Directed Trusts – Jewel Inside the UTC

The following article written by K&D shareholder, Glenn A. Henkel, and was recently featured in The Barrister (April 2016, Vol. 64, No. 9)  published by the Camden County Bar Association.


On January 19, 2016, Governor Christie signed Assembly Bill 2915/Senate Bill 2035, known as the “Uniform Trust Code” (“UTC”), as Chapter 276, P. L. 2015.  The UTC was created as a project of an ad hoc committee of trust and estates lawyers in the New Jersey Bar Association who attempted to conform the NJ UTC in compliance with New Jersey’s common law.  This large work includes 82 provisions and results in a codification of the New Jersey Trust rules.  In New Jersey, trust law has been developed over 150 years and, thus, the need for a trust code in New Jersey was not as prevalent as with other jurisdictions. In some states, there are only a few trust cases ever decided and the UTC was thus commissioned to add rules where none existed.  In New Jersey, our population has been making, challenging and litigating various issues related to trusts for a long time and, as such, the case law is extensive.  However, the UTC provides benefit by placing the trusts laws in one location.  This article is not about the trust code, per se, but instead, about a provision added to the trust code involving the concept of a “directed trust.”

 

The NJ-UTC was a product of the New Jersey Bar Association, principally the Real Property, Trust and Estate Law Section.  In order to obtain political support within the legislature for the provisions, the Bar reached out to the New Jersey Banker’s Association for its support. The Bankers’ lobbyists turned to their constituency to see whether the bankers should support this project or not.  Typically, in other states (the UTC has been enacted in about 30 other states), bankers were a significant ally in enactment.

In New Jersey, the bankers requested that the Bar make our trust law “more like Delaware.”  Like in the corporate arena, Delaware trust law has always been viewed as progressive and “pro management.”  The ad hoc committee considered this request and focused on two particular aspects to Delaware law that could have been considered- Qualified Domestic Trusts (QDT) and Directed Trusts. While beyond the scope of this article, the QDT did not seem consistent with New Jersey law. It seeks to allow “self-settled” trusts to escape the reach of creditors, contrary to NJSA 3B: 11-1.

state-local-taxBy contrast, the second provision of the Delaware law, regarding Directed Trusts, was perceived as being particularly appropriate for New Jersey (though many states are enacting “directed trusts” statutes).  If a settlor created a trust to provide for specific terms to bifurcate responsibility for a particular asset between two “fiduciaries,” New Jersey law has always followed the “probable intent” of the Testator.  This was such well settled case law that it was codified in 2004.  See N.J.S.A. 3B:3-33.1; See also, Fidelity Union Trust Company v. Robert, 36 N.J. 561 (1962); Engle v. Siegel 74 N.J. 287 (1977); in Re Estate of Branigan, 129 N.J. 324 (1992).  Since 1986, Delaware has had a statute which gave the trustee (usually a corporate trustee) the ability to take direction from another individual serving as an investment advisor. Typically, this will allow for a lower fee for a trust that holds a “difficult” asset, such as a residence or business. This, was thought of as an appropriate mechanism for New Jersey law because of the “probable intent” doctrine.

The bankers agreed to support the UTC assuming the Bar Association would support the directed trust statute.  Thus, with the UTC, we now also have a directed trust provision to be codified in NJSA 3B: 31-61 and NJSA 3B:31-62.  The directed trust statute now gives greater authority to New Jersey clients to include provisions that authorize a trustee to direct investment functions to another individual.

The UTC already included a provision which authorized direction in similar circumstances.  This provision is now codified in N.J.S.A. 3B:31-61 (to be effective July 17, 2016) whereby a trust can confer upon another trustee the ability to let a trustee follow the direction of a third party.  This power under N.J.S.A. 3B:31-61(c) can be even as broad as the power to direct the modification or termination of the trust.  However, the bill annexed an additional provision called “Powers to Direct Investment Functions” which is very similar to the Delaware directed trust statute contained in 12 Del. Code §3313.  See N.J.S.A. 3B:31-62.

philadelphia estate planning councilThis new statute has an operative provision authorizing a trustee to be obligated to follow a third party investment advisor “direction” or “consent.”  Such an “investment advisor” is a “fiduciary,” meaning that he or she will have typical fiduciary roles.  Moreover, our statute goes on to provide that the trustee would not be liable for acts except in the cases of “willful misconduct or gross negligence on the part of the fiduciary so directed.”  The “gross negligence” standard is broader than the Delaware statute and it appears to be very advantageous to a trustee.  Moreover, absent clear and convincing evidence, the directed trustee is not responsible for taking administrative steps to review the activities of the investment advisor.  The directed trustee also has no duty to monitor the conduct of the investment advisor, to provide advice to the investment advisor, or to communicate or apprise beneficiaries with regards to a “directed investment.”

Why would a directed trust provision be helpful?  In some circumstances, when an individual utilizes a corporate fiduciary, there could be a concern on the part of the corporate fiduciary to the underlying assets that are particular to the family.  Often, a family business or vacation residence will constitute a part of the corpus of the trust.  By having a third party investment advisor responsible for this particular asset, a corporate fiduciary can accept a trusteeship without the obligation to diversify.  Several cases in recent decades outside New Jersey have dealt with a circumstance where the trustee was told to maintain a particular investment (such as stock in Eastman Kodak Company) and because of the direction, the trustee did not pay attention to the decline in value.  Upon subsequent suit for damages by beneficiaries, the courts (again, outside New Jersey) held that a trustee was responsible for such circumstance.  With a directed trust statute, a third party “investment adviser” can be told to monitor the particular investment thereby allowing the corporate fiduciary to be free from the burden of this particular asset.

If an investment advisor is named in a document to fill that role, be wary that the individual will continue to have fiduciary duties as related to that investment.  This can be problematic if the investment is a business interest or vacation home.  However, typically, the individual serving as investment advisor will be closer to the family and will be aware of the goals and objectives of the family maintaining that asset.  As a fiduciary, the investment adviser will be entitled to commissions and fees. Moreover, the use of an investment adviser in a trust does not preclude a settlor from granting an individual a “non-fiduciary” power.

In sum, the enactment of the New Jersey directed trust statute in N.J.S.A. 3B: 31-62 is a welcome addition to our trust law. For those critics of this provision who feel that it can result to a bad result, simply draft away from its use.


Glenn A. Henkel

Glenn A. Henkel is a shareholder in the firm and earned his J.D. degree at Rutgers University School of Law, where he graduated with honors and was awarded the Prentice Hall Award for outstanding performance in the area of taxation. He earned his LL.M. in Taxation at New York University. Mr. Henkel’s particular areas of expertise include complex estate planning, tax-exempt organizations and Probate, Trust and Estate Law.