Probate & Trust Law Section Conference Manual ... - Minnesota CLE

the “prudent man rule” required. 76 Because the new law mandates that a fiduciary
exercise the “care, skill and caution to make and implement investment and management
decisions as a prudent investor would,” a trustee may even be required to delegate
investment authority, if the trustee is not sufficiently expert to perform that function for a
particular trust. Even a fiduciary with investment skill may delegate certain investment
functions. For example, a corporate trustee not expert in a specific investment area—such
as foreign securities, venture capital, etc., may properly delegate that particular
responsibility. 77 Consequently, a trust with situs and law in a state that has adopted some
form of the Prudent Investor Act can be very beneficial.
3. DIRECTED TRUSTS
A directed trust combines flexibility and control, as well as, the favorable trust, asset protection
and tax laws of the directed trust state with the skills of a client's own investment advisors. This
combination allows the client to maintain their trusted investment advisors.
Any type of trust can be established as a directed trust, including both revocable and irrevocable
trusts. The trust instrument vests control over investment discretion with an outside advisor and
exonerates the administrative trustee. This is also supported by the directed trust statute.
a. Directed Trust Structure
The typical directed trust has an administrative trustee and/or custodian, but an outside
investment advisor/manager of the client’s choice is responsible for the trust’s investment
management. There are many different ways of structuring each scenario based upon the
client's desires and needs.
A directed trust is generally drafted so that a trustee’s duties and discretion as to
distributions and/or investments are removed by a provision in the trust agreement and/or
by state statute, and given to an investment committee/advisor, a distribution
committee/advisor, a trust advisor, and/or trust protector. The general structure of a
modern trust using a directed trustee is as follows: 78
i. The Administrative Trustee
An administrative trustee is typically based in a directed trust state and/or is
drafted into such a role in the trust document and exonerated from acting in a
directed capacity. 79 However, drafting a directed trust structure without a directed
trust statute may not be as strong. The administrative trustee is not responsible
for the trust’s investment management, but instead takes direction from the
Investment Committee/Advisor. The administrative trustee’s typical duties are to
title and take ownership of the trust assets, establish and maintain a trust bank
76 29 C.F.R. § 2550.404(a)-1 (1974); Bogert, TRUSTS AND TRUSTEES § 612 n.20.
77 RESTATEMENT (THIRD) OF TRUSTS § 227 (Prudent Investor Rule); Lyman W. Welch, How the Prudent Investor
Rule May Affect Trustees, TRUSTS & ESTATES, Dec. 1991.
78 Al W. King, Pierce H. McDowell & Daniel G. Worthington, Dynasty Trusts: What the Future Holds for Today’s
Technique, TRUSTS & ESTATES, Apr. 1996; Al W. King, The Modern Dynasty Trust: Flexibility is More Important
than Ever, TRUSTS & ESTATES, Jan. 1998; Iris J. Goodwin & Pierce H. McDowell III, Delegating Responsibility:
Trustees Explore the Once Taboo, TRUSTS & ESTATES, Mar. 1999.
79 See supra note 73.
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