If you are a family business owner in Washington who wants to place control of your business in the hands of a trustee until your beneficiaries are ready to assume control, or for other reasons, a recent change in Washington law may make this alternative more accessible.
Until recently, trustees had little flexibility in managing an operating business, and might even sell the business in order to reduce their fiduciary risk by converting the value of the business to marketable securities. A law enacted by the Washington legislature in 2015 may provide increased flexibility for trustees and executors to delegate certain powers and duties to third parties (including managers of an operating business) without incurring liability for the actions of such delegates. This change should be good news for business owners on two fronts:
- First, corporate fiduciaries (such as banks and trust companies) may now be more inclined to accept trusteeships and executorships over a trust or estate that holds business interests or investments requiring active management.
- Second, such fiduciaries should now be more qualified to administer assets because they should now be better able to delegate business functions to specialized third party managers.
Under the previous law, a fiduciary (meaning a trustee or executor) could not be relieved of liability for a delegate’s improper performance of discretionary acts. In 2015, as part of a number of revisions to the Washington Uniform Trust Act, a new law was put into effect that changed a fiduciary’s exposure to liability for the actions of its delegates. Now, if a fiduciary exercises reasonable care, skill, and caution in selecting a delegate, establishes the scope and terms of the delegation consistent with the terms of the administration, periodically reviews the delegate’s actions to monitor its performance and compliance and enforces the delegate’s duties, the fiduciary can avoid liability for the third party delegate’s actions. The fiduciary does still have a duty to the beneficiaries to exercise prudence in delegating a function, and in choosing a qualified delegate, and would likely have an obligation to pursue legal action on behalf of the beneficiaries against a delegate who performs improperly, but, if the delegation was appropriate, the beneficiaries can no longer bring legal action against a fiduciary for the performance of a delegated function.
The potential relaxation of fiduciary liability for delegated functions means that trust companies and banks should now be more comfortable taking on trusts and estates holding non-traditional assets that, in the past, might have caused them to decline.
This is certainly a benefit for business owners who would prefer to have a corporate fiduciary serve as either a trustee or executor over their assets. Further, business owners should feel more confident entrusting corporate fiduciaries with management over their business interests and other assets because the fiduciaries should be more inclined to delegate management and investment functions to the most qualified institution, even if that institution is an independent third party.