I’ve been a fan of the “directed trusts” idea from the time it was first talked up in the press [click here], through to its recent adoption here in Florida [click here].
Whether you make a living drafting trusts as a lawyer or administering them as a trustee, you should get to know this important new statute, and a great way to do that is to read Directed Trusts: The Statutory Approaches to Authority and Liability, written by two of Miami’s very own trusts-and-estates stars, Mary Clarke and Diana S.C. Zeydel. Their article does a good job of zeroing in on the key issues drafters/trustees need to know about by using a compare-and-contrast approach among the various jurisdictions that have adopted a form of the directed-trusts statute, with a special focus on Florida and Delaware.
Here’s what the linked-to article had to say about Florida’s directed-trusts statute:
The Florida legislature recently passed an amendment to Florida Statutes §736.0703 intended to relieve the directed trustee of liability for acts done in reliance on the direction of a co-trustee having the authority to direct it in the trust document. Florida’s approach differs from the Delaware approach and the approach in the UTC in that it permits a directed trust only if the person giving the direction is also a trustee. The bill revises Florida Statutes §736.0703 by adding a new subparagraph (9) as follows.
Amendment to Fla. Stat. §736.0703. Cotrustees.
(9) If the terms of a trust instrument provide for the appointment of more than one trustee but confer upon one or more of the trustees, to the exclusion of the others, the power to direct or prevent certain actions of the trustees, then the excluded trustees shall act in accordance with the exercise of the power. Except in cases of willful misconduct on the part of the directed 3 trustee of which the excluded trustee has actual knowledge, an excluded trustee shall not be liable, individually or as a fiduciary, for any consequence that results from compliance with the exercise of the power, regardless of the information available to the excluded trustees. The excluded trustees shall be relieved from any obligation to review, inquire, investigate or make recommendations or evaluations with respect to the exercise of the power. The trustee or trustees having the power to direct or prevent actions of the trustees shall be liable to the beneficiaries with respect to the exercise of the power as if the excluded trustees were not in office, and shall have the exclusive obligation to account to and to defend any action brought by the beneficiaries with respect to the exercise of the power.
The significant difference between the approach in the amendment to the Florida statute and the approach of other states is that only a co-trustee may act as a “director,” thus subjecting the co-trustee with the power to direct to full liability as a fiduciary. Presumably, the governing instrument could, however, relieve the trustee with authority to direct from liability for breach of trust except for bad faith and reckless indifference to the purposes of the trust or the interests of the beneficiaries consistent with Florida Statutes §736.1011(1)(a). This should be distinguished from the authority contained in Florida Statutes §736.0808 where the power to direct the trustee does not completely exonerate the directed trustee from liability for following the direction, but the person giving the direction is limited to a fiduciary standard of “good faith,” rather than being subject to liability as a trustee.
The original bill did not include the language, “Except in cases of willful misconduct on the part of the direct[ed] trustee of which the excluded trustee has actual knowledge, ….” Surprisingly, it is not the directed trustee that is held liable for his or her own “willful misconduct” as in Delaware. Instead, the directed trustee must test the malfeasance of the directing trustee. This may present an interesting challenge for the directed trustee because the directed trustee must in effect test the state of mind of the directing trustee to determine if intentional misconduct has taken place. One wonders how the directed trustee will make such a determination. The “actual knowledge” requirement might mean that the directing trustee would have to articulate an intention to commit malfeasance regarding the trust before the directed trustee could be held liable. On the other hand, in its practical application the two tests may yield the same result. If the direction is a blatant violation of the terms of the trust, the directed trustee would likely be deemed to have engaged in willful misconduct upon following the direction, and the directing trustee would likely be deemed to have engaged in willful misconduct by giving such a direction.