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

problem or any tax issues. Although there may be tax issues with this strategy, if the
policy is being sold from a non-grantor trust and the fair market value of the policy being
sold is more than the cost basis of the policy. 106
7. DELEGATED TRUSTS
a. As previously discussed, only a few states have true directed trust statutes, however most
states have some form of delegated trust statues, particularly with the advent of the
Prudent Investment Act. 107 The trustee of a delegated trust is generally allowed to
delegate its investment responsibility to one or more qualified investment managers’
consultants and/or advisors, pursuant to the trust document and/or outside agreement.
Delegated trusts are generally invested pursuant to the provisions of the trust document as
well as an agreed upon Investment Policy Statement, which is periodically reviewed by
the investment professionals, trustee and the family, to ensure compliance.
b. Generally, most delegation standards no longer require the trustee to pre-approve all
transactions or to analyze each trade. 108 Many advisors suggest that a clause regarding
trading or brokerage commissions should be inserted into the trust document to protect
the trustee regarding the possible range of trading commissions. 109 The trustee of a
delegated trust generally has a much greater degree of responsibility than a directed
trustee. Consequently, a delegated trustee may desire exoneration language within the
trust document and/or by separate agreement. 110 In certain states, these exoneration
agreements are void against public policy in certain situations (for example, New York
Estates, Powers and Trusts Law Section 11-1.7 makes such exoneration void against
public policy for testamentary trusts, but not inter vivos trusts). 111
c. The trustee is generally involved in the selection of the investment manager to delegate
investment responsibility. Records regarding the investment manager selection due
diligence must usually be kept by the trustee (for example, the investment managers
experience, track record and the ADV). Additionally, the terms of the delegation
(compensation, duration, procedural safeguards) will generally be determined and
negotiated by both the delegating trustee and the family.
d. The delegating trustee works with the investment manager and the family in formulating
an investment policy statement and providing an annual review to ensure that the
investment objectives are in accordance with the trust document.
i. If one or more factors are triggered in the review, a more in-depth analysis will
be conducted to determine whether corrective action should be taken. The trustee
may utilize agents/experts to assist them with this process. Some of the typical
trigger points may be:
106 I.R.S. Priv. Ltr. Rul. 200518061, 200228019. Please note that if a policy is being sold from a non-grantor trust to
a grantor trust these need to be evaluated on a case-by-case basis. Generally, the fair market value of a normal policy
will generally exceed cost basis around the 7th year of its existence.
107 See supra notes 73, 77.
108 Iris J. Goodwin & Pierce H. McDowell III, Delegating Responsibility: Trustees Explore the Once Taboo,
TRUSTS & ESTATES, Mar. 1999; Roy M. Adams, Delegating, TRUSTS & ESTATES, June 2003.
109 Id.
110 Id.
111 See supra note 92.
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