Posts Tagged Advisory Trust of Delaware
On the surface, directed trusts are an obvious win for everyone. Splitting the administration of a newly created trust from the responsibility of managing the assets within it lets legacy advisors keep their accounts and custody provider—such as Schwab or Fidelity. Trustees avoid the headaches of managing exotic assets, while their clients can feel secure knowing that experts are in charge of every aspect of their wealth.
Jeffrey Lauterbach gets credit for turning the concept into a trust operation that propelled his firm, Capital Trust, from zero to $6 billion in trust assets in six years. “It was always market driven,” he told me in a recent interview. “Advisors told us want they wanted, and we delivered.”
Lauterbach sold his operation in 2005, which was subsequently sold to Wilmington Trust in 2007. He added, “Wilmington tried to make a go of it by itself, but didn’t stick with it long enough to make it work. We did”
Today, firms like Advisory Trust of Delaware (Capital Trust’s successor, owned by Wilmington Trust), Santa Fe Trust, Reliance Trust and Wealth Advisors Trust Company of South Dakota are actively courting advisors who want to add value without handing off the relationships they’ve worked so hard to build. Fees are generally split between trustee and investment manager, which helps make sure everyone stays happy.
These advisor-oriented trust companies are also promoting the directed trust model directly to wealthy people who may benefit from a trust but don’t feel like handing the reins of a family business, for example, to a relative stranger who knows nothing about how to keep the business going. In these cases, setting up a directed trust lets insiders stay in charge and still enjoy the other advantages of ownership under the trust structure.
“A corporate trustee doesn’t want to get involved in running a closely held business, and families don’t want corporate trustees interfering in a lot of their decisions,” trusts and estates lawyer Bruce Stone told Lawyers USA (a professional monthly for the legal profession) back in 2007. “With a directed trust, the corporate trustee only has to do certain things.”
Liability in the Details
So far so good, but if things go wrong, the question of who gets blamed still gets decided on a state-by-state basis. The limits of a trustee’s responsibility to monitor the advisors assigned to direct the trust’s investments are often nebulous, and some have been sued for failing to spot and stop misconduct fast enough.
It’s a controversial topic even among The Trust Advisor’s readership. When we posted back in January our analysis of the most trust-favorable states, estate planners piped up with corrections.
“In your chart, you indicated that Florida doesn’t have a power to direct,” wrote Lester Law, a senior vice president at U.S. Trust Bank of America Private Wealth Management working in Naples, Florida. “Can you review the … statute and let me know what you think?” And Boulder, Colorado attorney Scott Robinson alerted us that “The chart indicates that Wyoming does not have a directed trust statute. Wyoming does in fact have such a statute.”
In an influential 2007 white paper on the subject which may be downloaded, ”Directed Trusts: Can Directed Trustees Limit Their Liability?,” trust guru Richard Nenno, a managing director at Wilmington Trust Company of Delaware, divides the roughly 30 states that allow directed trust arrangements into two main groups. Most (including, according to the white paper, Florida and Wyoming) followed the approach laid down by Section 808(b) of the Uniform Trust Code.
In these states, trustees have to monitor what’s going on in the investment side and step in if the terms of the trust are in danger of being broken. This means the trustee’s potential liability still exists—in whole or in part—even though the work of managing the assets has been assigned to someone else. “Unless the governing instrument provides otherwise, a directed trustee must devote considerable resources” to the job, Nenno writes. In plainer terms, in these states, second-guessing the legacy money manager can be a grind.
However, other states, including Delaware, South Dakota and most of the Trust Advisor top tier, take what Nenno calls “a more protective approach” based on statutes that go beyond the UTC. In these states, trustees are held more-or-less blameless for anything that goes wrong in an area the trust grantor explicitly assigned someone else to handle.
Utah, for example, assigns directed investment advisors separate fiduciary responsibility; the trust company is almost completely off the hook for following the advisor’s investment calls except in cases of gross negligence or willful misconduct.
In these states, Jeff Lauterbach told The Trust Advisor, it’s cut and dried. “The trustee was directed to do something and the trustee did what he was supposed to do, he’s not liable. The advisor’s liable.”
“A Competitive Issue”
Whether a state has been content to go the UTC route or opted for more comprehensive directed trust rules can make or break its ability to support advisors cultivating directed trust arrangements. Joan Crain, a senior director at BNY Mellon Wealth Management in Fort Lauderdale, told Lawyers USA that it’s “a competitive issue” and that the 2007-era Florida rules didn’t go far enough to protect trustees.
“You still have the duty to oversee, to monitor, to intervene,” she said. “The directed trustee statutes in the few states that have strong ones are explicit as to the lack of responsibility on the part of the trustee for reviewing the actions of the investment manager.”
Even in relatively protected states like Delaware, where directed trust statutes go back to 1986, lawsuits still happen. Nenno’s own Wilmington Trust was a defendant in 2004 after the securities lawyer directed to oversee a trust’s assets sued the trust company for following his advice. The court found Wilmington blameless, noting that the investment advisor was happy to collect management fees and so was implicitly accepting the wages of failure.
As Leo Strine, the court chancellor who heard the case, summed up: “Had he wished for Wilmington Trust to be investment advisor to run a high-risk portfolio, I’m sure Wilmington Trust likes to make money. It would be willing to do it. It costs a lot more.”
Jerry Cooper, senior editor, The Trust Advisor Blog. Scott Martin and Steven Maimes contributed.