Florida Banking March 2022

TRUST BANKING

DIRECTED TRUSTS – WHO IS RESPONSIBLE IF SOMETHING GOES WRONG?

KELLY O’KEEFE, SHAREHOLDER, STEARNS WEAVER MILLER

W hen a settlor creates a directed trust giving a non-trustee certain administrative powers over the trust, who is responsible if something goes wrong? You must ask this question before agreeing to serve as a “trust director” or “directed trustee” of a directed trust. But where is the answer? The trust terms are your first source, but you can now look to the Florida Uniform Directed Trust Act (the “Act”), which went into effect on July 1, 2021, as Part XIV of Florida’s Trust Code, Chapter 736. The Act offers guidance on issues where little previously existed in Florida, including the controversial issue of who is the fiduciary in a directed trust. While the Act provides significant guidance, it leaves many issues open to interpretation. The Act is intended to make Florida directed trusts more appealing to those making and managing generational transfers of wealth. Transfers of wealth to future generations in the next two decades are expected to be larger than ever before and much of that wealth will pass through directed trusts. Directed trusts are appealing because they offer a means of ensuring a settlor’s intent is paramount in the trust administration. For example, they give a settlor the opportunity to continue using the services of a trusted family advisor who can provide the trustee instruction on specific issues, such as investments or distributions, requiring consideration of unique family relationships, family businesses or special needs beneficiaries. Were it not for the settlor’s selection of a trusted family advisor in these circumstances, a trustee might otherwise delegate that sensitive responsibility to an individual or entity who is ill-equipped to handle it. Directed trusts also allow settlors to appoint trust protectors and give them the flexibility to amend or terminate a trust or remove and appoint trustees when necessary to preserve the settlor’s intent or protect the beneficiaries. A directed trust may also prevent family turmoil by removing

distribution decisions from an adult child and giving them to a trusted family advisor or advisory committee. Directed trusts offer these advantages without the deadlock that may result when co-trustees of a traditional trust disagree. How do directed trusts deliver these advantages? Pursuant to the Act, a settlor may grant a trust advisor or trust protector, now collectively referred to in Florida’s Trust Code as a “trust director,” the power of direction over some aspect of the trust administration. That trust director also has the attendant powers needed to exercise the power of direction unless the trust provides otherwise. For example, trust directors can hire attorneys or other professionals to assist in performing their assigned duties provided the trust does not prohibit them from doing so. The trustee of a directed trust remains the trustee but is now also a “directed trustee,” who must follow the trust director’s instructions to the extent the trust director has been granted the power of direction. In addition to being effective estate planning tools, directed trusts increase opportunities for wealth managers. They permit a client’s longtime investment advisor to continue serving the client as a trust director tasked with investment decisions rather than losing that client to a trust company. The trust company, serving as a directed trustee, may in turn gain a new client who would not have retained the trust company without the benefit of that client’s longtime trust advisor. This arrangement clearly benefits the client in multiple ways. For example, where a directed trustee has only minimal responsibility for the decisions of a trust director, the directed trustee may be able to offer more competitive pricing for its services. The opposite is true if the directed trustee bears fiduciary responsibility for the trust director’s actions. In that situation a trustee has no incentive to take on the role of directed trustee.

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