Uniform Direct Trust Act
1. UNIFORM DIRECTED TRUST ACT (UDTA)
1.1. BACKGROUND. The Uniform Directed Trust Act (UDTA) is a product of the National Conference of Commissioners on Uniform state laws. The UDTA was approved in July of 2017. Indiana is the eighth (8th) state to approve it.
For centuries, trust law evolved under the assumption that the power to administer a trust belongs to a trustee.[1] Not only was a trustee required, the general assumption was that the trustee was solely in charge and solely responsible for the administration of the trust.
In 1960, primarily in the employee benefits area, a non-beneficiary third party who is granted a power to control a trustee in the performance of the investments was known as the trust advisor.[2] These advisors controlled the investments made by the qualified plans indicating that they were more than just advisors. In the 1990’s, with the advent of foreign asset protection trusts, trust advisors morphed into trust protectors who were conceived as a means of securing control over an offshore asset protection trust.[3] The trust protector became so popular that it spread to onshore trusts. These trust protectors were defined as a party who has overriding discretionary powers with respect to the trust but who is not a trustee.[4] In current trust drafting, trust protectors are used for flexibility and are often needed in irrevocable trusts designed to be in existence for a long period of time.
Generally, the trust protectors are considered to be fiduciaries and held to fiduciary standards.[5] However, problems developed with conflicts between trust protectors and trustees and the liability of each for the actions of the others. These problems were often addressed with good drafting of trust documents but remained problems for poorly drafted documents.
In Indiana, the Trust Code adopted in 1971 requires a trustee for the creation of a valid trust. A trustee must accept the trust.[6] A trustee holds title to all of the trust property as trustee.[7] The trustee must be given powers over the trust property.[8] One exception to the power requirement would be land trusts which allow a beneficiary the power to control the property with the trustee just holding title.[9]
In 1971, the Indiana Trust Code was in the forefront in recognizing that powers of direction could be given to third parties telling the trustee what to do. In that situation, the trustee was relieved from any liability based on that person’s direction.[10] If the person holding the power of direction has a fiduciary duty, the trustee retained a duty to refuse to comply the action would be a breach of duty owed by the person as fiduciary.[11] If the person holds the power solely for his own benefit, the trustee may refuse to comply only if the attempted exercise of power violates the terms of the trust with respect to that power.[12] Under the changes in SEA 265, these provisions concerning directions given to a trustee still apply for any directions given before July 1, 2019.[13] The UDTA will apply for directions given after June 30, 2019.[14]
1.2. TERMINOLOGY. The UDTA provides some helpful terminology and definitions in an area which is confused. “Directed trust” means a trust for which the terms of the trust grant a power of direction.[15] “Directed trustee” means a trustee that is subject to a trust director’s power of direction.[16] “Trust Director” means a person that is granted the power of direction by the terms of the trust to the extent the power is exercisable while the person is not serving as the trustee. The person is a Trust Director whether or not the terms of the trust refer to the person as a Trust Director and whether or not the person is a beneficiary or settlor of the trust.[17] All three of these definitions include the phrase “power of direction” which is the key terminology and definition in the UDTA.
1.3. POWER OF DIRECTION. A “power of direction” means a power granted to a person by the terms of the trust to the extent the power is exercisable while the person is not serving as trustee. The term includes a power over the investment, management or distribution of trust property or other matters of the trust administration.
The term excludes the powers described in Section 5(b) of I.C. 30-4-9.[18] Under Section 5(b), the UDTA does not apply to a:
(1) Power of appointment;
(2) Power to appoint or remove a trustee or trust director;
(3) Power of a settlor over trust to the extent the settlor has power to revoke
the trust; and
(4) Power of beneficiary over trust to the extent the exercise or nonexercise of the power effects the beneficiary interest of:
(a) The beneficiaries;
(b) Another beneficiary represented by the beneficiary with respect to the exercise or nonexercise of the power; or
(5) Power over a trust if:
(A) The terms of the trust provide that the power is held in a nonfiduciary capacity; and
(B) The power must be held in a nonfiduciary capacity to achieve the settlor’s tax adjectives under the Internal Revenue Code.[19]
The exclusion of a power of appointment is a major exception. It first requires a definition of power of appointment. The UDTA chose a definition similar to that contained in the Uniform Power of Appointment Act which Indiana has not adopted. A “power of appointment” means a power that enables a person acting in a nonfiduciary capacity to designate a recipient of an ownership interest or another power of appointment in or another power of appointment over trust property.[20] The UDTA goes on to provide a default rule stating that a power granted to a person to designate a recipient of an ownership interest in or a power of appointment over trust property that is exercisable while the person is not serving as a trustee, is a power of appointment and not a power of direction unless the terms of the trust provide otherwise.[21]
These provisions require careful thought by anyone drafting a trust with a distribution director or a power of appointment. Power of appointments are prevalent in trust drafting now and will be in the future. These are generally grouped in categories of living or testamentary powers of appointment and general or nongeneral powers of appointment. Retained powers of appointment can prevent completed gifts. Because these powers are so prevalent and have estate tax consequences, the UDTA makes the decision not to treat the holders of those powers of appointments as fiduciaries. However, a distribution trustee or director is now a popular drafting technique with irrevocable trusts designed to last a long time. Given the UDTA rules on liability and immunity, it may be wise to take advantage of the UDTA and use a distribution director. Another important distinction is that the holder of the power of appointment is usually related and may be subordinate to the settlor or to the beneficiaries. If a distribution trustee or director is chosen, that person must be independent under the Internal Revenue Code to avoid inclusion in the estate.
In the end, the client with the lawyer’s advice must choose whether the power of appointment to be held in a nonfiduciary capacity or the distribution direction in a fiduciary capacity is best. The terms of the trust should clearly provide if it is a power of direction.
The UDTA saw no reason to apply fiduciary standards to the exercise of the power to appoint or remove a trustee or trust director, the power to revoke the trust or the power of a beneficiary over a trust to the extent that it effects the beneficiaries interest or another beneficiary. These were thought to be too common to be subject to the fiduciary standards.
Finally, many powers of direction are drafted to achieve a certain objective under the Internal Revenue Code. The best example would be the power to substitute to trust property held in a nonfiduciary capacity which is often used to make the trust a Grantors Trust with income taxable to the grantor.
With those exceptions, a power of direction covers almost everything else that could be given to a nontrustee with regard to the distribution, investment, management or administration of a trust. This is true whether or not the nontrusts is designated as an advisor or otherwise.[22]
This creates drafting concerns. Under the Indiana Legacy Trust, the Transferor creating the Asset Protection Trust can be an advisor to the investment trustee or director but cannot be a director.[23] If the intent is to make the Transferor the advisor, the advisor cannot be given any power of direction because the power would violate the Indiana Legacy Trust. As an alternative, the Investment Director should be required to obtain the advisor’s consent before acting leaving the decision to the director.
The power of direction otherwise covers just about anything related to the trust and includes any powers appropriate to the exercise or nonexercise of the power.[24]
1.4. LIABILITY. One of the key innovations of the UDTA is its treatment of trustee and director liability. Before the UDTA, drafting involved creating co-trustees with specifically different duties, powers and liabilities. This drafting was necessary to avoid conflicts among the trustees and to protect trustees from co-trustees actions.
Under the UDTA, the trustee still retains the powers of a trustee. However, the trust director can direct the trustees in those areas where the power of direction is given. Accordingly, the liability must be allocated between the trust director and the directed trustee. Under the UDTA, the trust director has the same fiduciary duty and liability in the exercise or nonexercise of the power as the sole trustee in a like position and under similar circumstances would have. If there are multiple directors, the trust director has the same fiduciary duty and liability as if there were multiple trustees.[25] The terms of the trust may vary the director’s duty or liability or impose a duty or liability in addition to those imposed under the UDTA.[26] If the directed trustee has reasonable doubt about duties, the court may be petitioned for guidance.[27]
There is an exception to this liability rule that is a default rule if the trust director is licensed, certified, other otherwise authorized or permitted by law other than this chapter, to provide health care in the ordinary course of the director’s business or practice or profession to the extent that the director acts in that capacity. Unless the terms of the trust provide otherwise, the director has no duty or liability under this chapter.[28]
The UDTA requires that the directed trustee take reasonable action to comply with the trust director’s exercise and nonexercise. If the directed trustee complies, the trustee is not liable for the action.[29] However, the directed trustee must not comply with the trust director’s exercise or nonexercise of a power of direction to the extent that by complying, the trustee would engage in willful misconduct.[30] “Willful misconduct” means intentional wrongdoing and not mere negligence, gross negligence or recklessness.[31] “Wrongdoing” means malicious conduct or conduct designed to defraud or to seek an unconscionable advantage.[32] Under prior Indiana law, the directed trustee would be released of liability.[33] The willful misconduct requirement is designed to avoid intentional misconduct by the directed trustee. This standard for the directed trustee can be modified by the trust document.[34]
Unless the terms of the trust provide otherwise, a directed trustee does not have a duty to monitor a trust director or inform or give advice to a settlor, beneficiary, trustee or trust director concerning an instance in which the trustee might have acted differently from the director and by taking an action described above, the trustee does not assume the duty excluded above.[35]
Conversely, a trust director does not have a duty to monitor a trustee or another trust director or inform or give advice to a settlor, beneficiary, trustee or another trust director concerning an instance in which the director might have acted differently than a trustee or another trust director and by taking in this action, the trust director does not assume the duty excluded above.[36]
1.5. COMMUNICATION. A directed trustee must provide information to a trust director to the extent the information is reasonably related both to the powers or duties of the trustee and the powers or duties of the director.[37] Conversely, a trust director must provide information to a trustee or another trust director in this same regard.[38]
To the extent that a directed trustee or a trust director acts in reliance on the information received, the directed trustee or trust director are not liable for breach of trust to the extent that the breach resulted from the reliance, unless by so acting they engage in willful misconduct.[39]
The communication requirement set out above cannot be altered by the terms of the trust. This is true despite provisions in SEA 265 related to quiet trusts which deals with information about the trust withheld from beneficiaries.
1.6. CASE LAW. There are no reported cases to date which deal with the UDTA. There are, however, two cases that deal with the issue of trust directors and a directed trustee. Both cases involved investment advisors.
In 2001, a Virginia circuit court decided Rollins v Branch Banking & Trust Company of Virginia.[40] The case was decided under the Virginia statute in existence dealing with trust direction. That statute has since been amended to be closer to the Uniform Trust Code provision. The plaintiffs argued that the trustee had a duty to keep them informed and to impart to them any knowledge effecting their interest in the trust. The trial court disagreed, stating:
“The plain language of the instrument, however, clearly contradicts the beneficiaries argument. The beneficiaries, alone, have the power to make investment decisions. The statute enacted by the General Assembly recognizes the basic principal that the Court cannot hold a trustee, or anyone else, liable for decisions that it did not and could not have made. The statute clearly applies in this instance and the beneficiaries have not stated a cause of action against the trustee for failing to diversify the trust assets.”
In 2004, the Delaware court of Chancery was asked to determine a trustee’s liability under a similar fact situation. Delaware’s state law is the origin of the UDTA. In Duemler v Bloomington Trust Co., [41] the corporate trustee was sued by an individual co-trustee who was the sole investment director advisor. The investment director advisor chose not to tender a bond owned by the trust when he had the option to do so. The issue on the bond defaulted and the investment direction advisor sued the corporate trustee, alleging that it breached its fiduciary duty by failing to provide the investment direction advisor with appropriate financial information to allow to make an informed decision. The Court upheld the corporation trustee’s defense under the Delaware directed trust statute noting that there was absolutely no evidence of willful misconduct on behalf of the corporate trustee.
To date, the case law suggests that the UDTA will be effective in providing protection to trustee directors and directed trustees.
1.7. PROCEDURAL ISSUES. With the creation of trust directors, procedural issues arise. Generally speaking, the UDTA treats the trust director as a trustee. Similar to a trustee, the rules are default rules that can be changed by the terms of the trust. In that regard, an action against the trust director for breach must be commenced in the same limitation period as an action against the trustee.[42] A report or accounting has the same effect on the limitation period for a trust director as it does for a trustee.[43] In an action against the trust director for breach, the director has the same defenses as a trustee in a like position has.[44] Related to the issue of litigation is the UDTA provision that the common law and principals of equity supplement this chapter.[45] By accepting appointment as the trust director, the trust director submits to the personal jurisdiction though other methods of obtaining jurisdiction are not precluded.[46] Finally, the same rules that apply to a trustee, apply to a trust director with regard to:
(1) Acceptance;
(2) Giving the bond to secure performance;
(3) Reasonable compensation;
(4) Resignation and removal; and
(5) Making an appointment of a successor.[47]
In two areas, that cannot be changed, the trust director is subject to the same rules as trustees for:
(1) Medicaid reimbursement requirements, or
(2) Notice to attorney general under I.C. 340-4-6-6 for charitable trusts.[48]
[1] Morley, “Making Directed Trusts Work: The Uniform Directed Trust Act,” Acteq Law Journal, Winter 2019, p. 5
[2] Rounds, “The Uniform Directed Trust Act,” Trust and Estates,” December 2017, p. 24
[3] Id
[4] Id
[5] Restatement (3rd) of Trusts, §3.1.3”
[6] I.C. 30-4-2-2
[7] I.C. 30-4-2-6
[8] I.C. 30-4-2-9
[9] I.C. 30-4-2-13
[10] Id
[11] Id
[12] Id
[13] I.C. 30-4-3-9, as Amended by SEA 265
[14] I.C. 30-4-9-3
[15] I.C. 30-4-9-2(2)
[16] I.C. 30-4-9-2(3)
[17] I.C. 30-4-9-2(9)
[18] I.C. 30-4-9-2(5)
[19] I.C. 30-4-9-5(b)
[20] I.C. 30-4-9-5(a)
[21] I.C. 30-4-9-5(c)
[22] I.C. 30-4-9-2(5)
[23] I.C. 30-4-8-11 and 12
[24] I.C. 30-4-9-6(b)(1)
[25] I.C. 30-4-9-8(a)
[26] Id
[27] I.C. 30-4-9-9(d)
[28] I.C. 30-4-9-8(b)
[29] I.C. 30-4-9-9(a)
[30] I.C. 30-4-9-9(b)
[31] I.C. 30-4-9-2(11)
[32] I.C. 30-4-9-2(12)
[33] I.C. 30-4-3-9
[34] I.C. 30-4-9-9(e)
[35] I.C. 30-4-9-11(a)
[36] I.C. 30-4-9-11(b)
[37] I.C. 30-4-9-10(a)
[38] I.C. 30-4-9-10(b)
[39] I.C. 30-4-9-10(c)
[40] 2001 W.L. 34037931 (Va.Cir.Ct)
[41] C.A. 20033.N.C. (Del. Ch. 2004)
[42] I.C. 30-4-9-13
[43] I.C. 30-4-9-13(b)
[44] I.C. 30-4-9-14
[45] I.C. 30-4-9-4
[46] I.C. 30-4-9-15
[47] I.C. 30-4-9-16
[48] I.C. 30-11-9-7