Separating Investment Management and Trust Administration Duties: Directed and Delegated Trusts
By: Terry Doyle, Director of Fiduciary Sales
Trust creators or trust beneficiaries may wish to split the responsibility for trust administration and investment management. Utilizing features of the Uniform Trust Code, trustees like Prairie Trust can partner with financial advisors to offer a more flexible approach to trust administration and investment management. Acting as corporate trustee, Prairie can administer directed trusts and delegated trusts which can allow an outside advisor to manage irrevocable trust assets.
When drafting a trust document, the creator of the trust, also known as the settlor, may assign the job of managing assets to someone other than the trustee. The settlor might nominate someone known as a directing party to direct the trustee to utilize the services of an investment manager not affiliated with the trustee. Often, the directing party is a trust beneficiary or other individual who had a close relationship with the trust settlor. A directed trust can allow an existing wealth advisor to continue managing trust assets based on the authority of the directing party, while releasing the trustee from the responsibility of how the money is invested. In a directed trust, the trustee is legally required to follow the investment directives of an outside advisor (except for acts of willful misconduct) who manages investments and maintains a close relationship with the client.
Trust settlors who may not wish to name a directing party can still have a trust drafted that allows an outside investment manager to manage trust assets. The settlor can state their wish for the trustee to delegate investment authority to an outside investment advisor. Delegated trusts give the trustee the ability to delegate the investment of trust assets. In a delegated trust, the trustee remains responsible for ensuring the trust investments are suitable for the needs and purposes of the trust. As a result, the trustee must monitor the outside manager’s investment activities to ensure that all parties meet their fiduciary obligations. In delegated trusts, the corporate trustee shares more fiduciary responsibility for investment decisions than in a directed trust.
In either a directed or delegated trust, the trust duties are bifurcated: the advisor manages the assets and the trustee handles trust administration.
Though many older trust documents do not address the appointment of a directing party nor the delegation of investment authority, such issues can often be addressed utilizing what is known as a Non-Judicial Settlement Agreement, or NJSA. An NJSA can be utilized to appoint a trust beneficiary or other individual as the “directing party.” The directing party then directs the advisor-friendly trustee to utilize the services of an independent advisor to manage trust assets and to utilize the custodian chosen by the advisor. All qualified beneficiaries of the trust must sign off on the NJSA, as their unanimous request is required under the Trust Code. A qualified beneficiary is anyone who is currently entitled to receive distributions from the trust AND anyone who would be entitled to distributions from the trust if the current beneficiaries receiving distributions were to pass away.
Due to the tools provided by the Uniform Trust Code, trust beneficiaries don’t have to be to be stuck with a traditional corporate trustee’s investment approach. There are now options allowing for greater choice in selecting the investment manager of trust assets, allowing for better outcomes for trust beneficiaries.