A recent article in the Real Property, Trust and Estate Law Journal [Volume 50, Number 2, Fall 2015] discussed the phenomena of grantors of trusts "increasingly naming trust protectors, particularly for a trust that may endure for many years...." A number of other scholarly articles have been published in the last few years addressing the development of trusts under which some of the duties and powers of a traditional trustee have been sliced off and assigned to other "advisors." These other advisors have been labeled in a variety of ways: protectors, investment advisors, distribution advisors, investment committees, etc. The trusts involved in this phenomena are usually referred to as "directed trusts," given that the trustee may be required to act at the direction of another or, at a minimum, seek the consent of another in the exercise of the powers of the trustee. These trusts are often referred to as "multi-participant trusts" given the multiplicity of roles and allocation of powers/duties among a number of trustees and advisors.
The gist of most of the writing to date has been about the liability of trustees who act at the direction of a directing party. Broadly stated, the issues or topics include:
- What are the powers of the directing person?
- Is the directing party a fiduciary, and if so, what fiduciary duties exist?
- Is the directed trustee required to review the decisions of the directing party?
- When could a trustee be liable for actions taken at the direction of another?
- Does a trustee have any oversight duties?
A variety of approaches to the issues exist ranging from Section 185 of the Restatement (Second) of Trusts, the Uniform Trust Code Section 808, to specific state approaches [for example, Delaware, Del. Code Ann. Tit. 12, Section 3313]. In addition, a number of states have no statutory provision regarding the issues.
In previous articles, the "intersection" of fiduciary duties and the duties among equity participants has been considered in the context of trusts holding interests in closely held enterprises. Since equity holders may have duties to the entity or other equity participants, the concern has been resolving the issues of conflict that arise at the entity level with the duties of the trustee at the trust/beneficiary level. For example, see "Trustees Beware: Which Fiduciary Standard Applies to Your “Business Judgments?" and "Family Battle Royale: Lessons Learned from the Rollins Trust Dispute Case" on the Shareholder Rights Blog.
In the situation of a multi-participant or directed trustee of a trust holding an interest in a closely held or family owned business, the clients in planning the trust and selecting an advisor will now have to consider the role of the advisor not only as to the trust, but the "other roles" and duties that may exist.
An advisor of such a trust also may have individual interests in the business or entity; have a role as a director, officer, manager, partner of the entity or even hold a fiduciary role in respect of a different trust with interests in the entity. If the advisor is considered a fiduciary of the trust, consideration should be given to the standard of care and duties that arise at the level of the entity as opposed to the trust level. In other words, would such an advisor and conduct be considered under the business judgment type standard of a business decision or the more strict fiduciary role of a trust fiduciary when decisions are made at the entity level? What conflicting interests might exist between the advisor in other capacities and the trust beneficiaries?
The case law is developing in terms of the standards by which the conduct of a fiduciary holding interests in a business is to be measured when the same fiduciary has distinct roles in the business or has other interests in the business entity. In effect, must such a fiduciary make business decisions at the entity considering only the interests of the beneficiaries of the trust or may the fiduciary consider the best interests of the business even if potentially in conflict with the beneficiaries? If the fiduciary has separate duties to the entity and other equity participants in the business, how does a fiduciary resolve the conflict that could arise if the interests of the trust are not identical to those of the others with interests in the business? How does a fiduciary resolve a conflict that could exist between the role as trustee and interests that such trustee holds personally?
These issues have been arising more frequently as the use of trusts holding interests in closely held and family businesses has increased. As a result, planning for the use of trusts and the identity of the selected trustee has taken on a new dimension of issues relating to how to handle potential conflicts. Add to that development, the increasing designation of "advisors" and the question of whether such are to be held to fiduciary standards of duty, and matters quickly become more complicated and potentially a minefield of issues for those assuming roles with a trust.