Expanding the Availability of Directed Trusts
In Trusts and Estates | On March 17, 2021
Each year, a group of dedicated attorneys and trust professionals work together in an effort to maintain Delaware’s position as the premier jurisdiction for trusts. They do so by closely reviewing the marketplace and legislative landscape to identify ways to improve Delaware law as it relates to all things associated with trust planning and administration. They seek out ways to make Delaware more attractive as a jurisdiction for trust grantors and beneficiaries, as well as for trustees. This year, their efforts resulted in the passage of House Bill 334, or “Trust Act 2020,” which was signed into law by Governor Carney on August 6, 2020. A main focus of Trust Act 2020 was Title 12, section 3343 of the Delaware Code, regarding the authority to appoint additional trustees and to allocate duties among them.
Section 3343 was first added to the Delaware Code just in 2019. It provides, generally, that absent language in a trust instrument to the contrary, those with the authority to appoint a successor trustee, or to remove and replace an existing trustee, inherently have the authority to appoint multiple successor trustees, and to allocate powers among them. Importantly, the statute enables those with the authority to appoint a trustee to effectively modify the trust instrument to create a directed trust without actually undertaking a modification by other means – such as nonjudicial settlement agreement, decanting, modification with grantor’s consent/non-objection, etc.
Changes to section 3343 in 2020 sought: (i) to clarify the circumstances under which the statute may be used, (ii) to clarify the interplay between sections 3343 and 3313A of Title 12 and enhance protections for trustees when a trustee’s duties and powers have been modified via section 3343, and (iii) to add a requirement that the existing trustee be notified before changes made under this section take effect.
Circumstances Under Which Title 12, Section 3343 May Be Used
Subsection (a) of section 3343 has been revised to clarify the circumstances under which section 3343 may be used. The 2019 version of the statute provided that the power to appoint successor trustees included the additional inherent power to appoint multiple successor trustees, and to allocate powers among them. Some felt that ambiguity in the 2019 version of the statute left open the possibility that one could avail himself of section 3343 at any time—in other words, without a vacancy actually existing and with the appointing person not possessing a removal power. The 2020 changes make clear that the underlying power to appoint a successor trustee, as granted by the trust instrument, must itself be “presently exercisable”—meaning it can be employed at the current time—before one can appoint multiple successor trustees under section 3343. The 2020 version also makes clearer that, where authorized by the trust instrument to remove a trustee and appoint a successor, an individual may remove a trustee and appoint multiple successor trustees in its place.
Interplay Between Title 12, Sections 3343 and 3313A
Subsection (c) has been revised to more clearly state the interplay between sections 3343 and 3313A by expressly referencing sections 3313A(a)(1) and 3313A(a)(2) and providing that the authority to allocate duties and responsibilities applies to the establishment both of directed trustees and of excluded trustees. Section 3313A(a)(1) provides that where a governing instrument empowers a co-trustee to direct certain actions of the trustees, to the exclusion of certain other co-trustees, the excluded trustee(s) have no liability when acting at the direction of the directing co-trustee, unless such acts constitute willful misconduct. Section 3313A(a)(2) provides that where a governing instrument grants the exclusive authority to exercise certain powers to a co-trustee, the excluded co-trustee(s) have no liability with respect to the exercise of such power.
Doing so in accordance with section 3313A, the 2019 version of section 3343, subsection (c) provided for the allocation of duties and liabilities as between the authorized co-trustee and the excluded co-trustee. The 2020 version expands on the 2019 version, and more specifically provides for the allocation of duties and liabilities as provided under sections 3313A(a)(1) and 3313A(a)(2).
The 2019 version of section 3343, subsection (c) provided:
“Notwithstanding the provisions of subsection (b) of this section, in accordance with section 3313A of this title, a trustee to whom powers have been exclusively allocated under subsection (a) of this section shall be a fiduciary only with respect to the powers so allocated, and a trustee excluded from exercising powers shall have no liability for, nor any duty to monitor, the actions of any trustee to whom any such powers, duties, and responsibilities are so allocated.”
The current version of section 3343, subsection (c) provides:
“Notwithstanding the provisions of subsection (b) of this section, if an appointment under this section confers upon a cotrustee, to the exclusion of another cotrustee, the power to take certain actions with respect to the trust, including the power to direct or prevent certain actions of the trustees, then: (1) The duty and liability of the excluded trustee and the cotrustee holding the power, whether that be the powers of an excluded trustee or cotrustee described under § 3313A(a)(1) or § 3313A(a)(2) of this title, shall be as set forth under § 3313A of this title; and (2) The excluded trustee shall have the rights of a trustee that has been removed as trustee of the trust under applicable law and the terms of the governing instrument, to seek, with respect to the power and authority so excluded as a result of an appointment under this section, a judicial proceeding or nonjudicial matter, as defined in § 3303(e) of this title.”
Existing Trustee Must Be Notified Before Changes Made Under Section 3343 May Take Effect
Lastly, subsection (d) was added to section 3343 to provide that where any appointments are made under section 3343 that will modify the duties and responsibilities of an existing trustee, such modifications shall not become effective until thirty (30) days after receipt by the existing trustee of a written notice detailing such modifications. The thirty (30) day notice period may be waived by the existing trustee. This notice period provides trustees the opportunity to consider whether it is advisable to continue in service as trustee and whether renegotiation of their fee arrangement is appropriate.
The addition of section 3343 to the Delaware Code in 2019, and the revisions to it made in 2020, are vitally important as the use of directed trusts becomes more commonplace. As with any burgeoning industry practice, it is crucial that practitioners keep pace with the marketplace and legislative landscape. In order to fully avail themselves of new opportunities, they must understand current developments of practice and law, both from the legislative perspective and the practical one. Accordingly, to more fully understand and appreciate the utility of section 3343, we will look at some practical examples.
A directed trust is one in which one other than the trustee is empowered to instruct the trustee with regard to responsibilities which would otherwise belong to the trustee. This bifurcation of duties and authority initially came about for two reasons: (1) as a way for grantors to circumvent trustees’ potential unwillingness to take various actions which might expose them to liability (such as, for example, managing an investment portfolio with a concentrated position, which might fall outside the limitations of the prudent investor rule), and (2) as a way for cost-conscious grantors to tamp down trustee fees by: (a) allocating certain of a trustee’s responsibilities to other, non-fee charging parties, and (b) reducing the areas of potential liability to which a trustee might be exposed – that is, with reduced risk should come reduced fees.
Example 1 – The Directed Trust, Generally
Individual investor “X” has developed an algorithm which relies on historical fluctuations in equity valuations to predict future stock prices. X has utilized his algorithm to produce tremendous returns in each of the preceding five years and now wishes to contribute a sizable portion of the earnings to an irrevocable trust for the benefit of his children. Of course X intends that the trust assets be invested using his algorithm. Y, a corporate trustee, would be happy to add X’s trust to its assets under management, but X’s investment strategy violates the terms of Y’s internal investment policies, which were implemented in order to avoid potential liability. In order for Y to accept the trust without being exposed to the potential liability associated with X’s unique investment strategy, X and Y enter into an arrangement whereby X assumes all duties and liability associated with the investment of trust assets, and Y, acting only at X’s direction, is similarly relieved of all such duties and liability (other than for its own willful misconduct).
In the preceding example, the grantor was able to avail himself of the benefits of directed trusts by establishing his trust as such from the outset. But what should happen where an interested party to an existing trust, which does not include direction provisions, wishes to avail himself of such benefits? Section 3343 makes available such opportunities to irrevocable trusts already in existence which do not otherwise include direction provisions.
Example 2 – 3343 Directed Trust
In this case, X’s mother leaves a testamentary trust for the benefit of X’s children, to be administered by Y. Under the testamentary trust instrument, X is afforded the authority to remove and replace Y as trustee for any reason, or for no reason at all. X would like the trust’s assets to be invested using his algorithm, but since the trust is already in existence, he is unable to write directed trustee provisions into the trust instrument. Additionally, there exist extenuating circumstances which make it impossible to rely upon other methods for modifying irrevocable trust instruments (suppose the trust instrument forbids decanting, and remainder beneficiaries refuse to cooperate for purposes of a nonjudicial settlement agreement). Without the availability of section 3343, X’s only option might be to go searching for a trustee willing to assume the risk associated with X’s investment strategy. However, because X’s mother’s testamentary trust is administered in Delaware, X can avail himself of section 3343 to appoint himself as investment trustee, which by the interplay of sections 3343 and 3313A, will authorize him to direct Y (now the institutional co-trustee rather than sole trustee) with regard to investment of the trust’s assets.
As you can see, section 3343 enables X and Y to work together in ways which they otherwise would be unable – with X enjoying the ability to have trust assets invested as he wishes, and Y able to continue serving as trustee with an acceptable assumption of risk. By expanding the opportunities for the creation of directed trusts, section 3343 is a boon for those with interest in irrevocable trusts, and represents another step towards preserving Delaware’s place as the premier jurisdiction to situs trusts.
This article first appeared in Delaware Banker, Vol. 16 No.4, (Fall 2020)