The New Jersey Uniform Trust Code – Part 11: Directed Trusts
This concept is not as grounded in New Jersey law as it is in other jurisdictions. Essentially, a directed trustee can be told to make certain investment decisions or distributions, or to take other actions in the administration of the trust. A trust can allow a trustee to follow the direction of a third party. See Jeffrey A. Cooper, Dead Hand Investing: The Enforceability of Trust Investment Directives, 37 ACTEC L.J. 365 (2011); Richard Nenno, “Can Directed Trustees Limit Their Liability?” Prob. & Prac. ,Nov.-Dec. 2007. See also In re Trust Under Will of Wallace B. Flint for the Benefit of Katherine F. Shadek, 118 A.3d 182 (Del. Ch. 2015) (bucking the current trend toward the liberal modification of trusts to suit the preferences of current beneficiaries, the Delaware Court of Chancery in this case denied an unopposed application to convert a testamentary trust into a directed trust).
This power to direct creates a wide range of options. One of the most typical powers is to direct investments. However, often a trust holds assets unique to a family – e.g., a family business or vacation home – and the power can allow a trustee to have the handling of those assets directed by third parties.
The NJ UTC codifies the use of directed trusts in N.J.S.A. § 3B:31-61 and -62.
N.J.S.A. § 3B:31-61(a) specifies that while a trust is revocable, the trustee may follow the direction of a settlor that is contrary to the terms of the trust; in other words, the settlor can provide direction to the trustee that contradicts the trust provisions.
N.J.S.A. § 3B:31-61(b)-(d) then deal with powers to direct as granted to persons other than the settlor.
Under subsection (b), for a revocable trust, if the trust confers upon a person other than the settlor the power “to direct certain actions of the trustee, the trustee shall act in accordance with a written exercise of the power” unless it is contrary to the trust terms or the trustee knows it would be a breach of a fiduciary duty by the person holding the power.
Indeed, the trust terms may even confer the power to direct the modification or termination of the trust. N.J.S.A. § 3B:31-61(c). It appears that, because this subsection omits “revocable” – and the preceding ones apply only to revocable trusts – that this provision applies to both kinds of trusts.
Like the trustee, the power holder is “required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries; that holder is thus liable for any loss that results otherwise. N.J.S.A. § 3B:31-61(d).
The NJ UTC also adds a section, not in the model legislation, specifically on the power to direct investment functions. N.J.S.A. § 3B:31-62. That statute appears to have been incorporated from the Delaware statutes.
When one or more persons are given the authority to direct, consent to, or disapprove a fiduciary’s investment decisions, such persons are considered investment advisors and fiduciaries when exercising such authority, unless the governing instrument otherwise provides. N.J.S.A. § 3B:31-62 (a). In such a case, and in the absence of willful misconduct or gross negligence on the part of the fiduciary so directed, the fiduciary is not liable for any loss resulting from any such act. N.J.S.A. § 3B:31-62(b). An investment decision includes the retention, purchase, sale, and other transactions, as well as the valuation of nonpublicly traded investments. N.J.S.A. § 3B:31-62(d). When the governing instrument provides that a fiduciary is to follow the direction of an investment advisor, then, except to the extent otherwise provided in the governing instrument, the fiduciary shall have no duty to: monitor the conduct of the investment advisor; provide advice to or consult with the investment advisor; or communicate with, warn or apprise any beneficiary or third-party that the fiduciary would or might have exercised such discretion in a different manner. N.J.S.A. § 3B:31-62 (e).