The largest inter-generational wealth transfer in history will pass over $30 trillion in inheritance over the next few decades (others estimate the number will be more like $41 trillion or $68 trillion; whatever it is, it’s going to be a lot). Much of that wealth will end up in someone’s trust fund.
The jurisdictional competition among U.S. states to capture as much of that trust business as possible is fierce, and for the bankers and professionals who make a living working with those trusts the stakes are high. How high? Think billions of dollars.
For example, in 2001 Florida made dynasty trusts possible in this state by effectively abolishing the rule against perpetuities (RAP) as applied to trusts (it’s currently 1,000 years out). Two nationally recognized law professors then published an empirical study of federal banking data concluding that as of the end of 2003 roughly $100 billion in trust funds had shifted to states – like Florida – that abolished the RAP. According to the authors these new trust funds may translate into as much as $1 billion in yearly trustees’ fees. So yeah, the stakes are high.
Enter the new Florida Uniform Directed Trust Act (FUDTA):
The latest crop of market-driven legislation affecting the trust-and-estates world includes the “Florida Uniform Directed Trust Act” (FUDTA). FUDTA’s found in new Part XIV of Florida’s Trust Code. As explained in FUDTA’s Legislative Staff Analysis, it’s a slightly modified version of the Uniform Directed Trust Act (UDTA).
Florida bankers have long called for this kind of directed-trust legislation as “a competitive issue.” Here’s a quote from a 2007 article entitled Family trusts branch out:
Crain is the chair of a Florida Bankers’ Association Trust legislative committee, which expects to introduce a bill next year proposing a directed trustee statute in Florida. “It’s a competitive issue,” she said. “I personally have lost trust business because Florida doesn’t have a directed trustee statute.”
Florida’s existing trust laws “don’t go far enough in insulating a trustee,” Crain said. “You still have the duty to oversee, to monitor, to intervene,” she noted. “The directed trustee statutes in the few states that have strong ones are explicit as to the lack of responsibility on the part of the trustee for reviewing the actions of the investment manager.”
And yes, we’re talking about trust protectors:
While the term “trust protector” isn’t actually used in UDTA or Florida’s new FUDTA, the official commentary to UDTA makes clear the act’s intended to cover all cases involving anyone who’s functioning as a trust protector, no matter what they call themselves.
This act applies to any arrangement that exhibits the functional features of a directed trust within the meaning of this act, even if the terms of the trust use other terminology, such as “trust protector,” “trust advisor,” or “administrative trustee.” …
The definition of a “trust director” … refers to a person other than a serving trustee that is granted a power of direction by the terms of a trust. Such a person is a trust director even if the terms of the trust or the parties call the person a “trust adviser” or “trust protector” or otherwise purport to disclaim trust director status. …
In other words, if someone’s pitching the idea of a trust protector to your client or you’re involved in a case that turns on the fiduciary duty/liability of a trust protector, what you’re really talking about is a directed trust. And from now on if you’re a Florida lawyer your first stop for any question involving directed trusts needs to be FUDTA.
How much liability protection do Florida directed trustees and trust protectors have under FUDTA?
Remember, FUDTA is all about making Florida as competitive as possible in the high stakes competition for trust business. A key competitive issue was the generally held belief that Florida’s existing trust laws didn’t “go far enough in insulating a trustee.” (Which is puzzling, given Florida’s powerful risk-management tools for trustees.) It was also unclear whether Florida trust protectors could be granted blanket exemptions from any fiduciary duties/liabilities. FUDTA addresses both of these issues head on.
Is a Florida trust protector/trust director a “fiduciary” you can sue like a trustee? YES
Florida adopted the UDTA approach to this question. Under FUDTA a Florida trust protector/trust director has the same duties and liabilities as a trustee. Bottom line, they’re fiduciaries and can be sued just like a trustee (but they can also be exculpated from liability just like a trustee).
Here’s how the powerhouse duo of Jenna and Charles (Chuck) Rubin explained this aspect of our new directed-trust act in an excellent article entitled Protectors and Directors and Advisers: Oh My! The New Florida Uniform Directed Trust Act:
A trust director is subject to the same fiduciary duty and liability as a trustee would have if it had such a power.[736.1408(1)(a)] However, such duty and liability can be modified under the trust instrument in the same manner as a trust instrument can modify the duty and liability of a trustee.[736.1408(1)(b)] Thus, for example, since the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries cannot be eliminated by the trust instrument under F.S. §736.0105(2)(b) for a trustee, the same minimum duty applies to the duty of a trust protector. The terms of the trust may also impose a duty or liability on a trust protector that would not otherwise apply to a similarly acting trustee.
By contrast, our more aggressive competitors, such as South Dakota, allow for the complete abrogation of fiduciary duties for trust protectors/directors in certain limited circumstances. Here’s how the South Dakota approach is described in Directions to Trust Directors of Directed Trusts, by Michael A. Sneeringer and Jordan D. Veurink.
The UDTA provides that all trust directors are fiduciaries. UDTA sec. 8. Similarly, S.D. Codified Laws ch. 55-1B provides that investment trust advisors and distribution trust advisors act in a fiduciary capacity but allows trust agreements to set forth whether trust protectors are acting in a fiduciary or nonfiduciary capacity. S.D. Codified Laws §§ 55-1B-4, 55-1B-1(2). Like the UDTA, S.D. Codified Laws § 55-1B-1.1 ensures that investment trust advisors, distribution trust advisors, and trust protectors are subject to the same fiduciary duty and liability as a trustee would have if it had such power or did not exercise a power, stating that they have “no greater liability to any person than would a trustee holding or benefiting from the rights, powers, privileges, benefits, immunities, or authority provided or allowed by the governing instrument to such trust advisor or trust protector.”
Can a Florida directed trustee get sued for doing what a trust protector/trust director tells it to do? YES
Here again Florida adopted the UDTA approach. Under FUDTA a Florida directed trustee can be sued for doing what it’s directed to do, but only if doing so would constitute “willful misconduct.” There’s no blanket liability shield for directed trustees under FUDTA. By contrast, other states are more aggressive on this front, insulating directed trustees from all liability. Here’s how the competing camps are described in the official commentary for the UDTA:
Roughly speaking, the existing statutes fall into two groups. In one group, which constitutes a majority, are the statutes that provide that a directed trustee has no duty or liability for complying with an exercise of a power of direction. This group includes Alaska, New Hampshire, Nevada, and South Dakota. … In the other group of statutes, which includes Delaware, Illinois, Texas, and Virginia, a directed trustee is not liable for complying with a direction of a trust director unless by so doing the directed trustee would personally engage in “willful” or “intentional” misconduct.
So if you’re a Florida directed trustee, as in Delaware, Illinois, Texas, and Virginia, you aren’t liable if something goes wrong because you complied with the directions of a trust protector/director unless doing so amounts to “willful” or “intentional” misconduct. That’s a balanced yet high level of protection, but it’s not absolute.
If a balanced approach works for Delaware, why not the rest of us?
The rationale for the UDTA’s balanced approach to directed trustee liability appears to have been based, at least in part, on the if-it’s-not-broken-don’t-fix-it common sense observation that if it’s worked so well for so long in a state like Delaware (a national leader that’s often considered one of the best jurisdictions for trusts, with a directed-trust statute that’s been around since 1986), it should work for the rest of us. (Delaware has more ACTEC Fellows than Nevada and South Dakota combined—and an industry presence unrivaled by any other state.) Here’s how the the official commentary for the UDTA makes this point:
In preserving some minimal fiduciary duty in a directed trustee, the drafting committee was influenced by the prominent directed trust statute in Delaware, which provides likewise. See Del. Code Ann. tit. 12, § 3313 (2017). The popularity of directed trusts in Delaware establishes that a directed trust statute that preserves in a directed trustee a duty to avoid “willful misconduct” is workable in practice. The drafting committee therefore declined the suggestion that the Uniform Directed Trust Act should eliminate the fiduciary duty of a directed trustee completely.
By contrast, our more aggressive competitors, such as South Dakota, extend blanket liability protection to directed trustees. Here’s how the South Dakota approach on this key issue is described in Directions to Trust Directors of Directed Trusts, by Michael A. Sneeringer and Jordan D. Veurink.
Unlike the UDTA, which provides that a directed trustee shall take reasonable action to follow a trust director’s exercise (or nonexercise) of a power of direction, unless compliance would result in willful misconduct by the trustee, S.D. Codified Laws ch. 55-1B provides that a directed trustee has no duty or liability for complying with an exercise of a power of direction. See S.D. Codified Laws § 55-1B-2. Additionally, an excluded fiduciary is not liable, either individually or as a fiduciary, for [a long laundry list of potential damage claims that keep trustees up at night]. S.D. Codified Laws § 55-1B-2.
By the way, there are some really smart people who argue a blanket get-out-of-jail-free card for trust protectors is a really bad idea. For the best expression of that school of thought you’ll want to read Alexander Bove’s The Case Against the Trust Protector. Here’s an excerpt from written comments on the subject Mr. Bove previously shared with me:
In conclusion, I would like to express my belief that it is a disservice to practitioners to perpetuate what I call the fear of fiduciary duty. We readily serve to act as estate fiduciaries and trustees without such fears—why not protectors? Furthermore, it is common knowledge that exposure to liability can be reduced to a minimum, which would place more risk on the trustee and beneficiaries than on the protector. If we look at the definition of “willful misconduct” under Delaware law, for example, we would be hard pressed to justify any realistic concerns over liability. Perhaps if we stop trying to teach professionals how to fit a round peg into a square hole and instead show them how to assist clients without the fear of fiduciary duty, we would be rendering a better service to everyone.
Now back to the real world. So how’s this all supposed to work?
If there’s a breach of trust involving a directed trust covered by FUDTA, your fist line of recourse is against the party directly responsible for the breach: the trust protector/trust director. A second line of recourse is available vis-à-vis the directed trustee, but only to the extent of the trustee’s own “willful misconduct.” Again from the official commentary for the UDTA makes this point:
In summary, under the Uniform Directed Trust Act a beneficiary’s main recourse for misconduct by a trust director is an action against the director for breach of the director’s fiduciary duty to the beneficiary. The beneficiary also has recourse against a directed trustee, but only to the extent of the trustee’s own willful misconduct. Compared with a non-directed trust in which a trustee holds all power over the trust, a directed trust subject to this act provides for more aggregate fiduciary duties owed to a beneficiary. All of the usual duties of trusteeship are preserved in the trust director, and in addition the directed trustee has a duty to avoid willful misconduct.
What about the rest of FUDTA?
The Rubins provide a thorough analysis of the rest of Florida’s new FUDTA in Protectors and Directors and Advisers: Oh My! The New Florida Uniform Directed Trust Act. If you’re trying to make sense of our new directed-trust act, you need to read this article. It’s by two of Florida’s top trust lawyers. Here are a few excerpts I found particularly interesting.
Prior to the enactment of the FUDTA, under F.S. §736.0808(2), a directed trustee was obligated to act to follow a trust director’s power of direction, unless such action was “manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust.”
Now, a directed trustee is obligated to “take reasonable action to comply” with a direction received.[736.1409(1)] Under this provision, a directed trustee is not permitted to act regarding a power of direction if by so doing the trustee would be engaging in “willful misconduct.”[736.1409(2)] The standard is a departure from the standard described above under prior law.
Aside from being the language of the uniform act itself, the “willful misconduct” limitation on acting is appropriate since it is the same standard applicable under earlier law when one trustee had power to direct a co-trustee to act.[736.0703] Since that standard was acceptable when one fiduciary was directing another, and since a trust director is now imbued under the FUDTA with the same fiduciary duties as a trustee under F.S. §736.1408, it is appropriate that the willful misconduct standard is similarly applied to a directed trustee under the act. That is, no compelling policy reasons could be discerned why a trustee that is being directed should have a different limitation dependent on whether the directing person is a co-trustee with fiduciary duties or a trust director with fiduciary duties.
A trustee has no statutory duty to monitor a trust director, nor to advise a settlor, beneficiary, trustee, or trust director as to how the trustee might have acted differently than the trust director.[736.1411(1)(a)] A trust director likewise has no statutory duty to monitor a trustee or another trust director, nor to advise a settlor, beneficiary, trustee or another trust director as to how the trust director might have acted differently than a trustee or another trust director.[736.1411(2)(a)] The provision does not bar a trustee or trust director from doing any of the foregoing, and if done, the actor does not assume a duty to continue to do so in the future.[736.1411(1)(b)]
When trust terms confer a power on one or more trustees to the exclusion of another trustee to direct or prevent actions of the other trustee, the trustee subject to direction has the same duties and liabilities as imposed under the FUDTA on a directed trustee under F.S. §§736.1409 through 736.1411.[736.1412] The draftspersons’ reasoning was that the trustee in both circumstances is being directed by another fiduciary and thus there is no justification for imposing different rules or standards on the trustee subject to direction based on whether the person giving direction is a trustee or a trust director. Regarding the required standard of conduct for liability, the willful misconduct standard of [prior] F.S. §736.0703(9) continues to apply, and thus this aspect of trustee liability remains the same as under prior law.
Co-trustees — Because the FUDTA now addresses issues of fiduciary responsibility as they relate to co-trustees, prior F.S. §736.0703(9) was deleted. It is worth noting, however, that the “willful misconduct” standard of liability for the excluded trustee has not changed; it is just found in a different location.