The New York State legislature is considering becoming a directed trust state. In a directed trust, the trustee is allowed to act under the advice or direction of someone else, an advisor or protector, who could make decisions regarding investments, distributions or other trust matters. Earlier this year, the New York State Senate referred a bill to its Judiciary Committee which would expressly allow grantors to establish directed trusts in New York State and sets out general parameters for such trusts.

Under current New York state law an advisor may act on behalf of a trust; however, the trustees remains liable for all the advisor’s decisions. The New York State Senate justifies the proposed legislation in its memorandum as follows “this legislation is designed to remedy a gap in the State’s judicial fabric by providing guidance for courts, grantors and fiduciaries as to the governing law…. It clarifies matters of definition, court jurisdiction, compensation, fiduciary liability and the responsibility of administrative trustees and advisors or protectors…This bill is designed to help New York fiduciaries compete for trust business, which is increasingly flowing to states with more modern trust laws.”

Proponents of directed trust legislation argue that allowing different people to act in different roles is advantageous to those who want to create trusts. A bank could act as trustee, but could rely on the advice of someone having expertise in investing assets who would act as investment advisor. Alternatively, a trustee bank could rely on a distribution advisor who personally knows a family and a beneficiary’s needs to assess if discretionary distributions should be made from a trust.

The proposed bill adds a new section to New York State Estates, Powers and Trusts Law called Advisors. It envisions a trust’s governing instrument giving one or more persons authority to consent to or disapprove of a fiduciary’s investment or distribution decisions. In the case of such a “directed trust”, under the proposed legislation the directed trustee will not be liable for any loss resulting from the fiduciary’s investment or distribution decisions, except in the case of willful misconduct by the directed trustee. Furthermore, unless the trust’s governing instrument provides otherwise, the trustee has no duty to monitor the advisor’s conduct. The advisor would be entitled to “reasonable compensation” for acting as such, and the trustee would continue to be entitled to commissions under current New York law. The advisor by accepting appointment as such, would submit to the jurisdiction of the New York courts.

Right now there is no vote scheduled on this bill in the Senate and there is no companion bill in the New York State Assembly. But should this legislation take wind New York might join the ranks of such states as Delaware, Alaska, South Dakota and Nevada who have been trendsetters in trust law and legislation.