¶ 801
Overview
Scope of the chapter. A trust adviser is a person who is not a trustee and who holds a power over one part of the trust's administration. The investment adviser directs the trustee's investment decisions. The distribution adviser directs, approves or vetoes distributions. The special-holdings adviser manages a single asset or class of assets that the trustee is unwilling or unsuited to manage: the stock of a family company, a portfolio of real estate, a collection, or digital assets. Chapters 6 and 7 examined the statutes that allocate responsibility between the holder of a power of direction and the trustee who carries it out. See supra chs. 6, 7. This chapter examines the advisers themselves, by function. It asks what each adviser does in practice, how the instrument should define the adviser's power, whether the adviser is a fiduciary under each of the principal regimes, how the adviser is appointed, paid, replaced and released, what follows for income, gift and estate tax when the adviser is a member of the family, and by what means an adviser's exposure to liability is managed through exculpation, indemnity and insurance. It closes with model provisions and a drafting checklist.
Why instruments appoint advisers. The settlor who appoints an adviser is usually responding to one of four problems. The first is competence: a corporate trustee may administer a trust well and still be the wrong person to decide whether to hold or sell a controlling interest in a manufacturing company or a block of undeveloped land. The second is continuity: a family may want the investment manager who has advised it for twenty years to keep advising the trust, without making that manager a trustee. The third is cost: a trustee that takes full investment responsibility charges for it, and a trustee that only holds title, keeps records and files returns charges less. The fourth is situs: the trustee that gives the trust a favorable governing law and tax home may be a trust company in Delaware, South Dakota, Nevada or Wyoming, while the people who know the family and its assets live elsewhere. See supra ch. 2. Each problem is solved by separating a function from the office of trustee and placing it in the hands of a person chosen for that function.
The cost of separation. Separation has a price. Every power that moves from the trustee to an adviser raises a question about who answers to the beneficiaries for its exercise. The prudent investor rule speaks to "a trustee who invests and manages trust assets." Unif. Prudent Investor Act § 1(a) (1994). When the trustee does not invest, the duty must either follow the power to the adviser or be displaced by the terms of the trust, and the instrument should say which. The beneficiaries also need to know who holds which power, because a beneficiary who believes the trustee is responsible for the portfolio may sue the wrong person or sue too late. The adviser needs information from the trustee to act, and the trustee needs to know which of its ordinary duties survive. A well-drafted adviser provision answers each of those questions in the text. A poorly drafted one leaves them to a court, often after a large loss, as the litigation over the Mennen family trusts illustrates. See infra ¶ 880.02.
Terminology. The statutes use different words for the same person. The Uniform Directed Trust Act calls every holder of a power of direction a "trust director." Unif. Directed Trust Act § 2(9) (2017). Delaware calls the person an "adviser" and treats a protector as one kind of adviser. Del. Code Ann. tit. 12, § 3313(a), (f). South Dakota distinguishes an "investment trust advisor," a "distribution trust advisor" and a "tax trust advisor," and adds a nonfiduciary "family advisor." S.D. Codified Laws §§ 55-1B-1, 55-1B-12. Nevada defines a "trust adviser" as "a distribution trust adviser or investment trust adviser." Nev. Rev. Stat. § 163.5545. Wyoming classifies the holder of an investment power as a "trust advisor" and the holder of a distribution or other noninvestment power as a "trust protector." Wyo. Stat. Ann. § 4-10-718(b)–(c). This chapter uses "adviser" for the holder of a power over investment, distribution or a special holding, and uses the statutory term where the statute's text matters. A protector, whose powers usually reach the structure of the trust instead of its daily administration, is treated in Part III. See infra chs. 11–15.
Plan of the chapter. Paragraph 810 distinguishes the adviser from the trustee, the trust director and the protector. Paragraphs 820 to 840 take the three common advisers in turn: investment (¶ 820), distribution (¶ 830) and special holdings (¶ 840). Paragraph 850 sets out the adviser's fiduciary or nonfiduciary status under the Directed Trust Act and the statutes of Delaware, South Dakota, Nevada and Wyoming, with a comparative table. Paragraph 860 covers appointment, compensation, succession and resignation. Paragraph 870 examines the income, gift and estate tax consequences of naming the settlor, a beneficiary or another member of the family as an adviser. Paragraph 880 covers the adviser's liability, the limits on exculpation, indemnity and insurance, and the principal cases. Paragraph 890 collects model provisions and a checklist.