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

6-Feb-19

Trust Directors

The following is the short ‘checklist’ that I mentioned this morning, to be used when reviewing a trust instrument that contains a ‘trust director’ (formerly a ‘trust protector.’)

  1. Key Phrase Used?:The language used in the Michigan Directed Trust Act is “the trustee is subject to a power of direction.“We should make sure that this phrase is included in the trust instrument since its use greatly limits GLT’s exposure to liability when it follows the directions of a trust director. Example: “In delegating this power to the trust director, my intent is that the trustee shall act subject to a power of direction given by the trust director.”
  2. Key Word Included?:Another key word to make sure is in the trust instrument is the use of the word fiduciary that is used in conjunction with the delegation of a power that is given to a trust director. Example: “The trust director shall exercise the delegated power to make investments on behalf of this trust in a fiduciary capacity.”
  3. Scope of Powers Clearly Identified?: GLT is still charged to make sure that the trust director acts within the scope of the delegated power to provide a binding direction to GLT. If GLT follows directions beyond the scope of the trust director’s discrete power, then GLT can still be held liable if the action taken goes awry.
  4. Springing Powers?: GLT will have to understand when the trust director’s power is effective. The delegated powers could be delayed until some external event, e.g. when a beneficiary attains a specific age, or perhaps when the tax laws change in the future. Alternatively, the delegated power could be granted immediately when the trust becomes irrevocable. The key is to monitor and identify when that future ‘trigger event’ occurs.
  5. Limiting Standards?: If the trust instrument delegates discrete powers to the trust director, we need to identify what standards, if any, guide the trust director’s exercise of that power. If a trust director is given the authority to direct distributions from the trust by the trustee, GLT must assure itself that the directions are consistent with those limiting standards. Example: A trust director is given the authority to direct distributions to a beneficiary after taking into account other financial resources then available to the trust beneficiary. GLT will have to ascertain that, in fact, the trust director gathered sufficient information with regard to the trust beneficiary’s other financial resources. Restated, GLT cannot simply assume that the trust director adhered to the limiting standards with regard to its direction authority.
  6. May or Shall?” Like a trustee’s discretionary authority the same applies to a trust director that is given the authority to direct the trustee as to an act. Does the trust director have an affirmative duty to exercise its delegated power, or is that delegation merely discretionary. The trust director could be given the power to compel a distribution from the trust to a beneficiary. Or, the trust protector could be given an optional power. Example: Trust director is given power to compel a distribution to a trust beneficiary. GLT must follow that direction. But what if GLT decides to make a discretionary distribution, which the trust director can ‘veto?’ If the trust director does not exercise its veto power, then GLT in making its distribution decision is not acting as a directed trustee, and if problems later arise from that beneficiary designation, GLT could still be held liable. This is where the rhetorical question should be applied: which party, GLT or the trust director, initiated the decision that is later subject to challenge?
  7. Shared Responsibilities?:This whole area is pretty murky when both the trustee and the trust director share responsibilities under the trust instrument  i.e. either can make or direct a distribution to be made from the trust. If possible share responsibilities should be avoided since it is not clear where liability will ultimately rest.
  8.  Sharing Information: If a trust instrument uses a trust director along with a trustee, the question needs to be addressed what, when and how that information is to be exchanged between the two fiduciaries. This exchange of information process needs to be clearly spelled out in the trust instrument. For example, if a trust director is given the authority to manage and vote a closely held corporation, and nothing more, should the trust director be entitled to information as to the reasons why GLT makes a trust distribution to a trust beneficiary? Restated, the scope of the information to be exchanged needs to be consistent with the powers that are delegated to the trust director.
  9.  Indemnification: While the Michigan Directed Trust Act provides that the trustee that follows the directions of a trust director will generally not be held liable for following those diretions, I think we should not rely on the statute’s ‘default rul’ but should require express language in the trust instrument that the trustee willl be indemnified and held harmless by the trust for following those directions.