Finding Fiduciaries: Using Trust Protectors and Directed Trustees, Part 2

/ December 3, 2018

The Minnesota Trust Code introduced several new fiduciary or quasi-fiduciary positions into Minnesota trust law. Minnesota Statute section 501C.0808 creates the offices of “trust protector”, “directing party” and “directed trustee.”  The estate planning attorney should be familiar with the “directed trust” concept and understand how these new positions may be used to enhance an estate plan.

A directed trust is one in which the various administrative, investment, and distributive duties of the trustee are unbundled. With a directed trust the settlor designates one or more directing parties to give directions to the trustee. The trustee then, by definition, becomes an “excluded fiduciary” and is relieved of fiduciary responsibility as to matters within the scope of the direction.  A directing party may be either a “trust protector,” an “investment trust advisor,” or a “distribution trust advisor.” A “trust protector” is a person given any of the dozen powers specified in Minnesota Statute section 501C.0808.  An “investment trust advisor” is any person given authority to direct, consent to, or veto the exercise of the investment powers of the trustee. A “distribution trust advisor” is a person given the authority to direct, consent to, veto, or otherwise exercise the distribution powers of the trustee.

Directing parties are not necessary for all trusts. A garden-variety revocable trust designed to serve as a Will substitute is unlikely to require a directing party. Situations where a directing party may be appropriate include:

  1. where the settlor wants to provide flexibility in a long-term trust;
  2. where the trust holds special assets which might be better managed by an investment trust advisor or trust protector than the trustee; or,
  3. where the settlor, beneficiaries, or trustee cannot possess certain powers for tax reasons.

In cases where the use of a directing party is indicated, a number of issues should be addressed, including:

  1. whether the directing party should be subject to a fiduciary duty or required to act in accordance with the lower good faith standard (If the powers conferred upon the directing party are those normally exercised by a trustee, a fiduciary duty is probably appropriate. Conversely, if the powers are of a sort that would typically be exercised by the settlor, the beneficiaries, or a court, the lower good faith standard may be sufficient.);
  2. the scope of the directing party’s authority;
  3. the succession plan for the directing party;
  4. the mechanism for ensuring the directing party will have access to necessary information; and,
  5. the directing party’s compensation.