April 30 2021
The last 20 years of trust law evolution has been nothing short of transformative. Historically, trusts and trustees have been bound by a certain rigidity of administration, fashioned by trust laws that assume a trustee to be proficient (and liable) in all investment and administrative matters. Current laws in favorable trust jurisdictions, however, are designed with the goal of long-term flexibility and thus allow settlors to design trusts that contemplate governance roles for not only professional trustees, but also family members, business partners, and trusted advisors.
In a state such as New Hampshire, where Jordan Park’s affiliate, Jordan Park Trust Company operates, in which flexibility is a cornerstone of trust laws, four basic governance models exist, each of which can be finely tailored in a myriad of ways to satisfy settlor intent.
In the unitary trustee model, the trustee has all of the trust powers and all of the duties of a trustee. This is the traditional trust model. While a trustee can delegate certain powers to a co-trustee or another person, any delegation must be prudent, and the trustee must supervise the delegate for purposes of ensuring that the delegate acts properly within the scope of the delegation. The trustee will retain liability for this supervision, and the trustee’s fees typically compensate the trustee for this oversight obligation.
In a directed trust, a trustee has all of the trust powers, but must act in accordance with the direction of another person with respect to certain powers. For example, a person may have the power to direct the trustee to make distributions or make certain investments. In contrast to the unitary trustee model, a directed trust is a multi-party governance model. In a leading trust jurisdiction like New Hampshire, a trustee of a directed trust is not liable for acting in accordance with the directions of the person who has the power to direct, does not have any duty to monitor the person with the power to direct, and does not have any duty to warn the beneficiaries about a possible breach by the person with the power to direct.
In a divided trust, the trust powers are divided among two or more persons. Like a directed trust, a divided trust is therefore a multi-party governance structure. Unlike a directed trust, however, a divided trust does not involve a trustee being the hub of all trust activity. Rather, each trust official—i.e., trustee, trust advisor, or trust protector—can directly exercise the powers with which he, she, or it is vested. This is the key advantage of a divided trust over a directed trust. The named official can act independently and efficiently to perform their assigned function. In a leading trust jurisdiction like New Hampshire, a trust official is not liable for another trust official’s exercise or non-exercise of a trust power, does not have any duty to monitor the other trust officials, and does not have any duty to warn the beneficiaries about any possible breach by any other trust official.
This model proves most effective for settlors who want individuals or entities with special knowledge to participate in the trust’s activities. For example, a close family friend may be best positioned to make distribution decisions; the settlor’s business partner may be the best choice to make ongoing investment decisions regarding the settlor’s business. A trust protector well familiar with the settlor’s expectations and wishes may be given broad powers to remove and replace other officials—including the trustee—and provide guidance as to what the settlor would have wanted in certain circumstances. With a divided trust model, the settlor can place the most qualified advisors in decision-making roles.
A hybrid model combines elements of a directed trust and elements of a divided trust. For example, a distribution committee may have the power to direct the trustee regarding distributions, and a trust advisor may have the power to manage the trust property. A hybrid trust is less commonly used than directed trusts and divided trusts, because a (pure) divided trust often is more advantageous. Nonetheless, in designing a trust that suits a settlor’s particular objectives or modifying an existing trust so it can better achieve its purposes, a hybrid trust sometimes is the answer.
Considerations for Owners of Distinct Assets
The ability to customize the governance structure of a trust can prove especially advantageous in cases of unique holdings. In instances where a trust will hold specialized assets such as a family-controlled business, settlors will likely have specific views about how the assets should be invested or managed, or a particular vision of how the assets will be used in a future transaction. In cases like these, having a named advisor or committee with specialized knowledge of the family business will best ensure that the settlor’s aspirations can be realized. Most any circumstance can be addressed with a tailored governance structure that protects the settlor’s interests, achieves continuity in the management of the closely-held assets, and serves beneficiaries with both flexibility and fairness.
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