Open Architecture Trust Designs Under New Hampshire Law Provide Flexibility and Opportunities
| Citado como | Vol. 49 No. 2 Pg. 0034 |
| Páginas | 0034 |
| Año de Publicación | 2008 |
2008 Autumn, Pg. 34. Open Architecture Trust Designs under New Hampshire Law Provide Flexibility and Opportunities
Volume 49, No. 2
Autumn 2008
A. INTRODUCTION
An article recently appeared in the Wall Street Journal(fn1) in which the author observed that ". . .as trusts become more complex and investing strategies become more sophisticated, more well-off families are using teams of multiple trustees and advisors, each with very specific roles and responsibilities. . .Families are `slicing and dicing' trustee duties, and allocating them among these multiple trustee and non-trustee participants. . .", including co-trustees, agents, trust "protectors", distribution and investment committees and trust "advisors".(fn2)
You know that an estate-planning concept has achieved some currency when it moves beyond the arcane world of the professional journals and into the popular press. In recent years, many commentators have addressed the nuanced legal issues implicated by such multiple participant open architecture trust ("OAT") structures -- a modern development unknown to the common law.(fn3) New Hampshire is one of a modest but growing number of states that have responded by enacting statutory default rules governing the interrelationship and legal responsibilities of these new players to each other, to trustees and to beneficiaries. New Hampshire first adopted the OAT features of the Uniform Trust Code ("UTC") in 2004 without significant changes to the Model UTC.(fn4) In 2006, the New Hampshire overhauled those provisions with several important amendments and enhancements made as part of the "Trust Modernization and Competitiveness Act" ("TMCA"). New Hampshire's legislation has been hailed as the most comprehensive and thoughtful of the available statutory templates, and is likely to influence trust reforms in other states.(fn5)
OAT structures offer both promise and peril for estate planning attorneys, trustees and clients alike. They can be crafted to allow families more meaningful roles in the administration of their large trusts and address many of the constraints and liability risks trustees faced under prior law (particularly those relating to investments and the duty of diversification). However, there remains the potential for unintended tax and other consequences as the law and drafting practices continue to evolve. This article will attempt to trace the origins of these new models for trust governance and explore some of their implications for trust drafters, clients and trustees.
B. ORIGINS OF OPEN ARCHITECTURE TRUST DESIGN
1. The "Unitary Trustee" and the Non-Delegation Principle(fn6)
a. Feudal England. Trusts were originally developed in England as a means of conveyance of feudal lands, not as a vehicle for the management of fungible investment assets. The trust structure evolved as a title holding intermediary to avoid restrictions on land ownership and inheritance that existed under the ancient English law of real estate. Achieving these purposes required that trustee hold full legal title to the land. Accordingly, English common law protected the family by severely limiting the authority of the trustees. The chosen trustees were typically individuals: friends, advisors and members of the family. These early trustees served without compensation and did very little. There was no need for elaborate trust laws to define the powers of trustees and the interrelationship between the family and trustee because they peacefully co-existed within their limited spheres.
b. Post-Industrial England. The need for a deeper body of trust law became more apparent after the industrial revolution. Financial instruments -- stocks, bonds and other complex financial promises -- replaced real estate as the primary stores of private wealth. Traditional family trusts in England remained anchored in by their heritage as simple devices for holding and conveying real estate. The trustee's inherent powers continued to be limited despite dramatic changes in financial assets. The law continued to require that a single trustee, or multiple trustees acting unanimously, take all important trustee actions and participate in all significant trust decisions. Generally, critical trustee functions such as investing or distributing assets among beneficiaries could not be delegated to one of several trustees without the others retaining some responsibility for their co-trustees' misdeeds and breaches of fiduciary duties. The "unitary trustee" with limited powers, and the subsidiary principle prohibiting delegation, were generally immutable; they could not be overridden by the trust creator by a contrary instruction in the trust agreement. The early English common law, therefore, recognized only a single, integrated office of trustee.
c. United States. The unitary trustee principle was carried over from England to the crown colonies, including the United States. It initially proved resistant to reform despite a rapid evolution in financial and investment management practices that mandated more flexible conventions. American courts and some legislatures gradually responded first by replacing the concept of protecting beneficiaries by limiting trustee powers with a new system that granted broader powers, but restricted their exercise by imposing strict duties of fiduciary prudence and loyalty.
Another watershed development in the evolution of the law of trusts and trustees: the rise of the institutional trustee-for-hire. State and federally-chartered corporate trustees began to supplant the uncompensated lay trustee by the end of the 20th century. U.S. tax law helped accelerate this trend because many trustee powers -- particularly dispositive powers -- could trigger adverse federal estate tax consequences if they were held by settlors and related beneficiaries. Corporate trustees found comfort in the unitary trustee rule because it tended to protect their near monopoly position and give them disproportionate powers over substantial family trusts. Dissatisfaction with this situation, coupled with a desire on the part of family members to assert more control over their trusts, began to erode the unitary trustee principle and the dominant position of the corporate trustee. Other more recent developments have also contributed: a growing sophistication and complexity in the investment world, the decline of the rule against perpetuities and the resulting growth in dynasty trusts, vigorous competition among states for trust business, rapid consolidation and merger among financial institutions (including banks with trust departments) and dramatic recent changes in trust laws.
2. Gradual Erosion of the Unitary Trustee Concept
a. Evolution of the Laws Applicable to Co-Trustees. The use of non-trustee participants was not widespread in this country until the last decade or so. Before then, the movement away from the traditional fully empowered unitary trustee model began with the increased use of co-trustees. Co-trusteeships first became popular to overcome the inability of a single trustee to administer property in multiple jurisdictions (i.e., where the primary trustee was not legally competent to act outside of the state of its residence or charter). Later, co-trustees provided specific competence not possessed by the primary trustee -- for example, the use of "special trustees" to administer closely held business assets, or to participate in distribution decisions that an "interested" primary trustee could not make without risking adverse wealth transfer tax consequences. The increased use of multiple trustees forced changes in the law concerning the duties and responsibilities of co-trustees among themselves and with respect to the beneficiaries in several noteworthy respects that were instrumental in the development of the laws relative to non-trustee OAT participants.
1. Allocation of Responsibilities. Generally, if the terms of a trust with more than one trustee provide that one or more of the trustees will possess exclusive authority with respect to trust administration, the other trustee ordinarily has no duty to participate in the matters exclusively delegated to the empowered trustee.(fn7) If, however, a non-participating trustee believes that the empowered trustee may be committing a breach of trust, the non-participating trustee has a duty to take reasonable steps to investigate and prevent a breach, if possible.(fn8)
2. Trustee Action. The common law "default" rule initially required unanimous decision-making among co-trustees.(fn9) The law evolved over time and replaced the unanimity requirement with a majority rule standard.(fn10) A deadlock among trustees could only be resolved by court intervention.(fn11) These were default rules that could be modified by specific provision in a trust agreement. For example, even if a document empowered one of many co-trustees to decide specified questions or take actions as "controlling trustee" in the event of deadlock, the courts required that all trustees participate in decision making with respect to those matters and to be an informed fiduciary participant in all trustee deliberations (including those exclusively delegated to another co-trustee).(fn12) This is sometimes referred to as a "duty to consult".(fn13) The duty of each trustee to use reasonable care to prevent a breach by the controlling trustee was considered to be non-waiveable by a contrary instruction in the trust agreement.(fn14)
3. Co-Trustee Liability. Co-trustee liability is generally joint and several.(fn15) A co-trustee is not liable to a beneficiary for a breach of trust committed by another trustee unless such co-trustee: (i) participated in the breach; (ii)...
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