By David N. Anthony, Melissa Roberts Tannery and Tania S. Sebastian
A change in Virginia law effective July 1, 2012, will limit trustee liability with respect to directed trusts, which is good news for corporate and individual trustees alike. The amendment to Virginia Code Section 55-548.08, which is part of Virginia's Uniform Trust Code, protects trustees when acting or not acting pursuant to directions from a trust director.
Specifically, the new law provides that a trustee who acts in accordance with a trust director's direction shall not be liable for any loss directly or indirectly resulting from any act taken or not taken pursuant to the trust director's instructions or as a result of a trust director's failure to act after receiving a request by the trustee for direction, consent or action except "in cases of willful misconduct or gross negligence on the part of the directed trustee." Va. Code Ann. § 55-548.08(E)(2) (as amended effective July 1, 2012).
Thus, even if a trustee was negligent -- that is, failed to act with reasonable care -- with respect to a directed trust, he or she will be shielded from liability as long as he or she followed the instructions of the trust director or requested instructions or action from the trust director.
Significantly, under the new law, trustees of directed trusts, except as otherwise provided in the trust instrument, shall not have any duty to "(i) monitor the trust director's conduct; (ii) provide the trust director with information, other than material facts related to the trust administration expressly requested in writing by the trust director; (iii) inform or warn any beneficiary or third party that the trustee disagrees with any of the trust director's actions or directions (iv) notify the trust director that the trustee disagrees with any of the trust director's actions or directions; (v) do anything to prevent the trust director from giving any direction or taking any action; or (vi) compel the trust director to redress its action or direction." Va. Code Ann. § 55-548.08(E)(3) (as amended effective July 1, 2012).
The new law applies if the trust creator (settlor) incorporates the new code provision by reference in the trust instrument or by nonjudicial settlement agreement. Va. Code Ann. § 55-548.08(E) (as amended effective July 1, 2012). The protection of trustees from liability still applies even if not incorporated into the trust instrument or added by nonjudicial settlement agreement unless the trust director's instructions that the trustee followed were "manifestly contrary to the terms of the trust" or the trustee knew "the attempted exercise would constitute a serious breach of a fiduciary duty" that the trust director owes to the trust beneficiaries. Va. Code Ann. § 55-548.08(B) (as amended effective July 1, 2012).
Where the amended statute applies, a trust director "shall be deemed a fiduciary who, as such, is (i) required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries and (ii) liable for any loss that results from a breach of a fiduciary duty." Va. Code Ann. § 55-548.08(E)(1) (as amended effective July 1, 2012). Thus, the trust director will be responsible to the beneficiaries for his/her/its actions while the directed trustee will be liable only in cases of willful misconduct or gross negligence.
This trustee-friendly new legislation should minimize fiduciary liability. Plaintiffs asserting breach of fiduciary duty claims will have to meet a higher burden and prove willful misconduct and/or gross negligence by the trustee of a directed trust in order to recover damages. Trustees now will have a stronger defense against these claims.
Troutman Sanders Trust, Estate and Private Wealth Management Litigation Team attorneys can advise you regarding the effect of this new law on claims filed against fiduciaries. In addition, Troutman Sanders Trust and Estate Planning attorneys can assist settlors, trust directors and trustees regarding incorporating this new law into trust instruments and preparing nonjudicial settlement agreements.
Troutman Sanders is an accomplished and experienced leader in helping trustees, executors and beneficiaries resolve a wide range of estate and trust issues and disputes. Our Trust, Estate and Private Wealth Management Litigation Team regularly represents trust departments for national, regional and local banks, trust companies and individual executors, administrators trustees and beneficiaries in litigation of all types. We recognize that claims involving trusts, estates and private wealth management require expertise and knowledge in these substantive areas as well as the special skills to effectively try these disputes before a judge or jury. The Trust, Estate and Private Wealth Management Litigation Team is part of the Troutman Sanders Financial Services Litigation Practice Group, which provides regulatory and litigation services to a broad spectrum of financial services institutions.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.
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