Directed Trusts and the Trustee’s Protection from Liability

Richard W. Nenno, (Managing Director and Trust Counsel, Wilmington Trust Company) has recently published his article entitled Directed Trusts; Can Directed Trustees Limit Their Liability?, Prob. & Prop., Nov./Dec. 2007, at 45.

Here are excerpts from the introduction to his article:

Clients sometimes want to appoint a particular trustee for a trust but also want to have a co-trustee, adviser, committee, or protector (not the trustee) control certain trust decisions. For example, if a trustor funds an inter vivos trust with stock in the family company, he or she might want to continue to make decisions regarding the purchase, sale, and voting of such stock. Similarly, a family that has a long-standing relationship with a successful money manager might want that manager (not the trustee) to make investment decisions for trust assets. In addition, a client might want someone other that the trustee to decide when to make income or principal distributions to beneficiaries. In the situations, the client wants to minimize the trustee’s involvement in such decisions and wants the trustee to lower its fees to reflect its reduced duties. * * *

This article does not discuss delegated trusts – a trust in which the trustee hires someone to help administer the trust. Rather, this article will explore the extent to which a client may relieve the trustee of liability in a “directed trust” – an irrevocable trust in which a co-trustee, adviser, committee, or protector named in the governing instrument (“directing person”) directs the trustee on investment and/or distribution decisions. Specifically, it will summarize the relevant state statutes and caselaw, explore the extent to which a client may select the directed trust statute of a state where he or she does not live, consider whether an existing directed trust may be moved to another state to provide more protection to the trustee, and offer some comments. Citations for the 29 states and the District of Columbia that have directed trust statutes appear on page 50 at the conclusion of this article; 22 states have no directed trust statute.