Pennsylvania continues to emerge nationally as a modern state for trust planning with the execution of the Pennsylvania Directed Trust Act, Senate Bill 1231 (now part of Act No. 64 of 2024, sponsored by Senator Lisa Baker) (the “Act”), permitting directed trusts in the Commonwealth. As the 20th state nationally to enact a directed trust act, and following the Uniform Directed Trust Act of 2017, published by the Uniform Law Commission (“UDTA”), Pennsylvania makes trust planning a more dynamic opportunity for its residents by allowing bifurcation of traditional trustee’s powers among multiple advisors with clearer statutory guidance. Advisors might consider implementing the sharing of these trustee’s powers in new trust instruments, clarifying these advisors’ liabilities, and modifying or decanting older trust instruments to apply the principles of the Act.
Pennsylvania Directed Trust Act
Generally
While Pennsylvania trusts may have included certain directed trusteeship provisions prior to the Act’s enactment, the Act clarifies the directed trusteeship roles, responsibilities and liabilities. Generally, the settlor of a trust may appoint a “trust director” who can hold a “power of direction” to direct the trustee with respect to specific actions. Trust instruments may call these trust directors by other terms, such as “trust advisor” or “fiduciary advisor.” The trustee would be a “directed trustee” as to the powers controlled by the trust director. Some of the common types of trust directors include but are not limited to: (1) Investment Director; (2) Distribution Director; (3) Loan Director; and (4) Trust Protector.
New Subchapter H.1 under Chapter 77 of Title 20 of the Pennsylvania Consolidated Statutes (the “PEF Code”) applies to these directed trusts (Section 7780.11 through Section 7780.27). As defined under the provisions of Section 7778 of the PEF Code , a “directed trust” is one where the terms of the trust provide that a person who is not a trustee may direct a trustee to take (or not to take) certain actions, or where a person who is not a trustee may change the terms of the trust.
The situs of the trust may now be determined not only by the trustee’s principal place of business, the jurisdiction where the trust is administered, or where one or more of the beneficiaries resides, but also by a trust director’s principal place of business.
With the addition of this new provision, advisors should distinguish for their clients between delegated trusts and directed trusts. A delegated trust is one in which the trustee is responsible for appointing certain advisors, such as an Investment Advisor, but that does not include indemnification and bifurcation language to separate the trustee’s duties from those of these advisors. As a result, the trustee remains responsible for performing due diligence over, exercising oversight over and monitoring these advisors. A directed trust, however, allows advisors (usually appointed by the settlor or a beneficiary) to direct the trustee to make certain decisions, removing responsibility from the trustee for the decisions, actions or inaction of such advisors. With this change, Pennsylvania now permits trustees and trust advisors to bifurcate duties and responsibilities, and importantly liability, in furtherance of their specialized skills.
Powers of Direction
The Act defines the power of direction as including certain powers over the investment management to distribution of trust property or broadly as to other matters of trust administration. The power of direction also includes, in the case of a trust protector, the power to modify the terms of the trust. A beneficiary or the settlor of the trust may serve as trust director, allowing for continued management of the trust property while creating a completed gift and irrevocable trust structure. The settlor may appoint one or more trust directors, and the power of direction may extend to any one or more of a trustee’s powers, subject to the provisions of Section 7780.18 of the PEF Code (and the same limitations for tax purposes as would be applicable to a trustee).
Investment Director
Section 7780.16 of the PEF Code describes the explicit appointment by the terms of a trust for a “trust director for investments” or a “Investment Director.” This appointment must include a specific reference to this section, and incorporates the following powers, unless provided otherwise under the terms of the trust:
(1) To direct the trustee, or veto the trustee’s recommendations, as to the investment of the trust’s assets;
(2) To direct the trustee, or veto the trustee’s recommendations, as to the voting of proxies and the exercise of other voting powers associated with the trust’s assts;
(3) To select, change and determine reasonable compensation of one or more investment advisors or managers, and authorize or engage them to perform any of the investment duties of a trustee or trust director;
(4) To determine the frequency and methodology for valuing trust assets;
(5) To exercise, or veto the trustee’s exercise of, any other investment power the trustee has or might have; and
(6) To perform other acts relating to the investment of the trust’s assets as the terms of the trust specify.
Trust Protector
A “Trust Protector” is a trust director who has been expressly granted by the terms of the trust the powers, or the powers to direct a trustee’s actions, to modify the terms of a trust. Unlike the powers for an Investment Director, the powers listed for a Trust Protector under the statute are illustrative, and include such powers as:
(1) To increase, decrease or otherwise modify what is distributable to one or more beneficiaries of the trust;
(2) To terminate the trust and direct how the trustee shall distribute the trust property to or in further trust for any one or more of the beneficiaries;
(3) To expand, modify, limit or terminate a power of appointment, and to grant a power of appointment to a beneficiary of the trust on terms as the trust protector specifies;
(4) The powers described in section 8104 of the PEF Code (relating to the trustee’s power to adjust) to adjust between income and principal and to convert to a unitrust in accordance with Section 8105 of the PEF Code;
(5) To convert a trust, in whole or in part, to a special needs trust, or to provide that a special needs trust will be established at a specific time or upon the occurrence of an event with respect to some or all of the trust’s assets;
(6) To appoint or remove trustees, investment advisors and investment managers, and prescribe a plan of succession for future holders of such of such offices;
(7) To appoint or remove trust directors, specify their powers and modify the powers of a trust director;
(8) To appoint one or more successor trust protectors, and prescribe a plan of succession for future holders of that office;
(9) To renounce, release, limit or modify any power given to a trustee by the terms of the trust or by law;
(10) To resolve disagreements among trustees;
(11) To change the trust's situs or governing law, or both;
(12) To apply to a court of competent jurisdiction to interpret any terms of the trust or pass upon an action that the trust protector, another trust director or a trustee proposes to take or not take; and
(13) Any other or different power that the settlor expressly grants to the trust protector. The trust protector’s grant of any such powers controls their exercise, even when the same powers are given to another trust director.
The trust protector powers are subject to expected statutory limitations under subsection (c) of Section 7780.17 of the PEF Code, namely that, unless the terms of the trust expressly provide otherwise, no trust protector may exercise a power in a way that would benefit the trust protector personally or vest in the trust protector a taxable power of appointment described in Sections 2041 or 2514 of the Internal Revenue Code of 1986, as amended. The trust protector also must provide written notice to the trustees and the “qualified beneficiaries” of a trust of each exercise of a trust protector’s powers unless the terms of the trust explicitly direct that no such notice need be given. This presents an opportunity for the settlor to create a form of statutory decanting within the trust instrument whereby the trust protector has the power, without the need to notify any qualified beneficiaries thereof, to terminate the trust and direct how the trustees must distribute the trust property to or in further trust for any one or more of the beneficiaries.
In addition, trust protectors are subject to some of the same limitations in the exercise or non-exercise of their powers as apply to a trustee, specifically with regards to the payback requirements of Medicaid law, and for a charitable interest in a trust, including providing notice regarding the interest to the Office of the Attorney General.
Duty and Liability of Trust Directors and Directed Trustees
New Section 7780.19 of the PEF Code defines the standard of fiduciary duty and liability for the appointed trust directors under a directed trust, largely following the provisions of UDTA Section 8. Generally, these trust directors have the same fiduciary duty and liability as a trustee for the exercise or non-exercise of a power if the trust director may exercise such power solely, or as a co-trustee if such trust director shares such power with a trustee or another trust director. If, however, the trust director is licensed or certified to provide health care in his or her profession, and if the trust director acts in this capacity, then he or she will not be subject to duty or liability for such action (unless the terms of the governing trust instrument provide otherwise). In addition, the terms of the governing trust instrument may vary the trust director’s duties or liabilities from this statutory default. Therefore, settlors should consult with their drafting attorney when creating new directed trusts, and trust directors should consult with independent counsel when accepting such appointments, or when exercising (or not exercising) their powers under a directed trust.
New Section 7780.20 of the PEF Code relates to the duty and liability of directed trustees (as applied from UDTA Section 9). The duties of the directed trustees continue to be to act in good faith, in accordance with both the purpose and, now under the provisions of Section 7771 of the PEF Code, the terms of the trust (related to the duty to administer the trust, and as applied from the Uniform Trust Code Section 801). Generally, a directed trustee acting upon the direction of a trust director is liable only for following a direction that would be deemed “willful misconduct.” The directed trustee is otherwise required to take reasonable action to comply with such direction and will not be liable for the trust director’s exercise or non-exercise of a power. This standard of liability, and the duties thereunder, are subject, however, to the terms of the trust and a settlor may impose additional duties and liabilities upon the directed trustee; therefore, directed trustees and trust directors should review the governing trust instrument carefully before and after accepting such appointments. A directed trustee also may petition the court to resolve any ambiguity about its duties as a directed trustee.
Examples of Application
A directed trust may offer some clients desired flexibility in the administration of irrevocable trusts. For example, a trusted business advisor could oversee the interests in a closely held business, or some other unique asset, that the directed trustee may not be comfortable or equipped to manage. This scenario may arise as more business owners transfer interests in their businesses to irrevocable trusts for income or estate tax planning purposes prior to the sale of such businesses. Another example is a settlor who wishes to retain certain investment management decisions over assets transferred to the trust.
Generally, a directed trustee also may be a more cost effective or cost-efficient manner of trust administration, when certain trust directors can be uncompensated parties and perform certain duties and the directed trustee’s responsibilities could be limited to more administrative tasks, such as tax returns, state filings and Crummey or other notice requirements, which would allow the directed trustee to charge lower fees.
A directed trust may also work while the settlor is alive and the trust is revocable. Under the provisions of subsection (c) of Section 7753 of the PEF Code, related to the trustee’s duties and the powers of withdrawal, a directed trustee may follow the written direction of the settlor, even if such direction is contrary to the existing terms of the trust. If the trust is revocable by the settlor in conjunction with other persons, however, such written direction must be from both the settlor and those persons, but still may be contrary to the existing terms of the trust.
Next Steps
This new statute went into effect on October 15, 2024 (90 days from its July 15, 2024, enactment). Advisors should review the provisions of the Act carefully and then discuss utilizing this additional customization in future trusts with their clients. For existing trusts where the roles of different directors might be advisable, clients also may consider discussing modifying or decanting the current trust to add provisions for such bifurcated responsibilities. Pennsylvania has made two substantial updates to its Trust Code in 2024, namely its grantor trust statute and now its directed trust statute. Could trust decanting and domestic asset protection trusts be next on our 2025 wish list for Pennsylvania? Stay tuned – if it happens, we will let you know.
Brian M. Balduzzi (he/him) is a tax, business and estate planning attorney at Faegre Drinker in its Philadelphia, Princeton and New York offices. Brian specializes in estate and wealth transfer planning, helping families and business owners prepare for transitions, exits and succession by advising them on estate and gift tax exemption strategies, charitable planning, prenuptial and marital planning, estate and trust administration, and fiduciary litigation. He is an active member of the Philadelphia Estate Planning Council on multiple committees and as a speaker in our Roundtable program, and a leader within the ABA Real Property, Trust and Estate Section.