return of a single asset, the theory looked at the entire portfolio as a whole. Even if a given stock was exposed to risk, the entire portfolio could be reasonable and prudent if it properly balanced and diversified its positions based on risk and return.

c. Third, the theory considered various sources and types of risk. The theory recognized that a given portfolio or position could be subject to “industry risk,” if the portfolio could be adversely affected by a downturn in a particular market. Accordingly, the

9 Paul G. Haskell, The Prudent Person Rule for Trustee Investment and Modern Portfolio

Theory, 69 N.C.L. Rev. 87 (November 1990).

10 Paul G. Haskell, The Prudent Person Rule for Trustee Investment and Modern Portfolio Theory, 69 N.C.L. Rev. 87 (November 1990).

11 Edward A. Moses, J. Clay Singleton and Stewart A. Marshall III, Modern Portfolio Theory and the Prudent Investor Act, 30 ACTEC Journal 166 (2004).

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theory might lead an investor to minimize this type of risk by diversifying positions across industries. As a further example, the theory would note that while the government bonds and other investments on the “legal list” were exposed to minimal “default risk,” in that it was unlikely that the bonds would default and become worthless, such a position was also exposed to other types of risk, such as “inflation risk” and the risk that the real value of the investments would decrease over time.12

4. Incorporating these principles of Modern Portfolio Theory, the Third Restatement sets forth five “principles of prudence”:

a. Risk and return are so directly related that trustees have a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the trusts they administer;

b. Diversification is fundamental to risk management and is ordinarily required of trustees;

c. The fiduciary duty of impartiality requires a balancing of the

elements of return between production of current income and the protection of purchasing power against the effects of inflation;

d. Trustees have a duty to avoid fees, transaction costs and other expenses that are not justified by needs and realistic objectives of the trust’s investment program; and

e. Trustees may have a duty, as well as having the authority, to delegate investment decisions to third parties as prudent investors would.13

5. In particular, Modern Portfolio Theory is now reflected in Section 227 of the Third Restatement of Trusts, which provides the following:

The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.

12 See generally Jesse Dukeminier & Robert H. Sitkoff, Wills, Trusts & Estates 621–26

(9th ed. 2013).

13 Restatement (Third) of Trusts, Introduction.

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(a) This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.

(b) In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.14

6. These principles of Modern Portfolio Theory and the Third Restatement were ultimately codified in the Uniform Prudent Investor Act, discussed below.

D. The Uniform Prudent Investor Act

1. Overview

a. The Uniform Prudent Investor Act was promulgated by the National Conference of Commissioners of Uniform State Laws in 1994.

b. According to the Uniform Law Commission, the Uniform Prudent Investor Act has been adopted in 43 states and the District of Columbia: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.15

c. But of the states that have not adopted the UPIA, many have adopted rules substantially similar to the UPIA. For example, most of these states have statutory provisions addressing trustee delegation, which, as discussed below, was one of the particular concerns of the UPIA.

2. Goals and Focus of the UPIA

14 Restatement (Third) of Trusts § 227.

15 Uniform Law Commission, “Legislative Fact Sheet—Prudent Investor Act,” http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Prudent Investor Act.

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a. The UPIA was focused on two particular goals:

(1) To adopt the prudent investor rule as the guide to trustee investments; and

(2) To permit trustees to delegate investment responsibility.

b. The Prefatory Note to the UPIA states that the act has the following objectives:

(1) to apply the “standard of prudence“ in investing to the entire trust portfolio rather than individual assets;

(2) to introduce the concept of risk and return as the central concern of the fiduciary;

(3) to eliminate categorical restrictions on investments and to encourage the trustee to invest in any asset with the appropriate risk/return profile;

(4) to integrate the “duty to diversify investments“ into the concept of prudent investing by trustees; and

(5) to reverse the long-held rule forbidding the trustee from delegating investment and management functions.16

3. Provisions of the UPIA

a. Compliance with, and Alterations of, the Prudent Investor Rule

(1) The UPIA provides that generally, a trustee who invests and manages trust assets owes a duty to the beneficiaries to comply with the Prudent Investor Rule, as defined in the Act.17

(2) But the UPIA further provides that the Prudent Investor Rule can be “expanded, restricted, or otherwise altered” by the provisions of the trust instrument.18

(3) The Act further provides that a trustee is not liable to a beneficiary if the trustee “acted in reasonable reliance on the provisions of the trust.”19

16 Uniform Prudent Investor Act, Prefatory Note.

17 Unif. Prud. Inv. Act, § 1(a).

18 Unif. Prud. Inv. Act, § 1(b).

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b. Prudent Investor Rule

(1) Section 2 of the Act provides that a trustee is to invest and manage assets “as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”20

(2) The trustee’s investment and management decisions are evaluated based on two particular factors:

(A) The decisions are valuated “not in isolation but in the context of the trust portfolio as a whole”; and

(B) The decisions are viewed “as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”21

(3) The Act also provides a non-exhaustive list of circumstances that the trustee “shall consider,” as such factors are relevant to the trust or its beneficiaries:

“(1) general economic conditions;

(2) the possible effect of inflation or deflation;

(3) the expected tax consequences of investment decisions or strategies;

(4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;

(5) the expected total return from income and the appreciation of capital;

(6) other resources of the beneficiaries;




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(7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and

(8) an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.”22

(4) The comments to the UPIA also clarify that the trustee’s duty to manage includes a duty to “monitor” the investments, that is, “the trustee’s continuing responsibility for oversight of the suitability of investments already made as well as the trustee’s decisions respecting new investments.”23

(5) The Act also provides that if a trustee has “special skills or expertise” (or if the trustee is named trustee in reliance on the trustee’s representation of such special skills or expertise), then the trustee has a duty to use those special skills or expertise.24 That is, a trustee might be held to a higher standard, such as that of a “prudent professional,” if the trustee is a professional or has specialized skills. Case law supports this concept of a higher standard for a trustee who represents itself to be an expert or professional.25

(6) The comments also confirm that the Act creates no exception for small trusts, although the factors that the trustee can consider can be adjusted for a smaller trust.26

(7) Section 8 of the Act also confirms that compliance with the Prudent Investor Rule is determined “in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.”27

22 Unif. Prud. Inv. Act, § 2(c).

23 Unif. Prud. Inv. Act, § 2, cmt.

24 Unif. Prud. Inv. Act, § 2(f).

25 See Unif. Prud. Inv. Act, § 2, cmt.; Annot., Standard of Care Required of Trustee Representing Itself to Have Expert Knowledge or Skill, 91 A.L.R. 3d 904 (1979) & 1992 Supp. at 48–49.


27 Unif. Prud. Inv. Act § 8.

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c. Duty to Diversify

(1) The Act also provides that a trustee “shall diversity” investments, unless the trustee “reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”28

(2) The comments to the UPIA note the following examples that might “overcome” the duty to diversify:

(A) if a tax-sensitive trust owns an underdiversified block of low-basis securities, the tax costs of recognizing the gain may outweigh the advantages of diversifying the holding; and

(B) a trust may wish to retain a family business as a concentrated asset.29

d. Duties at Inception (1) The Act also provides that within a “reasonable time” of

accepting a trusteeship, a trustee “shall review” trust assets and make and implement decisions concerning the retention and disposition of trust assets to bring the portfolio into compliance with the Act.30

(2) As for what time period is “reasonable,” the authorities generally do not provide a set time period. The comments to the Act clarify that this question “turns on the totality of the factors affecting the asset and the trust.”31 The 1959 Restatement had provided that “[o]rdinarily any time within a year is reasonable, but under some circumstances a year may be too long a time and under other circumstances a trustee is not liable although he fails to effect the conversion for more than a year.”32 The 1992 Restatement similarly provided, “No positive rule can be stated with

28 Unif. Prud. Inv. Act, § 3.




32 Restatement (Second) of Trusts § 230, cmt. b.

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respect to what constitutes a reasonable time for the sale or exchange of securities.”33

e. Duty to Delegate (1) The Act also provides that a trustee has the power to

delegate investment and management functions that a prudent trustee could properly delegate.34

(2) The trustee is to exercise reasonable care, skill, and caution in: “(1) selecting an agent; (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (3) periodically reviewing the agent's actions in order to monitor the agent’s performance and compliance with the terms of the delegation.”35

(3) The comments to the Act note that this section is also designed to protect the beneficiaries and the trust from “overbroad” or “improper” delegation. For example, the comments clarify that a trustee could not delegate investment functions to an investment advisor with an agreement that obtains an exculpation clause that leaves the trust without recourse against reckless mismanagement; leaving the beneficiaries or the trust without recourse for mismanagement would be inconsistent with the trustee’s duties to use care and caution in formulating the delegation.36

f. Protection of Trustee in Case of Delegation (1) Importantly, if a trustee complies with these principles of

delegation, the trustee is not liable to the beneficiaries or to

33 Restatement (Second) of Trusts § 229, cmt. b.




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the trust for the decisions or actions of the agent to whom the function was delegated.37

(2) In Roberts v. Roberts,38 the Supreme Court of Virginia held that an executor was not liable to the beneficiaries for negligence of an agent. In that case, an executor testified that following his appointment, the estate became increasingly complex to administer, and the executor hired a bank to assist with the administration of the estate. The bank apparently declined to serve as executor, but instead served as agent, with the executor delegating various duties to the bank. The bank allegedly made an error on a tax return, which resulted in a cost to the estate of approximately $40,379.76 in penalties for the miscalculations on the return. The trial court found that the executor should have reviewed the estate tax return “in detail,” in which case he would have discovered the error, and thus he was liable for the error.

(3) On appeal, the Supreme Court of Virginia reversed. The Court noted that Virginia’s statute allowed the executor to delegate functions to an agent, and to not be liable for the agent’s negligence. The Court also noted that the executor could still be liable for his own negligence. The Court concluded that the applicable statute would be “rendered meaningless” if an executor was empowered to delegate functions to experts, but then was unable to rely on the advice of those experts. And based on the facts of the case, the Court found that the executor reasonably relied on the agent’s preparation of the tax return, such that the executor was not liable for the alleged negligence of the agent.

g. Other Duties of Trustee. The UPIA also provides that the trustee has a duty of loyalty, has a duty of impartiality, and may only incur investment costs that are appropriate and reasonable in relation to the trust, the purposes of the trust, and the skills of the trustee.39

IV. Alternatives to the Uniform Prudent Investor Act and the Prudent Investor Rule

A. Limitations of the UPIA and the Prudent Investor Rule

37 Unif. Prud. Inv. Act, § 9(c).

38 536 S.E.2d 714, 718–20 (Va. 2000).

39 Unif. Prud. Inv. Act, §§ 5–7.

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1. The development and adoption of the prudent investor rule has enabled

trustees to invest in a more balanced portfolio, which allows beneficiaries to enjoy the benefits of higher returns.

2. However, the prudent investor rule has its limits; while the prudent investor rule allows the trustee to invest in assets that are not on the “legal lists,” the rule’s emphasis on diversification comes at a cost, as under the rule trustees are discouraged from concentrating assets in one class or industry.

3. Meanwhile, many beneficiaries or settlors may desire to hold those assets

in a concentrated position. This can include the following:

a. The ability of a trust to hold a family company;

b. The ability of a trust to hold a type of asset that is believed by the settlor or beneficiaries to be a sound investment, such as real estate;

c. The potential for a trust to hold a life insurance policy; and

d. The potential for concentrated trust investments to greatly increase

over time.

4. Thus, while the prudent investor rule provides some benefits to settlors and beneficiaries, the prudent investor rule also provides some drawbacks and limits on the ability of a trust to hold assets that might be preferred by the settlor and beneficiaries.

B. Waiver of the Prudent Investor Rule 1. One means for a settlor or testator to address the limitations inherent in the

Prudent Investor Rule and the UPIA is to include express waiver provisions in the underlying document, waiving the Prudent Investor Rule.

2. The UPIA provides that the Prudent Investor Rule “may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust.”40 By waiving the rule, a settlor can allow the trustee to continue to hold concentrated positions or otherwise to invest not in accordance with the duty to diversify.

40 Unif. Prud. Inv. Act § 1(a).

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3. But even waiver language in a trust instrument must be carefully considered before the trustee retains such an interest.

C. Cases Involving Waivers (or Attempted Waivers) of the Rule

1. Wood v. U.S. Bank, 160 Ohio App. 3d 831 (2005)

a. In Wood, at the settlor’s death, 82% of his trust contained stock in Firstar Bank, who also served as trustee. The trust instrument specifically gave the trustee the power “[t]o retain any securities in the same form as when received, including shares of a corporate Trustee …, even though all of such securities are not of the class of investments a trustee may be permitted by law to make and to hold cash uninvested as they deem advisable and proper.”

b. The value of the Firstar stock subsequently declined, from $35 per share in 1999, shortly after the settlor’s death, to $16 per share in mid-2000, at the time of the final distribution to the beneficiaries.

c. The trustee argued that the above-referenced clause in the trust instrument enabled it to retain the investments in their original form, without liability for such retention.

d. The Court disagreed. The Court construed the retention clause merely to waive the trustee’s duty of loyalty, such that the corporate trustee could retain its own stock. The Court concluded, “The trust did not say anything about diversification.” And thus, “because the trustee still has the duty to act prudently, and diversification is normally called for, the retention language in this case did not affect the duty to diversify.”

e. Although this holding may at first seem harsh, the Court cited provisions of the Third Restatement in reaching this result. The Third Restatement provides, “In making and implementing investing decisions, the trustee has a duty to diversify the investment unless, under the circumstances, it is not prudent to do so.”41 The comments to the Restatement continue, “A general authorization in an applicable statute or in the terms of a trust to retain investments received as part of a trust estate does not ordinarily abrogate the trustee’s duty with respect to diversification or the trustee’s general duty to act with prudence in investment matters.”42

41 Restatement (Third) of Trusts § 227 (b).

42 Restatement (Third) of Trusts § 229 cmt. d.

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PRACTICE POINT. The trustee in Wood may have had a stronger case that retention of the stock was permissible if the retention clause specifically waived the duty to diversify, and authorized the trustee to retain such stock even if it represented an overconcentration

f. Considering the cautionary tale of Wood, a provision in a trust that more forcefully waives the duty to diversify might read as follows:

EXAMPLE 1. I may contribute assets to this trust that would not meet the standard in [Jurisdiction] as suitable investments to be held by my Trustee. My Trustee may retain such assets for as long as my Trustee may deem appropriate even if such assets represent an overconcentration or do not meet the “prudent investor” rule. My Trustee may continue the operation and participate in the management of such assets without liability for any decisions or actions made in good faith.

g. Notably, even this language requires the trustee to act “in good faith.” A trustee may be concerned that such language still opens the trustee to challenge if the assets are retained and decline in value.

h. Nevertheless, in light of Wood, a trustee should be wary of any situation in which, as in Wood, beneficiaries request that the trustee diversify investments. In such a case, the trustee should consider diversification, even if the trustee determines that such diversification is not necessarily required by the trust instrument.

2. W.A.K. ex rel. Karo v. Wachovia Bank, 712 F. Supp. 2d 476 (E.D. Va. 2010)

a. The terms of the trusts directed the trustee to retain the corporate trustee’s stock and empowered the trustee to invest trust property “without being confined to investments lawful through statute or otherwise for fiduciaries in the State of Virginia.” The court granted summary judgment holding that the duty to diversify was waived as to the trust property at the trust’s creation and any investments later transferred to the trust.

b. The appeal was subsequently rejected by the U.S. Court of Appeals for the Fourth Circuit without a reported decision. The Court also awarded payment out of the trust of the trustee’s reasonable

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attorneys’ fees and costs for its successful defense in the amount of $825,233.10.

D. Direction to Retain Assets

1. A trustee may instead prefer that the settlor include language requiring the

trustee to retain certain assets. Language merely suggesting that the trustee retain assets might be insufficient to allow the trustee to justify the additional risk of retaining the asset.

2. Sample language directing that the trustee retain such assets might read as follows:

EXAMPLE 2. Notwithstanding any other provision of this agreement or applicable law regarding diversification of trust assets, I direct my Trustee to retain [such assets or list of assets].

3. Despite such a direction, a beneficiary might still bring a lawsuit against

the trustee if the retained assets decline in value.

E. Cases Involving Directions to Retain Assets 1. Puhl v. U.S. Bank, N.A., 34 N.E.3d 530 (Ohio Ct. App. 2015)

a. In 1982, Rose E. Schaurte created a revocable trust agreement with

The Second National Bank of Hamilton (now U.S. Trust, N.A.) as initial trustee. The Trustee was granted specific powers including “full power and authority … [t]o retain any property or undivided interests in property received from any source regardless of a lack of diversification, risk or nonproductivity.” However, the Trustee was required to “consult with Rose’s husband] if [he] is reasonably available on all investment and sale decisions. If [Rose’s husband] is not reasonably available, Trustee shall consult with [Rose’s daughter-in-law,] Anita Hoelle Schaurte, especially on income and principal distributions for [Rose’s] three grandchildren.”

b. The trust was funded with only ten dollars from 1982 to 1989. Following Rose’s husband’s death in 1989, Rose transferred her holdings in six stocks valued between $300,000 and $400,000 to the trust. Rose exercised authority to retain the stocks in the trust’s investment portfolio. In 1991, she issued a written instruction to the Trustee “to hold and not sell” the stocks. In 1994, Rose acknowledged in writing that three of the six stocks constituted almost 90% of the investment portfolio. Nevertheless, she instructed the trustee not to sell the stocks “[d]ue to the very low

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tax basis and my own personal reasons.” In 2004, Rose acknowledged the stocks constituted a high percentage of the investment portfolio and directed the trustee to retain the stocks “until my death or incapacity, or until I direct otherwise [] in writing.” In 2005, Rose recognized that one of the stocks reached 27% of the investment portfolio and authorized the Trustee to liquidate that share to meet her expenses and requests for gifts and distributions. The portfolio’s value declined after 2007, when Rose entered a nursing home. Rose died in 2011.

c. In 2012, two of Rose’s grandchildren, beneficiaries of the trust (collectively, the “Beneficiaries”), sued the trustee alleging breach of fiduciary duty, failure to comply with the Ohio Uniform Prudent Investor Act. The trustee filed a motion for summary judgment. The trial court granted the motion for summary judgment. The Beneficiaries appealed.

d. The Court of Appeals for Ohio affirmed the trial court’s granting of summary judgment. The court found that the evidence demonstrated the trustee’s duty to diversify was modified by the terms of the trust. Moreover, because the trust was a revocable trust, during Rose’s lifetime she had the authority to instruct the trustee to retain the stocks. Rose exercised that authority to direct on several occasions. The trustee had a duty to follow such instructions, regardless of risk to the portfolio.

e. The Puhl case serves as a reminder to practitioners and trustees of the relationship between a trustee and settlor of a revocable trust during the settlor’s lifetime. Although the trust may designate certain people as beneficiaries, depending on the terms of the trust the trustee may owe an obligation only to the settlor and not such beneficiaries. Trustees should be careful to analyze the trust terms and assess to whom it owes a fiduciary obligation.

2. McGinley v. Bank of America, 109 P.3d 1146 (Kan. 2005)

a. The grantor, age 79, established a trust with a bank as trustee. The trust agreement provided that the grantor was to direct the trustee regarding investments during her lifetime, and in such case “the Trustee shall abide by the Grantor’s decision unless, in the sole opinion of the Trustee, the Grantor is incapable of managing her affairs, in which event the decision of the Trustee as to all investment matters shall be final and conclusive.”

b. The grantor wrote a letter to the trustee, entitled, “Direction by Powerholder to Retain Securities,” which directed the trustee to retain the stock in Enron, acknowledged that the trustee did not

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monitor the securities, and relieved the trustee of any duty to analyze or monitor the securities. By the end of 2001, the value of the Enron stock had declined to only 2% of the trust portfolio, down from a high of 77% o the trust portfolio.

c. The grantor sued the trustee, based on various theories. The trustee prevailed on summary judgment, but the trustee nevertheless was forced to defend its actions in court.

d. Such a retention clause also suffers from another disadvantage. Such a direction might work to a fault, in requiring a trustee to retain such stock and providing little flexibility in the case of changed circumstances.

F. Conclusion and Implications. In these cases, fiduciaries who acted upon an apparent waiver of the prudent investor rule, or a direction to retain assets, nevertheless faced potential liability regarding those actions. In light of these cases, fiduciaries, advisors, and planners are often reluctant to rely only on such provisions; meanwhile, many planners also understand that limits of these types of provisions, and seek to provide further direction to the trustee to ensure the settlor’s intention is carried out.

V. Slicing and Dicing Trustee Duties and Responsibilities

A. Introduction

1. For the fiduciary, advisor, or planner who seeks to deviate from traditional doctrines, another option is to divide trustee responsibilities and separate investment decision-making from decision-making regarding other aspects of trust administration.

2. Traditional Trustee Duties and Responsibilities

a. A trustee is under a duty to act for the benefit of the trust estate and its beneficiaries. A trustee’s duties are many and include the following: the duty to administer the trust, the duty of loyalty, the duty not to delegate the administration of the trust, the duty to furnish information to the beneficiaries, the duty to exercise reasonable care and skill in selecting trust investments, the duty to take and keep control of trust property, the duty to preserve the trust property for the benefit of the beneficiaries, the duty to make the trust property productive, and the duty to deal impartially with beneficiaries.

b. A trustee’s traditional responsibilities arise from these duties. These responsibilities include: holding title to the trust assets, determining the identity of the beneficiaries of the trust, investing the trust assets, making discretionary decisions concerning the

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distribution of trust income and principal to the beneficiaries, rendering reports to the beneficiaries, and filing income tax returns.

3. Purpose of Shifting Trustee Responsibilities to Non-Trustees

a. There are many reasons for shifting trustee responsibilities to third parties and the reasons vary depending on whether the viewpoint is the client’s or the trustee’s. From a client’s perspective, high net worth individuals have traditionally tried to obtain the best advisors in each field in which the individuals need advice. For example, a high net worth individual may use multiple tax advisors for advice in different areas, such as one expert in individual income taxation, anther expert in pass through entity taxation, and another expert in transfer taxation. Also, some clients will have special assets or a special family situation that need special attention from someone familiar with the assets or family situation.

b. From a trustee’s perspective, the trustee may not have the expertise to handle all of the trust investment needs. Given the emphasis in the investment community on international and alternative investments, it is difficult for a trustee to be an expert in all types of asset classes. Also, a wise trustee may not want to be responsible for making discretionary decisions if the client has special assets or a special family situation.

c. In response to clients’ desires for obtaining the best advice and trustee desires to offer more specialized services, client advisors have become more inclined to “slice and dice” trustee responsibilities. For example, the grantor may want to use a financial institution to hold legal title to the trust assets but a favorite third party manager for investment of the trust assets. Another example is where the trust assets consist of a concentrated position in a family company, and the client may not feel comfortable with trusting the decision of whether to sell the trust investment in the private company to an institutional trustee. The client may prefer to place the decision whether to sell in the hands of someone experienced with the family business, such as a family member, employee or a trusted advisor. Another example is where a client is not interested in allowing a financial institution to determine whether discretionary trust distributions should be made to family members. In this instance, the client may give the ability to make discretionary distributions of income and principal to one or more non-trustee individuals.

4. Shifting Trustee Investment Responsibilities—Delegation or Directed

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5. There are two primary methods of shifting trustee responsibilities.

6. First, the trustee may delegate the responsibility to a third party.

7. Second, the trust instrument may direct that a third party have responsibility for certain specified fiduciary actions. These entities might go by different names, but for purposes of these materials, the third party can be referred to as a “trust director” or an “investment director” or a “trust advisor,” and the trustee who follows those directions can referred to as a “directed trustee.”

8. Each of these methods, a trustee delegation or a directed trusteeship, has different ramifications and presents different risks and liability to the trustee. In addition, it is important that the drafter of the governing instrument provide clarity as to the authority and scope of the delegation or direction. Otherwise, there is a significant risk of problems and litigation in either scenario.43

B. Delegation of Investment Duties

1. Under the common law, a trustee was not permitted to delegate matters that the trustee could reasonably perform personally. This was construed to prohibit a trustee from delegating investment responsibility.44

2. The Third Restatement’s position on the ability of trustee’s to delegate their functions represents a dramatic departure from prior restatements which grudgingly accepted delegation only to the extent the trustee had no reasonable alternative. Under the Third Restatement, the trustee is directed to “act with prudence in deciding whether and how to delegate authority to others.”45

3. As discussed above, under the UPIA, the trustee is also authorized to delegate investment function, and the trustee must exercise reasonable care, skill, and caution in selecting, instructing, and monitoring the agent.46

43 Al W. King, III and Pierce H. McDowell, III, “Delegated Vs. Directed Trusts,” Trusts

and Estates, July 2006, page 26.

44 Jesse Dukeminier & Robert H. Sitkoff, Wills, Trusts & Estates 650 (9th ed. 2013); see generally Al W. King, III and Pierce H. McDowell, III, “Delegated vs. Directed Trusts,” Trusts and Estates 26 (July 2006).

45 Restatement (Third) of Trusts § 227(c)(2).

46 Unif. Prud. Inv. Act § 9.

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4. But while the Third Restatement and the UPIA altered existing law regarding a trustee’s authority to delegate, such delegation may not provide the certainty that a trustee seeks in absolving itself of any potential exposure in the case of a concentrated investment or other deviation from a diverse portfolio. A beneficiary could still argue that the trustee should have monitored the advisor more carefully.

5. As noted above, in Roberts v. Roberts,47 the Supreme Court of Virginia ultimately held that an executor was not liable to the beneficiaries for an error of an agent who had prepared a tax return for the estate; but this victory for the executor came only after a lengthy litigation and appeal, in which the trial court initially found that the executor was liable. A fiduciary may prefer to avoid any situation in which negligence of the agent could be imputed to the fiduciary.

C. Role of Delegation of Investment Authority

1. At common law, a trustee was charged with the personal duty to perform all aspects of handling a trust and the trustee was forbidden from delegating the trustee’s duties and responsibilities.48 As a trustee’s duties and responsibilities became more complex and varied, the law developed where a trustee has the personal duty to perform the trustee’s responsibilities, except as a prudent person would delegate those responsibilities to others.49

2. Under the law of most states, a trustee is under a duty to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances in determining when and to whom to delegate fiduciary authority in the administration of a trust. In addition, the trustee has a continuing duty to supervise the agent to whom the trustee delegated the trustee’s duty.50

3. According to Scott on Trusts, a trustee should consider the following factors in determining whether and under what circumstances and conditions the trustee should delegate the trustee’s authority:

a. The terms of the governing instrument of the trust,

b. The matter being delegated,

47 536 S.E.2d 714 (Va. 2000).

48 Uniform Prudent Investor Act, Section 9, comments.

49 Scott on Trusts, Section 171.

50 Id.

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c. The size of the trust,

d. The nature of the trust assets,

e. The amount of discretion granted the trustee,

f. The skill and expertise of the trustee regarding the activity being delegated, and

g. The economics of the delegation.51

h. A trustee can be charged with abuse of the trustee’s discretionary authority if the trustee –

(1) fails to delegate when the trustee does not have the ability to handle a significant trust function,

(2) makes an imprudent decision to delegate,

(3) fails to exercise prudence in the manner of degree of delegation, or

(4) fails to monitor the agent after delegation.52

i. A trustee needs to exercise care and caution in the selection of agents and establishing the terms of any delegation. Some of the significant terms of a delegation include the compensation of the agent (and the compensation of the trustee following the delegation), the duration of the delegation, the conditions of the delegation, and the mechanism for supervising the agent.53

j. The common law does not have clear rules on when and how a trustee can safely delegate trustee duties and responsibility. Because of the lack of clear rules in delegating investment responsibility, the National Conference of Commissioners of Uniform State Laws prepared the Uniform Prudent Investor Act which, in part, addresses the issue of trustee delegation. Those trustees serving under instruments governed by jurisdictions that have adopted the Uniform Prudent Investor Act benefit from clearer rules governing the delegation of investment responsibility.

51 Id.

52 Id.

53 Id.

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D. General Limitations and Scope of Delegation

1. There are two particular notes regarding terminology that are helpful for this discussion.

2. Delegation to, or Direction by, Co-Trustee

a. The method of delegation and direction discussed in this outline generally refers to the ability of a trustee to delegate responsibility to a non-trustee third party, typically referred to as an “agent”.

b. However, many states include specific provisions that provide additional protection if one co-trustee delegates authority to another co-trustee, that is, a delegation by one trustee to another trustee.

c. Moreover, some other states expressly allow one trustee to direct another trustee. Florida’s statute provides the following regarding the ability to allow one trustee to direct another:

If the terms of a trust 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 excluded trustee, an excluded trustee is not liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power. An excluded trustee does not have a duty or an 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 excluded 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.54

d. This power under Florida law is distinct from the ability of a third party other than a trustee to direct a trustee, under a separate statute:

54 See Fla. Stat. Ann. § 736.0703(9).

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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 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.55

e. Applicable law or the governing document may also give a co-trustee express protection if the co-trustee formally delegates responsibility to a co-trustee, or if the first co-trustee dissents from a decision by the trustees but is out-voted by a majority of trustees.

3. Scope of Delegation

a. These materials relate generally to the ability of a trustee to delegate to an agent a particular function: that is, to delegate investment and management authority.

b. However, under the UPIA and many states’ laws, a trustee can also delegate other functions to an agent, such as authority over distributions, tax matters, or other non-investment functions. A trustee who considers delegating non-investment functions should consider whether that delegation is permitted by applicable law and the trust instrument, and whether the delegating trustee is afforded any protection under applicable law.

E. Delegation under the Uniform Prudent Investor Act

1. Among the purposes of the Act was to reverse the rule of trust law forbidding the trustee to delegate investment and management functions.56 Section 9 of the Uniform Prudent Investor Act allows a trustee to delegate investment and management functions subject to certain safeguards. The Act’s allowance of trustee delegation was a continuation of the trend in trust law and followed the Prudent Investor Rule in the Third Restatement of Trusts57 and the delegation rule under Employee Retirement Income Security Act of 1974 (referred to as “ERISA”).58

55 See Fla. Stat. Ann. § 736.0808(2).

56 Uniform Prudent Investor Act, Section 9, comments.

57 Restatement of Trusts 3rd, Prudent Investor Rule, Section 171 (1992).

58 ERISA Section 403(a)(2), 29 U.S.C. Section 1103(a)(2).

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2. Section 9 of the Uniform Prudent Investor Act reads in its entirety as follows:

“A trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent,

(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust, and

(3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

(4) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.

(5) A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.

(6) By accepting the delegation of a trust function from the trustee of a trust that is subject to the law of this state, an agent submits to the jurisdiction of the courts of this State.”

3. The Comments to the Uniform Prudent Investor Act state that the trustee’s duties of care, skill, and caution in framing the terms of the delegation should protect the beneficiary against the trustee making an overbroad delegation. For example, a trustee cannot prudently agree to an investment management agreement containing an exculpation clause that leaves the trust without recourse against reckless mismanagement. According to the Comments, leaving the beneficiaries without a remedy against willful wrongdoing is inconsistent with the trustee’s duty to use care and caution in formulating the terms of the delegation.

F. Delegation under the Uniform Trust Code

1. Section 807—Delegation by Trustee reads as follows:

“(a) A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly

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delegate under the circumstances. The trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent;

(2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and

(3) periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation.

(b) In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation.

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

(d) By accepting a delegation of powers or duties from the trustee of a trust that is subject to the law of this State, an agent submits to the jurisdiction of the courts of this State.”

G. Trustee’s Duties and Liabilities When Delegating Investment Authority

1. In delegating investment responsibility, a trustee has several duties. If the trustee fails in any of these areas, the trustee may face liability from the beneficiaries. A trustee who delegates investment responsibility generally has greater exposure to liability than a trustee who is directed as to investments (see paragraph c, below). The first duty is to review the governing instrument and state law to verify that delegation is permitted. Assuming delegation is authorized by the governing instrument and applicable law, a trustee has these duties in delegating investment responsibility:

a. Determining whether the trustee should delegate all or a portion of the investment responsibility,

b. Exercising reasonable care in the selection of the investment manager,

c. Determining the scope and terms of the delegation, and

d. Reviewing and monitoring the delegation.

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2. Although a trustee should not be a guarantor of success, a trustee must be process oriented and follow a process in carrying out the trustee’s duties. The trustee should document the process followed in each of the steps mentioned below.

3. After determining that investment delegation is authorized, the trustee must determine whether the trustee should delegate all or a portion of the investment responsibility. In making this decision, a trustee should consider the following factors:

a. The skill and capabilities of the trustee (the greater the skill and capabilities, the less reason for delegation),

b. The size of the trust (the larger the trust, the more reason a trustee should delegate all or a portion of the investment responsibility),

c. The costs of the delegation (the additional expense may outweigh the potential benefits), and

d. The skill and expertise of the individual or entity to whom the trustee is delegating the investment responsibility.

4. A delegating trustee must exercise reasonable care in the selection of the investment manager. The first step should be the development of a written investment policy. This will involve determining the investment horizon (how long is the trust expected to last), the projected distributions to be made on an annual basis, the allocation of the trust assets, and the number of managers to be used to accomplish the objectives. After developing the investment policy, the trustee should conduct and document a search process to select the appropriate investment manager or managers. If the trustee is not a professional, the trustee may want to use a consultant to assist in this process. Special problems arise if the investment manager is affiliated with the trustee. These problems are discussed later in this paper.

5. It is important that a delegating trustee determine the scope and terms of the delegation. Otherwise, the trustee may not be fulfilling the trustee’s fiduciary obligations. In delegating the investment responsibilities, the trustee should have a written agreement with the party to whom the delegation is made. If possible, the beneficiaries should also acknowledge the delegation. Among the matters to be covered in the written instrument of delegation are the following.

a. The investment manager should acknowledge receiving a copy of the governing instrument and the applicable statutory law.

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b. The investment manager should agree to accept the delegation of the investment function of the trust pursuant to applicable law, the governing instrument, and the trustee’s investment policy.

c. The investment manager should agree to invest the trust assets in accordance with the terms of the governing instrument and applicable law.

d. The trustee and the investment manager should agree on the investment objectives, the asset allocation, the appropriate measuring benchmarks, and the reporting requirements (including format and the recipients of the reports).

e. The investment manager should agree to meet periodically (in person or by teleconference) with the trustee and the beneficiaries to review the investment objectives, asset allocation, and investment performance.

f. The trustee should have the right to remove the investment manager for any reason after appropriate notice to the manager.

g. The trustee may want to ask for indemnification from the investment manager for the manager’s acts outside the scope of the delegation.

h. If there is a question concerning the propriety of the delegation, the beneficiaries should direct the trustee to enter into the delegation and agree to indemnify the trustee for any losses incurred by reason of the delegation.

6. Under the Uniform Prudent Investor Act, a delegating trustee has the duty to monitor the delegation. Thus, the trustee’s duties have not ended after the trustee has delegated the investment function to one or more investment managers. A delegating trustee should review the manager’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation. The trustee’s review should evaluate the performance of the manager compared to the benchmarks mutually agreed upon at the commencement of the delegation. The review should also evaluate consistency of investment style and any turnover in personnel. The review should be periodic and no less frequently than annually (and quarterly is better).

H. Trustee Fees and Costs in Delegating Investment Authority

1. Fees are an important factor in overall investment performance. Because the investment manager to whom the investment responsibility is delegated will charge the trust an additional fee, administrative costs generally will increase when a trustee delegates the investment

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responsibility to a third party manager. As a result of the line of cases subjecting a trust’s investment management fees to the two percent limitation on itemized deductions,59 delegation to an investment manager who charges a fee separate from the trustee will in all likelihood increase the costs of delegating investment responsibility.

2. Many institutional trustees will reduce the trustee’s standard fees if the trustee is delegating the investment responsibility to a third party. This reduction is appropriate because the trustee will have fewer duties and less responsibility (assuming an otherwise proper delegation) than if the trustee were handling all aspects of the trust. An example of a fee schedule for a large established financial institution for a trust where the trustee has full investment responsibility is:

Fee Value of Account

1.20 % on the first $1,000,000

1.00 % on the next $1,000,000

0.90 % on the next $2,000,000

0.80 % on the next $2,000,000

Negotiable over $6,000,000

3. An example of a fee schedule of a trustee where the trustee does not have any investment responsibility is:


0.65 % on the first $ 500,000

0.55 % on the next $ 500,000

0.35 % on the next $4,000,000

0.25 % on the next $5,000,000

This produces a fee of 32.5 basis points ($32,500) on a $10,000,000 trust. But, the trust will have to pay an investment management fee in addition to the trustee fee. These fees can range from 20 to 200 basis points depending on the investment asset and the manager.

59 See: Knight v. Commissioner, 552 U.S. 181 (U.S. 2008).

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I. Drafting to Delegate Investment Authority

1. If a client desires to allow the trustee to delegate investment authority to a third party investment manager, it is important that the governing instrument contain certain provisions. The provisions that the drafter should consider inserting in the trust instrument are the power to delegate, the permissible scope of the delegation, and the trustee’s responsibility for the actions of the third party manager. If the investment manager to whom the trustee will be delegating the investment authority is an affiliate of the trustee, it will be necessary to add additional language covering the self-dealing aspects of using an affiliate.

2. Section 9 (c) of the Uniform Prudent Investor Act provides that a trustee who complies with the delegation procedure described in Section 9 (a) is not “liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.” Thus, the trustee should not have any liability if the trustee has properly carried out the trustee’s duties in exercising “reasonable care, skill, and caution” in selecting the manager, establishing the scope of the delegation, and monitoring the manager’s actions.

3. Sample Delegation Language

a. A trustee is charged with personally performing all fiduciary duties. Trustees are allowed to designate agents and professionals to provide services to the trustee in furtherance of those duties.60

b. One who agrees to serve as trustee may wish to engage a professional investment advisor for recommendations regarding trust investments, and a trust should specifically permit this. This does not relive the trustee of the liability for exercising reasonable care and diligence in selecting the advisor and carrying out the investment activity of the trust. It does indicate the grantor’s intent and understanding that the trustee may best serve the beneficiaries by seeking additional advice regarding trust investments.

EXAMPLE. My Trustee may employ a professional investment advisor in managing the investments of any trust. My Trustee may rely upon the investment recommendations of the advisor without liability to any beneficiary.

c. A grantor should carefully consider requiring the trustee to employ a specific investment advisor. Given the changing nature of the financial services industry, the changing nature of the trust assets

60 Code of Virginia § 64.1-57(k); § 55-5448.15.

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and investment strategies, and the relationships between trustee and beneficiaries, the trustee should have the ability to employ the agents best suited to provide the needed investment advice.

d. If any of the assets of the trust will be maintained in any funds or accounts managed by the same entity that serves as investment advisor, the trust agreement should provide language permitting the investment in affiliated funds.

EXAMPLE. My Trustee may invest the trust assets in a money market, other short-term fund or mutual fund whether or not my corporate Trustee or its affiliates are the sponsor, advisor, manager or custodian of, or provider of services to, such fund.

J. Directed Trustees under the Common Law and Statutes

1. For a more robust protection from liability for the trustee, the trustee may instead desire to be simply a “directed trustee,” with a third party, such as even the beneficiaries themselves, directing the trustee to retain certain assets or otherwise to deviate from the duty to diversify.61

2. The common law has traditionally recognized that the Trustee must personally perform all aspects of trust administration. Over the last century, the concept of the grantor specifically directing the Trustee to follow the direction has gained traction.62

3. Other areas of the law that utilize trusts have integrated the concept of a directed trustee: both asset protection trusts and ERISA trusts recognize the role trust advisors, who have the specific authority and fiduciary duty to manage certain functions normally reserve to the trustee.63

4. A trust director for investments may provide a settlor of a trust wishing to maintain a concentration an avenue for maintaining that specific investment strategy when a trustee’s fiduciary duties might otherwise compel the trustee to diversify the trust investments.

5. An investment director/directed trustee relationship may be useful:

61 See generally Al W. King, III and Pierce H. McDowell, III, “Delegated vs. Directed Trusts,” Trusts and Estates 26 (July 2006).

62 See Part One, I.b-c, notes 2-7, supra.

63 For a discussion of the role of directed trustees in ERISA and asset protection trusts, see Slicing and Dicing Responsibilities and Duties of Trustees, Dennis I. Belcher (43rd annual Philip E. Heckerling Institute on Estate Planning, January 2009).

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a. In the case of a family business held in trust, where a corporate trustee will manage distributions and administrative matters and a trusted advisor or family member will take responsibility for investments,

b. In the case of a trusted advisor or family member serving as trustee who lacks experience in making investment decisions,

c. In the case of a trust that holds a significant concentration is a specialized asset that requires unique skill and management, and where settlor or beneficiaries intend to maintain the concentration to promote the creation of wealth. This situation might include private equity/alternative investments or concentrations of publicly traded stocks.

K. Restatement (Second) of Trusts Section 185

a. The concept of a directed trustee is also recognized by the Restatement. The Restatement provides the following:

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 the 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.64

b. The Restatement distinguishes between powers held personally and powers held in a fiduciary capacity. If the power is held personally, the directed trustee must follow the directions and the trustee’s only duty is to verify that the exercise does not violate the terms of the trust. On the other hand, if the power is held in a fiduciary capacity, the directed trustee has a duty under the Restatement approach to verify that the exercise of the power does not violate a fiduciary duty that the power holder has to the beneficiaries of the trust. The Restatement treats a power holder who holds a power in a fiduciary capacity as a cofiduciary.

c. The Restatement should not give much comfort to a directed trustee since the trustee will have to treat the power holder as a cofiduciary. According to one commentator, two states, Indiana and Iowa, have statutes based on the Restatement approach. The Indiana statute provides, in part: “If the person holds the power as a fiduciary, the trustee has a duty to refuse to comply with any

64 Restatement (Second) of Trusts Section 185.

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direction which he knows or should know would constitute a breach of a duty owed by that person as a fiduciary.” Although the Iowa statute puts a duty on the directed trustee to determine the capacity of the power holder, the directed trustee does not appear to have a duty to determine whether the exercise of the power violates a fiduciary duty owed by the power holder to the beneficiaries.

L. Directed Trustees under Specific State Statutes

1. Although case law has allowed a grantor to provide that a third party may direct the fiduciary actions of a trustee for some time, statutory authority has been slow to be enacted. Although according to one commentator the first directed trustee statute in the United States was adopted by South Dakota in 1997 followed by Idaho in 1999.65 Florida66 and Georgia67 enacted more than 50 years ago statutory protection for a trustee serving under a trust instrument which grants a power of direction to a third party.68

2. According to one knowledgeable commentator,69 state statutes addressing directed trustees fall into one of three categories, those states which follow the approach of section 185 of the Second Restatement of Trusts, those states which follow the approach of section 808 of the Uniform Trust Code, and those states which have enacted more protective statutory protection for directed trustees.70

3. Protective State Statutes

a. Some states have not followed either the approach of the Restatement or the Uniform Trust Code, but have adopted their own statutes which are more protective of directed trustees. These

65 Bove, The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet?, 30 Estate

Planning Journal Number 8, August 2003.

66 Fla. Stat. Section 691.04(8) (1961).

67 Ga. Laws 1964, No. 732, at 258.

68 Note, Trust Advisers, 78 Harvard Law Review 1230, 1234 (1965).

69 Richard Nenno, Directed Trusts: Can Directed Trustees Limit Their Liability? Chapter RWN – 18, 2006 Notre Dame Tax and Estate Planning Institute.

70 Nenno, page RWN – 18-5.

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states include Colorado, Delaware, Georgia, Idaho, Indiana, Oklahoma, South Dakota, Tennessee, and Wyoming.71

b. State statutes generally authorize a grantor to give a third party the power to direct the actions of a trustee and give a trustee protection from liability for following the directions of a third party authorized to give directions by the grantor. State statutes vary in the duties and types of protection given a trustee for relying on the direction of a trust advisor. An example of a protective statute is Delaware. Delaware specifically covers trust advisors and provides that a trustee is liable only for “willful misconduct.” 72 Delaware’s statute is discussed in more detail later in this paper.

4. The Uniform Trust Code

a. Section 808 of the Uniform Trust Code expressly recognizes that a trust may provide for an investment advisor who directs investments:

If the terms of a trust confer upon 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 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.

… 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.

71 Nenno, RWN-18-5.

72 12 Del. C. § 3313(a). See Peter S. Gordon, Directed Trusts: The Use of Trust Advisers and Protectors: Can Fiduciaries Limit Liability Through Directed Trusts? Empowering Trust Protectors While Minimizing Their Liability, Or Can a House Divided Long Stand? 2006 Notre Dame Tax and Estate Planning Institute.

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b. Those states that have adopted the Uniform Trust Code approach73 include Alabama, Arkansas, the District of Columbia, Florida, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, Pennsylvania, South Carolina, Texas, Virginia, and Wyoming.

c. Under the Uniform Trust Code, a directed trustee must still monitor the actions of the trust advisor, to ensure that the trust advisor’s actions are not “manifestly contrary to the terms of the trust” or “the attempted exercise would constitute a serious breach of a fiduciary duty.”74

5. Other Statutory Approaches

a. Certain states have adopted an approach that is more protective to directed trustees than the Uniform Trust Code. These states include Colorado, Delaware, Georgia, Idaho, Indiana, New Hampshire, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, and Wyoming.75

b. For example, Delaware specifically provides that a trustee is liable only for “willful misconduct,” unlike the Uniform Trust Code, which implies that the directed trustee has a duty to monitor trust investments.76

M. Trustees Duties When Directed

1. The duty of a directed trustee to supervise or monitor the actions of the trust advisor is important because it determines, in part, the liability of the trustee for the trust advisor’s actions. In determining a directed trustee’s duties, the trustee must review the trust instrument and applicable state law. In reviewing the trust instrument, the trustee should pay particular attention to:

73 See Richard Nenno, “Directed Trusts: Can Directed Trustees Limit Their Liability?”

RWN-18-5, 2006 Notre Dame Tax and Estate Planning Institute.

74 Unif. Tr. Code § 808(b).

75 Richard Nenno, “Directed Trusts: Can Directed Trustees Limit Their Liability?” RWN-18-5, 2006 Notre Dame Tax and Estate Planning Institute.

76 12 Del. Code. § 3313(a). See Peter S. Gordon, “Directed Trusts: The Use of Trust Advisers and Protectors: Can Fiduciaries Limit Liability Through Directed Trusts? Empowering Trust Protectors While Minimizing Their Liability, Or Can a House Divided Long Stand?” 2006 Notre Dame Tax and Estate Planning Institute.

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a. The characterization of the role of the trust advisor (whether the power is held in a fiduciary capacity or personally),

b. The terms of the grant of authority to the trust advisor,

c. The duty of the trustee to supervise and monitor the directions given the trustee by the trust advisor,

d. The procedure, if any, for the directed trustee to question the directions given the trustee by the trust advisor, and

e. Whether there is any limitation on the liability of the directed trustee for following the trust advisor’s directions.

2. In some jurisdictions, trustees are fortunate to have the benefit of state statutes providing clarity as to the characterization of the trust advisor’s capacity and the directed trustee’s duty to review the trust advisor’s actions. State statutes address these issues from a variety of viewpoints. Some state statutes treat the trust advisor as a cofiduciary and limit the duties of the directed trustee to a limited monitoring role. This is the approach taken by the Uniform Trust Code. Some states, including Virginia, expressly permit the exclusion of a trustee from exercising investment power and make the directed trustee “liable, if at all, only as a ministerial agent.”

3. It is instructive to review the provisions of the Uniform Trust Code covering the issue of the duty of a directed trustee to supervise the actions of the trust advisor. Paragraph (d) of section 808 of the Code provides a presumption that a trust advisor is a fiduciary (which creates certain duties on the part of the directed trustee and potential liability on the part of the trust advisor). Paragraph (b) of section 808 provides rules for when the trustee must question the directions of the trust advisor. That section provides, in part that 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.” Thus, the Uniform Trust code significantly limits a directed trustee’s liability but does not eliminate all liability that a directed trustee has for the actions of a trust advisor.

N. Trustee Liabilities When Directed

1. As stated earlier, a trustee does not have the duty or responsibility to guarantee investment performance but must be process oriented. In contrast to a non-directed trustee, a directed trustee has minimal responsibility over investment performance. But, a directed trustee is not relieved of all responsibilities regarding the actions of a trust advisor. Disappointed beneficiaries have tried, generally unsuccessfully, to hold a

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directed trustee responsible for investment losses. Some of the allegations include the directed trustee failed to follow the directions of the trust advisor, the trust advisor exceeded the trust advisor’s authority set forth in the trust instrument, the directed trustee breached the trustee’s duty of investment responsibility, the directed trustee breached the trustee’s duty to supervise the actions of the trust advisor, and the directed trustee is responsible for the actions of the trust advisor as a co-trustee.

2. In determining the liability of a directed trustee, the trustee must determine the duties of the directed trustee under the terms of the trust instrument and applicable state law. In reviewing the trust instrument, the trustee should pay particular attention to whether the trust advisor is a fiduciary, the terms of the direction, the duty of the trustee to supervise and monitor the directions given the trustee by the trust advisor, and whether there is any limitation on the liability of the trustee for following the trust advisor’s directions.

3. Liability of Directed Trustee under the Uniform Trust Code.

a. Under the Uniform Trust Code, a directed trustee has the duty to monitor the actions of the trust advisor to make sure that the trust advisor’s exercise of the advisor’s power is not “manifestly contrary to the terms of the trust” or “the attempted exercise would constitute a serious breach of a fiduciary duty.” The key issues under the Uniform Trust Code are: What is manifestly contrary to the terms of the trust? and When is an attempted exercise a serious breach of a fiduciary duty?

b. The trustee will only know for sure when the exercise of a power is not manifestly contrary to the terms of the trust when the jury or judge finds the directed trustee liable for the following the directions of the trust advisor. Until there is case law on these subjects, a directed trustee will not know for certain when the trustee is protected in relying on the directions of a trust advisor.

4. Liability of Directed Trustee under Delaware Law

a. Delaware provides better protection for a directed trustee than the Uniform Trust Code. First, Delaware classifies a trust advisor as a fiduciary. §3313(a) of Chapter 12 of the Delaware Code provides: “Where 1 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, distribution decisions or other decision of the fiduciary, such persons shall be considered to be advisors and fiduciaries when exercising such authority unless the governing instrument otherwise provides.”

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b. In addition, Delaware amended its trust advisor statute in 2003, 12 Delaware Code §3313, to read as follows:

(a) Where 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, distribution decisions, or other decision of the fiduciary, such persons shall be considered to be advisors 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 advisor, and the fiduciary acts in accordance with such a direction, then except in cases of wilful misconduct 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 advisor, then except in cases of wilful 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 advisor’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 an advisor with authority with respect to such decisions is an investment advisor.

c. R. Leigh uemler v Wilmington Trust Company, C.A. 20033, V.C. Strine (Del. Ch. Oct. 28, 2004).

(1) Mr. Duemler, a sophisticated investment advisor who was a securities lawyer, was named as the sole investment direction advisor and given the express power under the trust instrument to direct Wilmington Trust Company as trustee with respect to all trust investments. While Mr. Duemler was on vacation, Wilmington Trust Company forwarded a prospectus to Mr. Duemler with respect to

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which he should have taken action. Mr. Duemler did not provide Wilmington Trust Company with any directions concerning the prospectus and the investment declined in value significantly. Mr. Duemler sued Wilmington Trust Company alleging that Wilmington breached its fiduciary duty to the trust for failure to provide him with appropriate financial information to allow him to make an informed decision.

(2) In an unreported and unwritten decision, Vice Chancellor Leo E. Strine, Jr. ruled in favor of Wilmington Trust Company holding that there was no evidence of “willful misconduct” under Delaware’s directed trust statute (12 Del. C. §3313(b)). The Vice Chancellor stated that the Delaware statute requires the investment advisor to make investment decisions in isolation, without oversight from the trustee and to hold otherwise would undermine the role of investment trust advisor. The Vice Chancellor did find that Mr. Duemler breached his fiduciary duty as investment advisor to the trust.

O. Trustee Fees and Costs When Directed

1. Similar to a delegating trustee, the compensation of a directed trustee should be lower than a trustee with investment responsibility to reflect less responsibility and risk.

2. From discussions with several institutional trustees, the compensation may be reduced anywhere from 20 percent to 50 percent depending on the size of the trust assets and the policy of the institution. An example of a fee schedule for a large established financial institution for a trust where the trustee has full investment responsibility is:


0.60 % on the first $1,000,000

0.50 % on the next $1,000,000

0.45 % on the next $2,000,000

0.40 % on the next $2,000,000

Negotiable over $6,000,000

P. Drafting for the Directed Trustee

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1. Notwithstanding that a trustee is relieved statutorily of investment responsibility, a directed trustee should not feel bullet proof. A directed trustee is still a trustee and not an agent. A trustee has duties other than the duty to invest prudently. A statute similar to the Uniform Trust Code statute may protect a directed trustee from a claim of improper investments, but can the trustee be held liable for breaching the trustee’s other fiduciary duties?77

2. A drafter who wants to appoint an investment director for a trust and protect the directed trustee should consider whether it is appropriate to include the following provisions in the trust instrument:

a. The circumstances surrounding the appointment of an investment director, including who may appoint the investment director and at what time.

EXAMPLE 1. My Trustee may, but shall not be required to, appoint an Investment Director to serve for any or all trusts under this agreement. The decision to appoint an Investment Director shall be made by my Trustee, in my Trustee’s sole and absolute discretion.

b. The nature and identity of those persons or entities that may serve as investment director, including:

(1) whether institutions may serve,

(2) whether separate trusts may have separate investment directors, and

(3) whether the beneficiaries will have any voice in determining the identity of the investment director.

EXAMPLE 2. The Investment Director may be an individual or a corporation (which may include a bank, trust company or other entity having trust powers). Different Investment Directors may serve for different trusts under this agreement. My Trustee may solicit and consider nominations (which shall not be binding),

77 See Rollins v. Branch Banking and Trust Company of Virginia, 56 Va. Cir. 147, 2001

WL 34037931 (Virginia Circuit Court 2002) discussed earlier in this paper.

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including nominations by the beneficiaries then authorized to receive trust income who are sui juris.

c. The fiduciary relationship of the investment director and the directed trustee.

EXAMPLE 3. The Investment Director shall serve in a fiduciary capacity. It is my specific intention that at any time an Investment Director is serving that my Investment Director shall be solely liable and responsible for any losses to the trust estate by reason of investment actions taken or not taken by my Trustee pursuant to directions given by my Investment Director.

d. The process by which an investment director may resign or be removed and replaced.

EXAMPLE 4. Any Investment Director may resign by written notice delivered to my Trustee then serving. The resignation shall not be effective until the appointment of a successor Investment Director pursuant to this agreement. The Investment Director may be removed and replaced (or a successor may be appointed in the event the Investment Director declines to serve, resigns, or ceases serving) by the following person or persons in order of priority: (a) by my Trustee, (b) if there is no Trustee serving or designated to serve, by the adult beneficiaries then authorized to receive trust income or the adult persons responsible for any minor beneficiaries then authorized to receive trust income. The removal shall be effective upon written notice to the Investment Director being removed and appointment of a successor Investment Director. The appointment shall be effective upon written notice to and acceptance of fiduciary duties by the successor Investment Director.

e. The scope and terms of the power, including what power the investment director has with respect to the trust investments and whether the investment director is entitled to compensation.

EXAMPLE 5—SCOPE AND TERMS OF POWER. The Investment Director shall have the sole authority and responsibility for all investment

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decisions and shall have full authority to direct my Trustee to take any action with respect to the trust investments that my Trustee is authorized to take under this agreement, including without limitation the retention, purchase, sale, exchange, tender, or other transactions affecting the ownership of the assets held in the trust. Notwithstanding the foregoing, the Investment Director may not direct my Trustee to take any action that would violate federal, state, or local law or the provisions of this agreement and all powers of the Investment Director shall be subject to the restrictions in this agreement. EXAMPLE 6—COMPENSATION. The Investment Director shall be entitled to reasonable compensation as my Trustee and the Investment Director shall agree at the time services are rendered to my Trustee. In the case of any professional investment advisor serving as Investment Director and in the absence of a fee agreement, reasonable compensation means the compensation specified in its published fee schedule in affect at the time it renders services to my Trustee.

f. The authority of the investment director to invest in affiliated products of funds, including whether compensation can be derived from such investments.

EXAMPLE 7. The Investment Director may from time to time direct my Trustee to purchase securities or mutual funds underwritten or advised by my Trustee, notwithstanding that the Investment Director, my Trustee, or an affiliate of the Investment Director or my Trustee may benefit or be directly compensated for the purchase of such securities or funds.

g. The nature of the directed trustee’s duty to monitor or review the actions of the investment director.

EXAMPLE 8. My Trustee shall exercise reasonable care and diligence in monitoring the performance of the investment director.

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h. The expectations regarding the relationship between the investment director and the directed trustee.

EXAMPLE 9. The Investment Director shall provide my Trustee with sufficient information about the Investment Director’s actions as necessary to enable my Trustee to participate effectively in the administration of the trust and carry out their fiduciary obligations. The Investment Director shall timely respond to all reasonable requests for information by my Trustee.

3. Modification to Insert Directed Trustee Language

a. A settlor can include directed trustee language in the trust instrument upon creation. However, even if the trust instrument does not include directed trustee language, the parties may be able to modify the trust to insert that language.

b. A trust can be modified in numerous ways under applicable law, such as by judicial modification, decanting to a second trust, or nonjudicial settlement agreement.

c. However, one recent case, while perhaps an outlier, has suggested that the parties may not be free to modify a trust to provide for a directed trustee.

d. In re Trust under Will of Wallace B. Flint for the Benefit of Katherine F. Shadek, C.A. No. 10593-VCL (Del. Ch. June 17, 2015).

(1) Wallace B. Flint’s 1934 will created a trust, first established under New York law, for the benefit of his wife for her lifetime and, thereafter, for the benefit of his daughter, Katherine F. Shadek. Following the wife’s death, the terms of the will required trust income to be distributed to Katherine, and gave her certain limited rights to distributions of principal. The will named certain individuals and Chemical Bank and Trust Company as trustees. The will also included general language that the trustees were “to invest and reinvest” the trust assets during the term of the trust.

(2) The situs of the trust was later moved to Delaware, and a 2002 court order provided that Delaware law would govern certain investment powers and other issues, whereas New York law would continue to govern other matters related to administration of the trust.

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(3) The trust held a concentrated position in IBM stock—Wallace’s brother had founded a predecessor to IBM in 1911. While Katherine and the remainder beneficiaries desired the trust to continue to hold this position, JPMorgan desired to diversify. To address the trustees’ concern, the trustees delegated investment duties to two of Katherine’s adult children, and the trustees and beneficiaries entered into consent and release agreements regarding the investments. Ultimately, Katherine petitioned the court to modify the trust, to convert the trust to a directed trust, with her son as investment advisor. The petition also sought to modify the 2002 court order, to provide that Delaware law would govern all matters related to the administration of the trust, unless application of Delaware law “would or might” extend the vesting of the trust, extend the duration, or shift an interest to a lower generation—as any one of these consequences could jeopardize the status of the trust as exempt from generation-skipping transfer tax or have other adverse tax consequences.

(4) Under Delaware law, the settlor’s intent controls. A court may only exercise its equitable powers to modify a trust under certain circumstances. The court noted that on prior occasions, Delaware courts had apparently modified trusts following consent of the beneficiaries. But the court concluded that statutory law and case law in Delaware, including the Peierls opinions from 2012, would require the court to “independently test[] whether there was a live dispute or similar basis for jurisdiction” and to “examin[e] carefully whether there were adequate grounds for the relief requested.

(5) The court found that none of the bases for judicial modification of the trust existed. The court concluded that the terms of the trust demonstrated that the settlor intended that the trustees, including a corporate trustee, would exercise oversight regarding the investment of the trust assets. Because the modification of the trust would be inconsistent with the testator’s intent, the court denied the petition to modify the trust. In addition, the court found that the “contingent” choice-of-law provision would be too vague to be applied, and would lead to uncertainty regarding applicable law.

Q. Exculpation Clauses

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1. Notwithstanding the protection referenced above, a trustee who delegates the investment management function to a third party, or who relies on a direction of a third party, should consider whether the trustee can have the benefit of an exculpation clause for the acts of a third party investment manager.

2. An exculpation clause is a clause that exonerates a fiduciary from liability to the beneficiaries for the actions or inactions of the fiduciary. In some states, exculpation clauses are not enforceable. Even in those states that recognize exculpation clauses, the clauses are not generally enforceable in all instances.

3. Restatement (Second) of Trusts provides the following:

Except as stated in subsections [below], the trustee, by provisions in the terms of the trust, can be relieved of liability for breach of trust.

A provision in the trust is not effective to relieve the trustee of liability for breach of trust committed in bad faith or intentionally or with reckless indifference to the interests of the beneficiary, or of liability for any profit the trustee has derived from a breach of trust.

To the extent to which a provision relieving the trustee of liability for breaches of trust is inserted in the trust instrument as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settler, such provision is ineffective.78

4. Section 1008 of the Uniform Trust Code—Exculpation of Trustee provides:

“(a) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it:

(1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or

(2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.

78 Restatement (Second) of Trusts, Section 222.

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(b) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.”

5. Although exculpatory clauses are closely scrutinized by the courts, these clauses may be appropriate in certain circumstances. For example, the drafter should consider an exculpation clause where the trustee is inexperienced in investment matters and it is anticipated that the trustee will delegate investment responsibility.

6. A trust agreement may not relieve the trustee of all liability for actions taken in connection with the delegation of investment or management functions. If state law allows, the trust agreement can create a higher standard, such that the trustee may only be liable for gross negligence, willful acts, criminal or reckless acts. The standard should be set by the tolerance of the settlor of the trust for these acts considering:

a. the identify (corporate or individual) of all current and potential successor trustees,

b. the sophistication of the trustee with respect to the management and functions which may be delegated, and

c. the relationship of the trustee to the beneficiary and the settlor.

EXAMPLE. When acting in my Trustee’s fiduciary capacity, except for willful action or omission or gross negligence, my Trustee shall not be liable for any act, omission, loss, damage or expense arising from the administration of any trust hereunder, including, without limitation, the investment and reinvestment of the trust assets with or without the advice of investment counsel, or pursuant to or contrary to the recommendation of investment counsel. My Trustee shall not be liable for any acts, omissions or defaults of any agent or depositary properly appointed, selected or delegated authority hereunder with reasonable care. Each Trustee shall be liable only for such Trustee’s own acts or omissions occasioned by the willfulness or gross negligence of such Trustee and shall not be responsible for the acts or omissions of any other Trustee; no Trustee, in particular, shall be liable in regard to the exercise or nonexercise of any powers and discretions delegated pursuant to the provisions of this agreement to another Trustee.

7. Communication and Ethical Issues

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a. Some states require that any exculpation clause be communicated to the settlor of the trust to be effective, any drafting attorney should take care to: (i) discuss the desired standard of liability to be applied the trustee and (ii) specifically notify the client in writing of any change in the standard of liability for the trustee.

b. Because many attorneys serve as trustees, the attorney should also consider the ethical issues implicated in drafting a trust agreement with an exculpation clause and agreeing to serve as trustee of a trust under such agreement.79

R. Nonjudicial Settlement Agreements

1. As noted above, another means of authorizing a trustee to retain certain investments or otherwise to deviate from the duty to diversify is through an agreement or modification to an existing trust, such as through a nonjudicial settlement agreement.

2. Under a nonjudicial settlement agreement, authorized by Section 111 of the Uniform Trust Code, interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.

3. A nonjudicial settlement is valid only to the extent it:

a. does not violate a material purpose of the trust; and

b. Includes terms that could be properly approved by the court.

4. Of relevance to this discussion, proper subjects of nonjudicial settlements include, without limitation:

a. Directions to trustees to refrain from any particular act;

b. Granting trustees necessary or desirable powers; and

c. Liability of trustee for an action relating to the trust.

5. Accordingly, through a nonjudicial settlement agreement the beneficiaries may agree and direct the trustee to refrain from selling a certain asset, grant the trustee the power to retain certain assets, and may even resolve the issue of a trustee’s potential liability in the case of a retained interest.

6. “Material Purpose” of the Trust

79 See Virginia Rules of Professional Conduct, Conflict of Interest: Prohibited

Transactions – 1.8(h)

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a. One potential obstacle to a nonjudicial settlement agreement is the requirement that to be valid, the agreement may not violate a “material purpose” of the trust.

b. There exists little case law on the “material purpose” of a trust in the context of a nonjudicial settlement agreement. However, there is case law on a “material purpose” of a trust in the context of a judicial modification of a trust by beneficiary consent, as such a modification under the common law or under most state statutes would only be required if such a modification does not violate a material purpose of the trust.

c. That case law is helpful in some respects, but in general that case law simply helps to emphasize the case-by-case nature of this determination of whether a given agreement might violate a “material purpose” of a trust.

d. Some authorities set a relatively high bar for the type of provision of a trust that might constitute a “material purpose,” such that modification or departure from that provision would violate a material purpose of the trust. The comments to the Uniform Trust Code state that a material purpose must be “of some significance.”80 The Restatement adds, “Material purposes are not readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity.”81 Some cases also suggest that a material purpose of a trust is at least those features of the trust which would protect the trust assets from creditors or retain the assets in trust for a set time period; that reasoning might provide that a provision related to investment or management of trust assets may not rise to the level of a “material purpose.”82

e. But the Restatement also confirms that this question of a “material purpose” of the trust is necessarily a factual and case-by-case inquiry. The Restatement continues that the “line” between a material purpose and other intentions “is not always easy to draw.” When such an expression of a material purpose is not contained in the document itself, “the identification and weighing of purposes

80 See Unif. Tr. Code § 411, cmt.

81 Restatement (Third) of Trusts § 65, cmt. d.

82 See, e.g., In re Estate of Brown, 529 A. 2d 752 (Vt. 1987).

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… frequently involve a relatively subjective process of interpretation and application of judgment to a particular situation, much as purposes or underlying objectives of settlors in other respects are often left to be inferred from specific terms of a trust, the nature of the various interests created, and the circumstances surrounding the creation of the trust.”83

f. The settlor’s intent is clearly relevant to this inquiry. The Restatement provides that the intent of the settlor is not dispositive, in that the objection of a settlor to a modification would not necessarily foreclose it; but the Restatement notes, “Of course, a settlor's testimony would be relevant in a material-purpose inquiry.”84 And generally, the Restatement provides that in determining whether a particular provision is a material purpose, “a court may look for some circumstantial or other evidence” in determining whether a particular provision is a material purpose.85 In one case, the court reasoned that the definition of a “material purpose” of the trust “cannot answered through resort to ... traditional[] categories.” The court instead held that “the intent of the settlor, as revealed by the language of the instrument, is determinative.”86

g. In light of the potential that such a nonjudicial settlement agreement could violate a material purpose of a trust, such an agreement might be combined with the appropriate releases on the part of beneficiaries, and the parties might also proceed to court to ask the court to validate the nonjudicial settlement agreement.

S. Future Developments in the Law: A New Uniform Act.

1. Overview

a. The National Conference of Commissioners on Uniform State Laws has empaneled a committee to begin drafting the Uniform Divided Trusteeship Act. In the draft discussion notes for Section 101 of the proposed act, the reporter notes:

This project was approved for a ‘divided trusteeship act; with the expectation that we would address all

83 Restatement (Third) of Trusts § 65, cmt. b.

84 Restatement (Third) of Trusts § 65 cmt. a.

85 Restatement (Third) of Trusts § 65 cmt. d.

86 In re Estate of Brown, 529 A. 2d 752 (Vt. 1987).

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manner of divided trusteeship, including directed trusts, trust protectors, trust advisors, and any other manifestation of the practice of breaking off a function of trusteeship and giving it to a non-trustee or otherwise giving a non-trustee power over the terms of the administration of a trust.

b. This proposed act is responding directly to the changing nature of the trust business and the progression in trust law that has accommodated the change in trust business.

c. The Divided Trusteeship Act signals a continued progression in the law of fiduciary duties and liabilities, and to the extent it is adopted, will provide new territory for defining the role of the trustee.

2. Provisions of the Divided Trusteeship Act

a. The drafting of the proposed Divided Trusteeship Act is ongoing. The final product is not expected to be produced until the Summer of 2017. In its current formulation, the Divided Trusteeship Act will address:

(1) The appointment and authorization of trust directors,

(2) The power of trust directors,

(3) The limitations on the powers of trust directors,

(4) The duties of trust directors,

(5) The notice and information requirements of trust directors,

(6) The authorization of directed trustees,

(7) The powers of directed trustees,

(8) The duties of directed trustees, specifically including the duty to monitor the activity of the trust director(s), and

(9) The notice and information requirements applicable to directed trustees.

3. The Divided Trusteeship Act signals a continued progression in the law of fiduciary duties and liabilities, and to the extent it is adopted, will provide new territory for defining the role of the trustee.

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VI. Conclusion

A. The Uniform Prudent Investor Act was designed to provide additional flexibility and certainty to fiduciaries and beneficiaries in the administration of trusts. Provisions such as the ability of a trustee to take on risk through a balanced portfolio was an innovation that represents significant steps forward regarding trust administration.

B. However, this innovation has itself created potential uncertainty, including the following:

1. The emphasis on diversification has made it more difficult for settlors to rest assured that their trustees will retain certain assets of particular meaning to the settlor, such as a concentrated position in a given industry or company, or a family business.

2. However, such provisions can be properly managed to ensure that they are used to further the settlor’s intent and the smooth administration of the trust.

C. Meanwhile, certain other doctrines, such as delegation or directed trusteeships, can provide a solution to some issues created by the UPIA or the common law.

D. As discussed above, the day-to-day administrative decisions regarding trust investments can lead to potential conflict among beneficiaries and liability on the part of the trustee.

E. Understanding these issues, and their potential solutions, can help the trustee manage fiduciary liability, manage conflict among beneficiaries, avoid uncertainty, and avoid disputes between the beneficiaries and the trustee.

88035605_8

2017 ABA Trust and Estate Planning Briefing Series The American Bankers Association announces the 2017 Trust and Estate Planning Briefing Series. Our featured speakers, Thomas W. Abendroth, partner, Schiff Hardin LLP and Charles D. Fox IV, partner, McGuireWoods LLP are nationally-recognized trust and estate attorneys and tenured teachers from the ABA Trust Schools who will provide you and your staff with critical information on estate planning and trust administration topics. This series provides you with an excellent business development opportunity; invite outside counsel to attend these informative programs at your location.Make the most of this high-impact content! Save 10% when you spend $400 or more on 2017 Trust Series Briefings or online recordings. Use the promo code LISTEN2LEARN.

February 2, 2017

Current State of Asset Protection 2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Taxes); 2.0 CFP

Our clients continue to focus, with justification, on protection of their wealth from liabilities arising out of business dealings and litigation. This briefing will provide an update on developments and the most appropriate planning techniques to use for asset protection. Topics to be discussed are:

• Different types of protection• Joint tenancy and tenancy by the entireties• Third party gifts and trusts• State exemptions• Insurance• Retirement plans and IRAs• Fraudulent conveyances• Family limited partnerships and limited liability companies• Offshore and domestic asset protection trusts

March 2, 2017

The Section 2704 Valuation Rules and their Impact on Advanced Estate Planning Techniques 2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Taxes); 2.0 CFP

The currently proposed valuation regulations under Section 2704 could have a significant impact on the economic and tax benefits of a variety of estate planning techniques. This program will discuss those techniques that could be most impacted, and the general options available for transferring wealth in an advantageous way. Topics to be discussed include:

• Annual exclusion gifts and applicable exclusion gifts and inflation adjustments to the amounts

• Installment sales• GRATs• Use of limited partnerships and LLCs as family investment vehicles• Partnership and LLC freezes• Portability Planning versus A / B planning at the first spouse’s death• Split interest charitable gifts• Loans

Charles D. Fox IV Thomas W. Abendroth

Reserve 1:00–3:00 p.m. ET on these datesIn order to provide listeners with timely information, the presenters reserve the right to alter the content or emphasis of the programs.

Register online at www.aba.com/trustbriefings or call 1-800-BANKERS (1-800-226-5377).

April 6, 2017

Trustee Liability for Investments - A Review of the Current State of the Prudent Investor Rule, Delegation, and Direction 2.5 CTFA; 2.0 CPEs for CPAs (Regulatory Ethics); 2.0 CFP

One of the most significant areas of potential fiduciary liability will be discussed in this session. The fiduciary standards applicable to trustees regarding investments and the ability to avoid liability by serving a more limited role will be the focus of this briefing.

• Prudent Investor Rule• Diversification• Waiver of Diversification• Passive versus active management• Delegation of investment responsibility• The do’s and don’ts of being a directed trustee• Trust protectors and trust directors

May 4, 2017

Fiduciary Litigation Roundtable 2.5 CTFA; 2.5 CRSP; 2.0 CPEs for CPAs (Business Law); 2.0 CFP

A panel of attorneys will discuss current trends in trust disputes and fiduciary litigation, and steps for minimizing a trustee’s exposure to liability. Topics will include:

• Defenses and limitations• Trustee compensation• Jurisdiction and standing• Construction and modification• Trust distributions• Settlements and arbitration• Trust investments• Power of attorney

June 1, 2017

Planning in Illiquid Estates 2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Taxes); 2.0 CFP

An estate with a large interest in closely-held business or other illiquid asset provides numerous challenges from a planning and tax payment standpoint. This briefing will review the pre-death and post-death planning options available to help avoid a crisis. Topics to be covered include:

• Closely held assets and illiquidity• Impact of limits on valuation discounts• Lifetime planning to fund estate tax payments• Deferral of payment of estate tax• Post-death loan options• Section 303 stock redemptions• Funding marital and charitable trusts with illiquid assets• Charitable issues

September 7, 2017

Retirement Benefits 2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Taxes); 2.0 CFP

The often complex rules for payments of benefits from tax advantaged accounts, and planning options available will be reviewed during this session.

• Minimum distributions• Payments elections after participant’s death• Corrective actions after participant’s death• Trusts as beneficiaries• Qualifying for the marital deduction• Advantages and disadvantages of different beneficiaries• Inherited IRAs• Gifts to charity

October 5, 2017

A New Look at Distribution Standards 2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Admin Practice); 2.0 CFP

Both trustees and beneficiaries struggle with applying the distributions standards that exist in documents. Our speakers will discuss the current law on distributions and the tax implications of standards. Topics to be included:

• Different distribution standards and what do they mean• Tax consequences of distribution standards• Ascertainable versus non-ascertainable standards• Case studies of distribution standards

November 2, 2017

Planning for the Elderly. What Can and Should Be Done for an Increasingly Aging Population 2.5 CTFA; 2.0 CPEs for CPAs (Behavioral Ethics); 2.0 CFP

This session will provide a fresh look at the challenges of planning for and protecting elderly clients. Topics will include:

• Increasing importance of planning for elderly• Avoiding abuse of elderly• How to recognize undue influence• Use of power of attorney and medical directives• Importance of revocable trusts• Planning when the client is incompetent• Medicare and Medicaid planning• Social Security planning

December 7, 2017

Recent Developments in Estate and Trust Administration2.5 CTFA; 2.5 CISP; 2.5 CRSP; 2.0 CPEs for CPAs (Taxes); 2.0 CFP

A review of recent legislation, regulatory developments, cases and rulings in the estate, gift, generation-skipping tax, fiduciary income tax, and charitable giving areas will be provided. Some of the subjects to be discussed include:

• Legislative and regulatory developments• Gifts• Valuation including the 2704 regulations• Generation-skipping planning• Life insurance, including split-dollar plans• Charitable planning• Tax Liens• State Death Taxes

Registration/Site License Fee PER Briefing Purchased ABA/ICB Member/Service Member: ........................................................................ $265

Non-Member:....................................................................................................... $395

2017 ABA Trust and Estate Planning Briefing Series

American Bankers Association is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional educational on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: learningmarket.org.

Register online at www.aba.com/trustbriefings or call 1-800-BANKERS (1-800-226-5377).

ABA BRIEFING

Challenging Ethical Times: Fiduciary vs. Suitability April 20, 2017 ▪ 2:00–3:30 p.m. ET*

As we move through a changing regulatory environment, investment professionals are challenged with keeping up with the latest ethical requirements from regulators. Instead of wondering what to do, why don’t we as industry leaders show more leadership with these issues? This topic was presented at the 2017 ABA Wealth & Trust Management Conference. In this briefing, we will review the history of ethical challenges across various industries, the differences between fiduciary and suitability standards that apply to investment professionals, and why the two standards exist. We will challenge you to take the lead on this issue, and not wait for regulators to determine your ethics. We will explore how to take a position that shows leadership for our industry when it comes to ethical behavior. Don’t miss this opportunity to get your questions answered! This Briefing will focus on: Understanding the art and science of ethics Articulating the requirements for suitability and fiduciary standards Taking action to show leadership on ethical issues for investment professionals Speaker: Ronald Florance, CFA, Advisory Board Member Robertson Stephens Advisors RMF Consulting LLC

Who Should Attend? Portfolio Managers Wealth Managers Investment Managers Private Bank Relationship Managers Trust Officers and Managers Financial Planners Registered Financial Advisors CTFAs, CRSPs, CISPs, CSOPs and CPAs

REGISTRATION FEES ABA/ICB/Service Member $235 per registration Non-member $365 per registration

Each live registration provides a connection for one room for each briefing where unlimited listeners can be present, and streaming recording access FREE for 7 days.

2 EASY WAYS TO REGISTER Online www.aba.com/briefings

Call 1-800-BANKERS (1-800-226-5377)

GET THE CREDIT YOU DESERVE! This group-live briefing/webinar has been approved for 2.0 CTFA, 2.0 CRSP, 2.0 CISP, 2.0 CSOP and 1.5 CPE credits for CPAs.

American Bankers Association is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org

*This ABA Briefing/Webcast includes streaming audio over the Internet. Live registration provides a connection for one room where unlimited listeners can be present, and streaming recording access FREE for 7 days. Audio over the telephone can be provided as an alternative. Any transmission, retransmission or publishing of the audio portion of this briefing is strictly prohibited

You are receiving this fax communication because of your established business relationship with the American Bankers Association. Our objective is to provide you with the most relevant information, opportunities and issues impacting the financial services industry. If you would like to change your communication preferences, unsubscribe or receive additional information please contact 1-800-BANKERS or email your request to [email protected]. Your request will be processed within 30 days of receipt, as required by law.

http://www.aba.com/briefings


ABA Wealth Management and Trust Online Training

aba.com/WMTCourses

Benefits• Banks can structure the training to target the needs

of the clients and markets they serve.

• Content focuses on the needs of diverse clients— from corporate executives and high-net-worth families to entrepreneurs and retirees.

• Well-trained advisors contribute to better team performance and provide future leadership within the bank.

• Greater client satisfaction brings more business and higher revenues.

Key Features• Short, interactive courses complement busy

schedules and reinforce learning

• Sample client scenarios give advisors the opportunity to test their understanding

• Each course supplemented with reference guides, charts and readings.

• Courses can be printed for reference.

• Courses qualify for CTFA, CISP, CRSP and CSOP continuing education credits.

From the retirement of current advisors, to the ongoing transfer of wealth to the millennial generation, to regulatory uncertainty, a lot is changing in the world of wealth management and trust.

That’s why it is critical to build the trust expertise that sets you and your team apart, and positions you to consistently deliver unmatched client service.

These online training offerings help advisors develop and deepen client relationship skills, and back office staff gain a better understanding of the business. Online training is flexible, cost-effective, high-quality and engaging to build the expert advisory skills that are crucial to attracting and retaining loyal clients.

ABA CertificatesCourses are available individually to meet specific training needs and certificates provide a clear path to earn a recognized standard of excellence for trust and wealth advisors.

• ABA Certificate in Trust: Foundational • ABA Certificate in Trust: Intermediate • ABA Certificate in Trust: Advanced

© 2017 American Bankers Association All rights reserved.

ABA Wealth Management and Trust Online Training Courses

aba.com/WMTCourses

Estate Planning and Trust ActivitiesAccount Acceptance and Termination

Basic Characteristics of a Trust

Discretionary Distributions

Duties and Powers of a Trustee

Estate and Guardian Administration

Estate Planning to Achieve Client Goals

Estate Planning for Charitable Giving

Estate Planning for the Marital Deduction

Estate Planning Solutions for Business Owners

Fiduciary Law

A Guide to Ethics in Fiduciary and Trust Activities

Minimizing Fiduciary Risk and Litigation

Special Needs Trusts

Financial PlanningEducation Planning Solutions for Minors

Estate Planning for IRAs and Qualified Plan Balances

Fundamentals of Life Insurance

A Guide to Ethics in Financial Planning

Income Tax Planning

Introduction to IRAs

Introduction to Planning for Retirement Assets

Managing Life Insurance Policies

Types of Insurance

Investment PlanningAsset Allocation and Portfolio Management

Bond Selection and Analysis

Economics and Markets

Fundamentals of Alternative Investment Products

A Guide to Ethics in Investments

Investment Policy

Investment Products

Prudent Portfolio Management

Stock Selection and Analysis

Tax Law and Tax PlanningFiduciary Income Tax

Generation-Skipping Transfer Tax

Gift Taxation

A Guide to Ethics in Tax Law and Tax Planning

How Trusts are Taxed

Planning for Estate Tax

Understanding Transfer Tax

Trust FundamentalsIntroduction to Estate Planning

Introduction to Investment Management

Introduction to Trust Administration

Documents

Trustee Liability for Investments: A Review of the Current State of …content.aba.com/briefings/3015255.pdf · American Bankers Association Briefing/Webinar Thursday, April 6, 2017