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George F. Bearup, J.D. Senior Legal Trust Advisor

14-Nov-18

Directed Trustees in Michigan – The Uniform Directed Trustee Act

Take-Away: Michigan is currently exploring the adoption of the Uniform Directed Trustee Act (UDTA.) If adopted, the UTDA would provide a dramatic improvement on Michigan’s current law, at least from the directed trustee’s perspective.

Background: Michigan’s current law that deals with a directed trustee is actually its trust protector authorization. [MCL 700.7809(4).] This Michigan Trust Code section provides that a trustee ‘shall not act in accordance with the attempted exercise of the power [of a trust protector] unless the trustee receives prior direction from the court if either of the following exists: (a) the exercise [direction] is contrary to the terms of the trust; or (b) the exercise [direction] would constitute a breach of any fiduciary duty the trust protector owes to the beneficiaries of the trust.’

Problem: The primary problem of Michigan’s current ‘directed trustee’ statute is that the trustee still has a duty to monitor the trust protector to assure itself that the direction from the protector is neither a violation of the trust protector’s fiduciary duties nor is it inconsistent with the terms of the trust instrument. This then leaves the directed trustee exposed to claims by the trust beneficiaries that: (i) the trustee did not adequately monitor the trust protector, or; (ii)  the trustee did not conduct its own due diligence into the circumstances that led to the trust protector’s direction, or: (iii) the trustee was negligent in carrying out its monitoring responsibilities.

Duty to Warn: Some courts, in other states, have also extended  duty of the directed trustee to warn beneficiaries when it is believed that the trust protector’s directions are contrary to the protector’s fiduciary duties. For example, in Rollins v Branch Banking and Trust Company of Virginia, 2001 Va. Cir. LEXIS 146 Va Cir.Ct. 2001) the court found that the trustee was not liable for following the direction of the trust beneficiary that provided the ‘investment decisions as to the retention, sale or other purchase of any asset of the trust fund shall likewise be decided by such living children’ but the trustee was nonetheless liable for a breach of trust by its failure to warn the trust beneficiaries about the decline in value of the stock the trustee was directed to hold in the trust. The court observed- “the trustee cannot rid himself of this duty to warn.” This case prompted many states to add language to their directed trustee statutes to clarify that a directed trustee has no duty to monitor the actions of the advisor/protector or to advise or warn trust beneficiaries when an advisor/protector’s actions are contrary to how the trustee would have acted.

UDTA: The UDTA provides far greater protection to a  trustee that follows the directions of an advisor (the term used in the UDTA) or a trust protector. If the UDTA is adopted in its suggested form:

  • No Liability for Following Directions: The directed trustee will not be liable for taking reasonable action to comply with the advisor/protector’s exercise or non-exercise of a power;
  • Willful Misconduct Liability: The directed trustee must not comply with the advisor/protector’s direction if by doing so the trustee would engage in willful misconduct which requires a higher standard of proof than mere negligence or gross negligence;
  • Reasonable Action to Execute the Direction: The directed trustee has a duty to take reasonable action to execute a direction from the advisor/protector;
  • No Duty to Monitor the Protector or Warn Beneficiaries: The directed trustee has no duty to monitor the advisor/protector and no duty to give advice to the settlor, the trust beneficiaries, or the co-trustees with regard to an instance in which the trustee might have acted differently than the advisor/protector;
  • No Implicit Assumption of Protector’s Duties: Even if the directed trustee takes action that is viewed as monitoring others or giving advice, the directed trustee does not assume those excluded duties which are allocated instead to the advisor/protector; and
  • Duty to Share Information: Both the advisor/protector and the trustee have duties to share information with one another. An affirmative duty exists to provide information if it pertains to a matter that is reasonably related to the powers and duties of either the trustee and the advisor/protector.

What’s Missing: While the UDTA is an important improvement to protect the trustee who serves at the direction of another, there still are a few issues that hopefully Michigan’s version of the UDTA, if adopted, might address.

  • Willful Misconduct: The UDTA does not define willful misconduct behavior for which a trustee is remains liable. While some state’s directed trust statutes completely exonerate a trustee who follows the direction of the advisor/protector, the UDTA does not completely eliminate a directed trustee’s fiduciary duty. The rationale is that even though a trustee acts only at the direction of another, the trustee is still acts as a fiduciary. The willful misconduct standard recognizes that there is at least a base level of responsibility for a fiduciary, including a directed trustee. Since there is no statutory definition of willful misconduct provided by the UDTA, that either leaves that definition to be included in the trust instrument or the need to resort to the common law definition of willful misconduct behavior. Delaware’s directed trustee statute expressly defines willful misconduct as ‘intentional wrongdoing, not mere negligence, gross negligence or recklessness” and wrongdoing as “malicious conduct or conduct that is designed to defraud or seek an unconscionable advantage.”
  • Affirmative Duty: The UDTA imposes an affirmative duty on both the directed trustee and the advisor/protector to communicate with each other. Consequently, the directed trustee could be found in breach of fiduciary duty if it possesses information that could have been used by the advisor/protector to make a better investment decision, of course, with hindsight. Some state directed trustee statutes, e.g. Delaware’s,  impose a duty to inform co-fiduciaries only upon request of the other fiduciary.
  • Administrative Matters: The UDTA does not have a provision that any actions taken by the directed trustee to review documents or proposed transactions are presumed to be merely administrative actions which are taken solely to allow the trustee to perform the duties assigned to the directed trustee. That is also a provision used in the Delaware directed trustee act to better insulate the trustee from following the directions of the advisor/protector, i.e. it is an administrative responsibility not a substantive duty to carry out the direction.
  • Form of Direction: The UDTA does not mandate how directions are given from the advisor/protector to the directed trustee. Presumably the directions should be in writing so that there is a clear record of what directions are given to the directed trustee. But written communications can take many forms, such as by letter, an email, a pdf, or a fax. Since the statute is not particularly detailed in this regard, the trust instrument will have to clearly spell out how communication and directions are given between the fiduciaries. Along these same lines, the trust instrument will have to make it clear, as the UDTA does not, that the directed trustee will act ‘solely on the written direction’ of the advisor/protector. If the trust instrument only states that the ‘trust protector may direct the trustee’ or ‘ the trust protector shall have the power to direct the trustee’ it is possible that the trustee may have  simultaneous duties to either take directions from the advisor/protector or to act in its own discretion when a direction has not been received from the advisor/protector. Accordingly, to better protect the directed trustee, since the UDTA is not abundantly clear on this point, the trust instrument will need to clearly state that ‘the trustee shall only act on written direction from the trust protector.’

Conclusion: It is not yet clear if Michigan will proceed to adopt the UDTA in its model form, or it will make changes to reflect Michigan’s trust customs and practice. It is possible that Michigan will never get around to adopting the UDTA in any form. But what is clear is that more and more individuals are inclined to adopt some form of directed trustee, whether for investments, managing closely held business interests held in trust, making or vetoing distribution decisions, making administrative decisions like decanting the trust or changing a trust’s situs and its tax attributes. This division of a conventional trustee’s several duties among several distinct fiduciaries, will continue apace as modern trust design continues to evolve. My hope is that Michigan decides to adopt the UDTA fairly soon. Until it does, if confronted with a trust instrument that attempts to direct the trustee in certain aspects of the trust’s administration, consider implementing some of the points mentioned above to better protect the directed trustee.