Virginia Enacts Directed Trustee Statute

April 26, 2012

On April 4, 2012, Virginia Governor McDonnell signed into law Senate Bill 180 which, when incorporated into a trust either by the settlor or the interested parties, provides protections for a trustee when acting or not acting pursuant to the directions of a trust director. The bill amends Virginia Code section 55-548.08, which is the part of the Virginia Uniform Trust Code (VUTC) that addresses the power to direct the action of a trustee.

As estate planning and investments have become more complicated, settlors are increasingly interested in giving third parties – often called “trust directors,” “trust protectors” or “trust advisors” – powers to direct the actions of a trustee. For example, a settlor may desire to name a family member as trustee, but give a professional investment advisor the authority to direct trust investments. Or, a settlor may desire to name a professional fiduciary to administer the trust, but give an involved family member or business expert with special expertise the power to direct the trustee with respect to managing a closely held business interest held in the trust.

Currently, the VUTC provides that a trustee must act in accordance with a trust director’s directions unless (1) the directions are manifestly contrary to the trust terms or (2) the trustee knows the action would be a serious breach of the duty that the trust director owes to the beneficiaries of the trust. These statutory exceptions to the trustee’s obligation to act pursuant to a direction, along with other obligations arising out of the common law, could expose the trustee to beneficiary claims for losses resulting from the trust director’s directions. The current statute also provides that the trust director is only “presumptively” a fiduciary, leaving open the possibility that a settlor could attempt to give powers to a trust director and at the same time provide that the trust director does not owe duties to the beneficiaries and is not liable for losses caused by its actions.

The law adds a new subsection E to Virginia Code section 55-548.08 that applies to any trust administered under Virginia law, but only if the subsection is either (1) incorporated into the trust instrument by specific reference by the settlor or (2) incorporated into the trust instrument by specific reference in a nonjudicial settlement agreement under the VUTC. The ability to bind minor, missing, unknown, unborn and incapacitated beneficiaries to a nonjudicial settlement agreement by virtual representation under the VUTC will facilitate the use of agreements to incorporate the new subsection.

Where subsection E applies, a trust director will be deemed a fiduciary with fiduciary duties and liability for losses resulting from a breach of those duties, notwithstanding any contrary language in the trust instrument.

Correspondingly, where the subsection applies, a directed trustee will have no liability to the beneficiaries for any losses from actions taken or not taken pursuant to the trust director’s directions or as a result of the trust director’s failure to direct or otherwise act after receiving a request for direction, consent or action by the trustee. The directed trustee remains liable to the beneficiaries only in the case of willful misconduct or gross negligence by the directed trustee.

Unless the trust instrument expressly provides otherwise, the subsection also limits or eliminates the directed trustee’s obligations to (1) monitor the trust director, (2) provide information to the trust director, (3) inform or warn the beneficiaries, third parties or the trust director that the trustee disagrees with the trust director, or (4) take any action to prevent the trust director from acting or to compel the trust director to redress its actions or directions.

The cumulative effect of the subsection, where it applies, is to clarify that in most circumstances the trust director will be solely responsible to the beneficiaries for the consequences of its actions.

The law goes into effect on July 1, 2012.

The full text of the law is available here.

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