Directed Trusts in Estate Planning: New State Law Changes, Critical Structuring Issues, Advising Fiduciaries

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TUESDAY, MAY 12, 2020

Presenting a live 90-minute webinar with interactive Q&A

Jeffrey B. Kadavy, JD, CTFA, President & Chief Executive Officer,Trail Ridge Wealth Management, Denver

Dylan H. Metzner, Shareholder, Jones & Keller, Denver

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Directed Trusts in Estate Planning:State Law Changes, Critical Structuring Issues,

and Advising Fiduciaries

Jeffrey B. Kadavy, JD, CTFATrail Ridge Trust Company, LLC

President & Chief Executive Officer

Dylan H. Metzner, Esq.Jones & Keller, PC

Shareholder

Presented By• Counsels U.S. and international clients, including high-net-worth

individuals, corporate executives, closely held business owners, and professionals, in advanced trust and estate planning strategies

• Designs estate plans that minimize tax consequences and family conflict through strategies that preserve wealth, legacies and succession for future generations

• Advises clients on tax-advantaged legal and entity structures including family limited partnerships and limited liability companies, dynasty trusts, trusts structured to hold inherited qualified plans such as IRAs and 401K, split interest trusts, grantor trusts, and life insurance trusts

• Delivers business planning around choice of entity selection, maintenance and business succession

• Represents family members, fiduciaries, and beneficiaries in resolving estate and trust-related disputes, including guardianships and conservatorships

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Dylan H. Metzner, Esq.Shareholder(303) 785-1632dmetzner@joneskeller.comJones & Keller, PCwww.JONESKELLER.com

Presented ByWith more than 15 years in financial services, Jeff’s professional expertise includes consulting with high-net-worth individuals regarding complex estate and financial planning needs and the administration of personal and charitable trusts. Jeff served as a Senior Vice President for a mid-sized regional bank in Denver, and as Managing Director of Trust Services for the largest privately-held bank in the United States. He graduated with high honors from the American Bankers Association Graduate Trust School and holds the Certified Trust and Financial Advisor (CTFA) designation from the Institute of Certified Bankers. Jeff is a board member of the Rocky Mountain Estate Planning Council. He is an active member of the Colorado Bar Association Trust & Estate Section, serving on its Uniform Trust Code and Uniform Directed Trust Act subcommittees. Jeff authored the Directed Trusts chapter for the seventh edition of the Colorado Estate Planning Handbook.

HEADSHOT

Jeffrey B. Kadavy, JD, CTFAPresident & Chief Executive Officer(720) 577-4320 Jeff.Kadavy@TrailRidgeWM.comTrail Ridge Trust Company, LLCTrailRidgeWM.com

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Agenda

• Introduction to Directed Trusts

• Distinguishing Between a Directed Trust, a Delegated Trust, and a Co-Trusteeship.

• When Might a Directed Trust be Suitable?

• State Law Approaches

• New State Law Changes

• Review of UDTA

• Structuring Issues

• Advising Fiduciaries

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Introduction to Directed Trusts

Before Directed Trusts: DelegationRestatement (Second) of Trusts § 171: Trustee has a duty not to delegate to others the acts which the trustee can reasonably be required to perform. • Russell v. Rici, 213 N.E.2d 566, 569 (Ill. App. 1966):

Trustee breached fiduciary duty by delegating to attorney the power of holding proceeds from sale of trust property.

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Introduction to Directed Trusts

Before Directed Trusts: DelegationUTC § 807: Trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. Trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent;

(2) establishing the scope and terms of the delegation; and

(3) monitoring the agent’s performance and compliance with the the delegation.

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Introduction to Directed Trusts

Before Directed Trusts: Co-Trusteeship• Trust instrument authorizes or requirement more than one

Trustee to serve at a given time.

• Powers and duties of co-trustees are held jointly and co-trustees generally remain fully liable for any breaches of trust.

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Introduction to Directed Trusts

Not a DelegationDelegation: Trustee Exercises Power to Assign Functions

to a Third PartyDirected Trust: Trustee Exercises No Power — Trust’s Terms

Assign Director’s Functions

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Introduction to Directed Trusts

Not a Co-TrusteeshipCo-Trusteeship: Powers and Duties are Jointly Held and

ExercisedDirected Trust: Trustee Disempowered as to Director’s

Functions

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Introduction to Directed Trusts

When Might a Directed Trust be Suitable?

Investment of Trust Assets

Distributions

Ministerial Matters

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Introduction to Directed Trusts- State Law Approaches

Directed Trust Statutes

Only 3 states have not enacted some form of directed trust statute:

California, Louisiana, and New York

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Introduction to Directed Trusts- State Law Approaches

UTC § 808 (2000)

If the terms of a trust confer upon a person…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 offiduciary duty that the person holding the power owes to the beneficiaries of thetrust.

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Introduction to Directed Trusts- State Law Approaches

No Duty, No Exception- Alaska Approach

• “[A] trustee who…is required to follow the directions of the [a trustadvisor] is not liable, individually or as a fiduciary, to a beneficiary for aconsequence of the trustee’s compliance with the advisor’s directions,regardless of the information available to the trustee, and the trusteedoes not have an obligation to review, inquire, investigate, or makerecommendations or evaluations with respect to the exercise…of thepower [that] complies with the direction given to the trustee.” AlaskaStat. § 13.36.375(c).

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Introduction to Directed Trusts- State Law Approaches

No Duty, Willful Misconduct Exception- Delaware Approach

“If a governing instrument provides that a fiduciary is to follow thedirection of an adviser…and the fiduciary acts in accordance withsuch a direction, then except in cases of wilful misconduct on the part ofthe fiduciary so directed, the fiduciary shall not be liable for any lossresulting…from any such act.” 12 Del. C. § 3313(b).

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State Law Changes

Uniform Directed Trust ActArkansas, Colorado, Connecticut, Georgia, Indiana, Maine,

Michigan, Nebraska, New Mexico, Utah, Virginia, Washington and West Virginia have enacted the UDTA.

(Rhode Island - UDTA is currently sitting with the Senate Judiciary Committee for further study)

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Structure of UDTA Section 1. Short Title Section 2. Definitions Section 3. Application; principal place of administration Section 4. Common law and principles of equity Section 5. Exclusions Section 6. Powers of trust director Section 7. Limitations on powers of trust director Section 8. Duty and liability of trust director Section 9. Duty and liability of directed trustee Section 10. Duty to provide information to trust director or trustee. Section 11. No duty to monitor, inform, or advise. Section 12. Application to cotrustee. Section 13. Limitations of action against trust director. Section 14. Defenses in action against trust director. Section 15- Jurisdiction over trust director. Section 16-Office of trust director. Section 17-Uniformity of application and construction. Section 18-Relation to electronic signatures in global and national commerce act. Section 19- Repeals; Conforming Amendments Section 20- Effective Date

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Establishing Trust Director’s Powers & Duties

The Terms of a TrustDefine a Trust Director’s Powers and Duties

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UDTA Section 1- Definitions

The Terms of a Trust UDTA Section 1(8)(A)

“[T]he manifestation of the settlor’s intent regarding a trust’s provisions as . . . expressed in the trust instrument[,]” or “established by other evidence in a judicial proceeding.”

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UDTA Section 1- Definitions

The Terms of a TrustAlso include:

• Trustee or Trust Director in Accordance with Applicable Law• Court Order• Nonjudicial Settlement Agreement Under the UTC

UDTA Section 1(8)(B)

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UDTA Section 1- Definitions

Power of DirectionUDTA Section 1(5)

“[A] power over a trust granted to a person [who is not serving as a Trustee of the trust] by the terms of the trust,” including “a power over the investment, management, or distribution of trust property or other matters of trust administration.”

UDTA does not prescribe any specific default powers, rather the Act relies on the “Terms of a Trust” to specify the powers of direction.

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UDTA Section 1- Definitions

Trust Director’s Power of DirectionUDTA Sections 1(5), 5(b)

Excludes:

• Powers of Appointment• Power to Remove a Trustee or Trust Director• Power Held in a Non-Fiduciary Capacity to Achieve Settlor’s Tax Objectives• Several Other Powers

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UDTA Section 6- Powers of Trust Director

Trust Director’s Further PowerUDTA Section 6(b)(1))

“Unless the terms of a trust provide otherwise, a Trust Director may exercise any further power appropriate to the

exercise or nonexercise of a power of directiongranted to the director . . . .”

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UDTA Section 8- Duty and Liability of Trust Director

Trust Director’s DutiesUDTA Section 8(a)(1)(A)

A trust director generally has “the same fiduciary duty and liability in the exercise or nonexercise of [a] power [of direction]” as a sole trustee or a co-trustee “in a like position and under similar circumstances.”

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UDTA Section 9- Duty and Liability of Directed Trustee

Mandatory ComplianceUDTA Section 9(a)

A directed trustee “shall take reasonable action tocomply with a trust director’s exercise or nonexercise

of a power of direction . . . .”

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UDTA Section 9- Duty and Liability of Directed Trustee

No Liability For ComplianceUDTA Section 9(a)

In complying with a trust director’s direction,“the trustee is not liable for the action.”

BUT…

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UDTA Section 9- Duty and Liability of Directed Trustee

Willful Misconduct ExceptionUDTA Section 9(b)

A trustee “must not comply…to the extent that bycomplying the trustee would engage in willful misconduct.”

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UDTA Section 9- Duty and Liability of Directed Trustee

What is “Willful Misconduct?”UDTA is silent, but the comments to Section 9 provide

guidance

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UDTA Section 9- Duty and Liability of Directed Trustee

What is “Willful Misconduct?”Prior to UDTA, two statutory approaches:

1. No duty or liability for complying with direction.

2. No duty or liability for complying with direction unless by doing so the directed trustee would personally engage in “willful” or “intentional” misconduct.

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UTDA Section 10- Duty to Provide Information to Trust Director or Trustee

Reciprocal DutiesUDTA Section 10(a)

A trustee must share information with a trust director to the extent that it is “reasonably related both to . . . the powers or duties of the trustee[] and . . . the powers or duties of the director.”

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UTDA Section 10- Duty to Provide Information to Trust Director or Trustee

Reciprocal DutiesUDTA Section 10(b)

Similarly, a trust director must share information with a trusteeor another director to the extent it is “reasonably related both to…the powers or duties of the director [] and . . . the powers or duties of the trustee or other director.”

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UTDA Section 10- Duty to Provide Information to Trust Director or Trustee

Exculpation for Reliance on Information Received

UDTA Section 10(c) and (d)“A [Trustee/Trust Director] that acts in reliance on information provided by [the other or another Trust Director] is not liable for a breach of trust to the extent the breach resulted from the reliance, unless by so acting the [Trustee/Trust Director] engages in willful misconduct.”

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Duty to of Trust Director to Communicate with and Provide Information to Beneficiaries

Same as a TrusteeA trust director “has the same fiduciary duty and liability in the exercise or nonexercise of [a] power [of direction]” as a trustee “in a like position and under similar circumstances...” UTDA § 8(a)(1). Thus, duty to provide information to beneficiaries under the UTC 813 (2010), applies to trust directors.

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UDTA Section 11- No Duty to Monitor, Inform, or Advise

No Duty to MonitorUDTA Section 11(a)(1)(A), (b)(1)(A)

“A trustee does not have a duty to . . . monitor a trust director,” and a “trust director does not have a duty to . . . monitor a trustee or another trust director.”

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UDTA Section 11- No Duty to Monitor, Inform, or Advise

No Duty to Inform (i.e., Warn)UDTA Section 11(a)(1)(B), (b)(1)(B)

A trustee has no duty to “inform or give advice to a settlor, beneficiary, trustee, or trust director concerning an instance in which the trustee might have acted differently than the director.”

Similarly, a trust director is relieved of such a duty with respect to situations in which he or she might have acted differently than the trustee or another director.

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UDTA Section 11- No Duty to Monitor, Inform, or Advise

No Assumption of Ongoing DutyUDTA Section 11(a)(2), (b)(2)

If a directed trustee gives information or advice regarding an instance in which the trustee might have acted differently than a trust director, the trustee does not assume a duty to do so.

Similarly, a trust director who gives information or advice regarding an instance in which the trust director might have acted differently than a trustee or another trust director, the trustee does not assume a duty to do so.

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UDTA Section 16- Office of Trust Director

• Acceptance of Appointment

• Giving of Bond• Reasonable Compensation• Petitioning Court for

Instruction

Same Rules as a TrusteeUDTA Section 11

• Resignation

• Removal

• Vacancy/Successor Appointment

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UDTA Section 13- Limitation of Actions Against Trust Director

Same Rules as a TrusteeUDTA Section 13(a)

“An action against a trust director for breach of trust must be commenced within the same limitations period [under Uniform Trust Code Section 1005] as an action against a trustee for a similar breach of trust . . . .”

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UDTA Section 13- Limitation of Actions Against Trust Director

UTC Section1005 Default 5-Year Period

A beneficiary must bring an action for breach of trust against a trust director within 5 years after the first to occur of (a) the removal or resignation of the trust director, (b) the termination of the beneficiary’s interest in the trust, (c) the termination of the trust, or (d) death of the trust director.

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UDTA Section 13- Limitation of Actions Against Trust Director

UTC Section1005Reduced Limitations Period Available

“A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year after the date that the beneficiary . . . was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding.”

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Structuring Issues

Clearly Define Responsibilities• What form will directions to the trustee take? • Who will have custody of the liquid assets managed by TD1?

Are the directed trustee and TD1 both amenable to that arrangement?

• With respect to the assets managed by TD1, who will allocate receipts and disbursements to principal and/or income?

• Whose Power is superior?• Shelton v. Tamposi, 62 A.3d 741 (N.H. 2013)

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Structuring Issues

Clearly Define Responsibilities• At the outset of a directed trust administration, the

trustee and trust director(s) should meet to identify the areas in which they will need to work together to discharge their respective obligations and the mechanics or logistics of how they will do so.

• Memorialize in a written memorandum of understanding, which can be amended as needed.

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Advising Fiduciaries

Identify the CulpableParty or Parties

1. Identify the aspect of administration from which theloss occurred.

2. Identify which party had authority over the aspect ofadministration from which the loss occurred.

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Advising Fiduciaries

Identify the CulpableParty or Parties

3. Determine whether the party identified was, under thetrust instrument and governing law law, solelyresponsible for the loss or whether another fiduciaryshould properly share in the loss.

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Advising Fiduciaries

Do not be Lulled into aFalse Sense of Security

A mere direction to sell does not exempt a directed trustee from its normal duties and liabilities with respect to price and other terms of sale, unless the terms a trust provide otherwise.

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Advising Fiduciaries

Do not Comply without Determining if Direction is within the Scope of Power

The directed trustee should confirm that a direction is within the scope of the trust director’s power of direction, as provided in the trust instrument.

• Ascertain whether the exercise of the power is authorized under the terms of the trust.

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Advising Fiduciaries

Anyone Can Sue Anyone

Expect that a lawsuit from a beneficiary will name everyone involved with the Trust.

• When in doubt, seek instructions from the court.

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