2018 Heckerling Institute – Directed Trustees and a ‘Shout Out’ for Professional Trustees

Take-Away: The Annual Heckerling Estate Planning Institute is being held this week in Florida. I receive daily summaries of those estate planning presentations from a nationally known estate planning speaker and prolific writer, Martin M. Shenkman. In Mr. Shenkman’s summary of Tuesday’s Heckerling presentation with regard to the use of directed trustees, he provides a short summary on the increased use of directed trustees [hence the Uniform Directed Trustee Act being considered in Michigan] and he also provides a positive observation on the use of professional trustees.

Directed Trusts: “In directed trusts, the direction trustee has a fiduciary duty to beneficiaries and the administrative trustee has a standard of willful misconduct which is less than good faith. The definition [willful misconduct] is difficult to pin down but the notion is that it is lower than good faith. The general notion is that if you have a trustee that trustee should not be exonerated 100%. Comment: If you go too far [with exoneration] is the arrangement still a trust? While there is some standard of liability, a directed trustee can be reduced to a very low standard. Now with a directed trust the outsider is responsible as if they were a trustee from the standpoint of liability which is the correct answer as they are performing the responsibilities of a trustee. A corporate fiduciary can still be at the table, even if not liable. They are still there and that is better for administration of the trust,  and that is better than just having a family member run the trust. The presence of a professional trustee makes administration better. “

Good faith and willful misconduct are standards of fiduciary liability in the context of a directed trustee. The breach of good faith fiduciary standard is easier to prove by an unhappy trust beneficiary than the willful misconduct fiduciary standard, which means that a directed trustee that is primarily charged with administering the trust at the direction of others [for investments; for distributions] faces less risk and liability than the persons who direct that trustee who must always act in good faith.

Professional Trustees: “Comment: This is an incredibly important point. Some practitioners are loath to involve an institutional trustee for a range of reasons, but the reality is that the professionalism, formalities, processes and policies that they [institutional trustees] can bring to the administration of a trust that family-member trustees too often don’t provide can be a tremendous benefit to the trust and enhance the likelihood of formalities being adhered to,  thereby assuring the success of the overall plan.”

Mr. Shenkman’s observations about the benefits from using a professional trustee is what we have been reminding our centers of influence about for several years now. The success of an estate plan and the implementation of a settlor’s wishes are best assured when an objective and professional trustee is charged with administering the plan.

Conclusion: As Michigan starts to seriously consider that adoption of the Uniform Directed Trustee Act, or the proposed companion Divided Trustee Act, it will be important to consider the role and responsibilities of a professional trustee that serves  in that directed trust setting.