Comparing Directed / Delegated Trusts

Pro-grantor trust states, such as Nevada, have clearly defined and codified certain strategic "offices" that can be occupied within a trust arrangement by a person or entity. The Trust Protector and Trust Investment Advisor (TIA) appointees are prime examples of such offices that can carry significant importance in meeting the overall goals and objectives of the trust creator.

That is particularly so when the grantor is establishing either a "directed trust" or a "delegated trust" arrangement. Most grantor trusts incorporating TIA provisions default to the directed trust format. In any case, there are basic but notable differences between the two that should be understood, and which are comparatively discussed below.

A "directed trust" is a specific format that enables the grantor of the trust to name and authorize a person, entity, or committee as the Trust Investment Advisor (TIA) — and a Trust Protector — of the trust. A grantor-appointed TIA is allowed to make essentially all investment decisions concerning how the trust assets are to be managed so as to increase the value of the trust estate as well as to generate income when and where necessary.

With a directed trust arrangement, the corporate trustee occupies mostly only a passive mode with anything other than the basic fiduciary duties of record keeping and reporting. In fact, with a directed trust, the corporate trustee generally cannot be held culpable in the event of adverse investment results as a consequence of improper investing or even negligence by the TIA.

The primary body of law by which the TIA is regulated under a directed trust arrangement is the Prudent Investor Act (PIA). Under a directed trust, the trustee cannot remove or replace the TIA; only the Trust Protector can remove the TIA (if the grantor is not present) under such a trust format.

The trustee may, of course, resign if it determines that the TIA is not properly following the rules established under the PIA or similar standards. But the trustee cannot advise or remove (or appoint) the TIA unless specifically authorized to do so in the governing document.

A "delegated trust" is an arrangement where significantly increased fiduciary authority and responsibility is appointed, and charged, to the corporate trustee of record by the grantor of the trust. To that end, the corporate trustee is vested with the power to remove and appoint a Trust Investment Advisor (TIA), which power can include the corporate trustee appointing itself as the TIA. As with directed trusts, the PIA is the general standard by which the TIA would manage trust assets.

Although the grantor may appoint the TIA in a delegated trust arrangement, the corporate trustee would normally appoint (i.e., delegate) the TIA in the grantor's absence. The corporate trustee of a delegated trust is duly charged with the responsibility of overseeing and regularly monitoring the activity of the TIA and to take appropriate action to remedy any potential adverse condition created by the TIA — including the power to remove the TIA.

Therefore, the corporate trustee of a delegated trust must assume, and is charged with, a more direct "hands-on" approach as the trustee of the trust and is fully expected to operate at the highest fiduciary standards imposed by state statutory law. That is particularly so if the corporate trustee has named itself as the TIA.

A corporate trustee in a delegated trust can also be held culpable in the event of significantly adverse third-party TIA performance or negligent activities resulting in damage that may be connected to the TIA. As mentioned, such level of responsibility charged to the trustee correspondingly empowers the trustee to remove and replace the TIA with cause.