Trust law traditionally required trustees to be jacks of all trades, responsible for a panoply of job descriptions from bookkeeper to investment manager to family counselor. The drawback of the do-it-all trustee role is that it often fails to advance the purpose of the trust. It puts specialized tasks—such as the management of family business assets—in the hands of a trustee, who may not always be the most qualified individual for each particular task. Thus, a notable recent trend in trust drafting is dividing traditional trustee duties among different individuals. This structure gives the grantor flexibility to appoint the most qualified individual for each of the variety of tasks that trustees typically perform. The most obvious division of duties is separating trust administration from investment management.
Yet, the statutory framework governing divided duties gives little practical guidance on the implementation of such divided powers. The trustee’s duties may seemingly overlap with those assigned to other individuals, and the question of who has what authority may arise and cause confusion, if not conflict. Also, fiduciaries may wonder if they must check up on their co-fiduciaries to avoid liability for the others’ breaches of duty.
One recent case stands out as a helpful source of guidance to trustees in such bifurcated trusts and to estate planners seeking to create such a structure. In Shelton v. Tamposi,1 the New Hampshire Supreme Court clarified the interaction of a directed trustee and her co-fiduciary investment advisors and upheld the grantor’s intent to limit the trustee’s authority to make distributions to the beneficiaries. The opinion clarifies the roles of a trustee and investment advisors in power-splitting trusts and offers useful guidance to fiduciaries, investment advisors and estate planners seeking to implement a more effective trust structure, which divides the trustee’s duties to better accomplish the grantor’s intent.
Division, Not Delegation, of Duties
Historically, trust law has placed all responsibility for trust management in the trustee’s hands. Only two options existed to lighten a trustee’s load, and both required a trustee to engage in significant oversight. A grantor could appoint co-trustees, yet the problem remained that both trustees had the same responsibilities under the common law. A trustee could also, in some circumstances, delegate certain trust tasks to an agent.
Modern trust law, as demonstrated by the Uniform Trust Code (UTC), now allows for broad delegation of a trustee’s duties—those duties a prudent trustee of comparable skills might delegate. But delegation as a means of bringing in outside expertise to implement the trust’s goals has limitations. First, trust law requires a trustee to exercise significant oversight of delegates, undermining the very reason for delegation in the first place. Delegation still places the onus on the trustee to find the appropriate person to whom he should farm out his trustee responsibilities and to monitor the delegate consistently to avoid liability. Second, it’s the trustee, not the grantor, who selects a delegate. Delegation doesn’t serve as a means for a grantor to provide explicit direction regarding the performance of certain tasks, such as investment of trust assets.
In contrast, a bifurcated trust structure divides a trustee’s fiduciary duties among different individuals, allowing the grantor to select the most qualified individual for each role. Grantors now create trusts in which a trustee’s traditional duties are split between the trustee and other individuals, such as trust advisors, investment committees and trust protectors. By providing for this division in the trust instrument itself, the grantor can exercise a significant amount of control over the exact split of duties.
When a trust document renders another individual responsible for a traditional trustee task, and the trustee must follow that individual’s instructions, the trustee is called an “excluded” or “directed trustee.” The UTC and the Restatement (Second) of Trusts (Restatement (Second)) explicitly recognize the power of grantors to split a trustee’s traditional duties among multiple individuals. For example, UTC Section 808 recognizes that the terms of the trust may confer on another individual the power to direct certain actions of a trustee and ratifies the use of trust protectors and advisors.2 Likewise, Section 185 of the Restatement (Second) provides that a trustee isn’t liable for following the instructions of a person empowered under the trust agreement.
Based on the recognition of these different roles, one would assume that a directed or excluded trustee would face little risk arising from the duties tasked to other individuals. Not so: Until recently, cases didn’t exist interpreting the overlap, if any, of the roles of trustees and investment advisors in such bifurcated trusts. The potential for conflict between the trustee and investment advisor regarding the demarcation of their respective powers is significant, and little exists to stop one from overstepping the bounds of his authority into the realm of the other.
Further, in many states, a grantor’s plan to split duties may be undermined by the existing codification of the Restatement (Second) and the UTC.3 These provisions leave a trustee potentially liable for actions for which the trust document explicitly excluded his participation or directed him to follow another’s instruction. For example, states that follow the Restatement (Second) still require directed trustees to ensure that instructions don’t violate the trust document or a fiduciary duty owed to the beneficiaries. Though UTC Section 808 provides that a trustee is generally not to be held liable for losses arising from directed conduct, it does assign liability if the trustee follows the direction when it’s manifestly contrary to the terms of the trust or the actions would be a serious breach of fiduciary duty. This potential liability may leave a trustee with little choice but to meddle in arenas from which he’s excluded under the trust instrument.
In response, a few states, such as New Hampshire, have enacted specific statutes clearly defining the role of the directed or excluded trustee and limiting the resulting responsibilities and potential liability.4 In these states, trustees, trust advisors and trust protectors generally won’t be liable for following the direction of a trust advisor or trust protector. In other words, the trustee has no duty to oversee or monitor trust advisors overseeing investment of the trust’s assets.
Yet, given the paucity of cases interpreting these provisions and trust structures, at a minimum, many trustees find themselves looking over the shoulders of investment advisors when they shouldn’t need to do so. This uncertainty undermines the power-sharing structure that many grantors are now endeavoring to create and, instead, creates the potential for a power struggle.
Shelton v. Tamposi
A challenge to a grantor’s bifurcation of duties between a trustee and investment directors served as the basis for the appeal in Shelton. In Shelton, a trustee of a set of sub-trusts appealed the Hillsborough County, New Hampshire Probate Court’s decision,5 which: 1) rejected a beneficiary and her trustee’s claims of breach of fiduciary duties against the trust’s investment directors based on their management of the trust assets, the family’s real estate interests; 2) removed the beneficiary’s trustee for breaches of fiduciary duty arising from prosecution of the lawsuit in bad faith to undermine the trust structure; 3) applied the trust’s in terrorem clause to forfeit the beneficiary’s interest in the trust based on the filing of the lawsuit challenging the trust structure; and 4) ordered the beneficiary and trustee to pay the investment directors’ and intervening parties’ (other beneficiaries and their trustee) attorneys’ fees.
The grantor was a successful real estate developer in southern New Hampshire. He established a trust and divided it into 12 sub-trusts for the benefit of his six children and their children. The grantor funded the trust with his real estate assets and sought to use the trust as a vehicle to provide for the continuation of the family real estate business. To that end, he named two of his children as investment directors of the trust. The investment directors, who had worked closely with the grantor in the family real estate business, were charged with the management of the family real estate portfolio for the benefit of their siblings’ sub-trusts.
The grantor also appointed for all of the sub-trusts a trustee charged with determining distributions to the beneficiaries. (As the result of an agreement settling earlier litigation over the trusts, the trust was later court-modified to allow two of the siblings to select their own trustees for their sub-trusts, resulting in three separate trustees overseeing the sub-trust distributions to the beneficiaries.) The grantor absolved the trustees of the duties assigned to the investment directors, tasking the trustees solely with determining distributions to the sibling sub-trust beneficiaries.
One of the sibling beneficiaries engineered the appointment of a longtime friend as trustee. Together, they filed a lawsuit in New Hampshire Probate Court alleging that the investment directors breached their fiduciary duties by, among other things, failing to acknowledge the trustee’s sole authority to determine distributions from the master trust to the sub-trusts for distribution to the beneficiaries. They argued that the trustee’s power to control distributions meant that the trustee could instruct the investment directors to liquidate trust assets and direct the investment directors’ strategy.
The trial court found that the trust instrument explicitly divided trust duties, giving the investment directors responsibilities typically given to a trustee, including the exclusive right to invest and manage the trust assets. The trustees, on the other hand, were responsible for determining the beneficiaries’ needs and distributing money to them. The trial court, therefore, concluded that because the trust expressly prohibited the trustee from making decisions regarding the investment or sale of trust assets (the realm of the investment directors), the trustee was an “excluded fiduciary” under the New Hampshire UTC.6 Section 1-1:03 of the New Hampshire UTC defines an excluded fiduciary as a trustee, trust advisor or trust protector who, under the trust’s terms, is excluded from exercising a power or is relieved of a duty when the trust entrusts that power or duty to another fiduciary. Likewise, under the trust agreement, the trial court found that the investment directors were excluded fiduciaries regarding distributions to the beneficiaries. As a result, the trial court rejected the trustee’s claims that the investment directors breached their duties by failing to sell or modify the investment program common to all the trusts to fund the distributions to the sub-trusts she demanded.
In her appeal,7 the trustee contested the trial court’s interpretation of the trust, arguing that the trust didn’t allow the investment directors to decide whether to distribute proceeds from the trust assets to the trustees for distribution to the beneficiaries. The trustee instead argued that the trust not only authorized her to determine the distributions from the sub-trusts for which she was the trustee, but also authorized her to determine the amount and timing of distributions from the master trust by the investment director to the sub-trusts. The trustee argued that, despite the articles of the trust vesting investment decisions in the investment directors, the trust provisions granting her authority to make distributions to the beneficiaries allowed her to review, challenge and direct the decisions of the investment directors. Essentially, the trustee argued that if the investment program didn’t allow for sufficient cash flow to meet her distribution targets, she could force the investment directors to change the program, including forcing a sale of investments held in common with all the trusts, such as a family business, to fund projected distributions.
The New Hampshire Supreme Court rejected the trustee’s arguments. The court upheld the trial court’s conclusion that the trust structure created two classes of fiduciaries: trustees and investment directors. By rejecting the trustee’s argument, the New Hampshire Supreme Court affirmed the grantor’s intent that the trustee and investment directors would act in separate spheres. The investment directors, the grantor’s trusted appointees in managing the family business, were entrusted with investment and management of the trust assets. They would play no role, however, in the distributions to beneficiaries. That responsibility was the province of the trustee, whom the grantor tasked with evaluating the beneficiaries’ needs in light of the trust’s ascertainable standard to provide for the beneficiaries’ education and maintenance in health and reasonable comfort.
By affirming the trial court’s interpretation of the trust instrument excluding the trustee from investment decisions, the New Hampshire Supreme Court decision in Shelton provides helpful guidance on the interpretation of trust instruments that divide duties between a trustee and investment advisors. A grantor can rely on this guidance to avoid creating overlapping roles for trustees and advisors that can lead to conflict and litigation over the application of the trust instrument. Additionally, the New Hampshire Supreme Court’s interpretation of New Hampshire’s directed trustee statute confirmed that it doesn’t require a fiduciary to watch over his co-fiduciary. Instead, New Hampshire law affirms a grantor’s intent to entrust certain tasks to an individual other than the trustee and instructs a fiduciary not to overstep the bounds of the authority granted to him in the trust instrument.
Dividing Powers, Not People
The Shelton decision sets New Hampshire as a particularly favorable jurisdiction for upholding a grantor’s intent and reducing the threat of liability for trustees and other individuals, such as investment advisors, other trust advisors and trust protectors in a divided trust. Further, the decision highlights the importance in a bifurcated trust of clearly delineating each individual’s duties and explicitly excluding each individual from the other’s realm, particularly in light of the trust situs law that may otherwise impose a monitoring duty.
The decision has even broader application regarding the manner in which a grantor can structure a trust dividing responsibility between a trustee and investment advisor, particularly to achieve a grantor’s intent to continue a family business for the benefit of the beneficiaries. It provides support for investment advisors to pursue a long-term plan for trust assets in accordance with the grantor’s intent, without the burden of a trustee objecting that the plan frustrates short-term distribution goals. Shelton is, therefore, required reading for anyone considering, or acting under, a trust instrument that divides and reassigns a trustee’s historic duties.
1. Shelton v. Tamposi, No. 2010-634 (January 2013).
2. See National Conference of Commissioners on Uniform State Laws 2010, Comment to Uniform Trust Code, Section 808, Powers to Direct. www.nccusl.org.
3. Douglas Moore, “Situs Shopping,” Trusts & Estates (Jan. 1, 2010) at p. 33.
4. New Hampshire Rev. Stat. Ann. 564-B:7-711.
5. Shelton v. Tamposi, 316-2007-EQ-0219 (August 2010). The trial court’s decision contains further discussion on topics of interest for family business trusts, such as application of the duty to diversify in the face of trust language permitting concentration in real estate and application of a trust’s in terrorem clause to cut a beneficiary out of the trust for challenging the trust structure by filing a lawsuit. For a discussion of these aspects of the opinion, see Andie M. Schwartz, “The Cementing of Family Bonds,” (Feb. 23, 2011), http://wealthmanagement.com/financial-planning/cementing-family-bonds.
6. New Hampshire Rev. Stat. Ann. 564-B:7-711.
7. The trustee also appealed the application of the in terrorem clause, her removal based on her bad faith initiation of the lawsuit and the finding holding her personally responsible for the investment directors’ and intervening parties’ attorneys’ fees. The New Hampshire Supreme Court rejected these challenges as well, finding that the trustee had no standing to challenge the application of the in terrorem clause and that the probate court’s factual findings regarding her bad faith, resulting in the removal and fees order, weren’t in error.