The Role of an Administrative Trustee

One service offered by Commonwealth Trust Company is that of an Administrative Trustee. As directed trusts have become more common and trust-friendly jurisdictions have expanded their statutes to accommodate these structures, the term “Administrative Trustee” has become a familiar fiduciary role in the trust industry. 

This article will explore the role of the Delaware Administrative Trustee, including how the role is distinguishable from other types of trustees, and the importance and common responsibilities of the Administrative Trustee.

Types of Trustees

The term “Administrative Trustee” is not defined in the Delaware statute. The role is a product of Delaware’s directed trust statute, 12 Del. C. § 3313, which governs the roles and interactions of Advisers and Trustees in a directed trust structure. Section 3313 permits a trust document to give an adviser authority over investment decisions, distribution decisions, or other decisions with respect to the trust and provides a default framework for the administration of a directed trust.

Although Delaware law does not define the term, the trust industry generally considers a trustee as an Administrative Trustee when other fiduciaries are given sole authority over investment and distribution decisions. The Administrative Trustee is responsible for any activity falling outside the purview of the other fiduciaries. 

This structure can take several forms. The investment fiduciary and/or distribution fiduciary can act as direction advisers or as co-trustees (note: we will refer to such parties as “fiduciaries” throughout this article, as the Delaware statute provides that such parties are presumed to be fiduciaries unless explicitly noted otherwise in the trust instrument).

Clear and unambiguous drafting is especially important when there are multiple trustee roles. For example, a trust may have an Investment Trustee, a Distribution Trustee, a Special Holdings Trustee, and an Administrative Trustee. The trust instrument should clearly define the roles, responsibilities, and liabilities of each trustee, and how those trustees interact with the other co-trustees. In addition to proper drafting, Delaware has introduced numerous statutes to address these types of trust structures. 

One such statute is 12 Del. C. § 3313A, which was introduced in 2017. It addresses situations in which a trust instrument confers certain powers (including the power to direct or prevent the actions of the other trustees) to a trustee, to the exclusion of the other trustees. The “excluded trustee” is generally protected from liability for the decisions and actions taken by the co-trustee holding the exclusive authority over such decision. Section 3313A provides important liability protection by allowing responsibilities to be allocated among multiple trustees while limiting the exposure of trustees who lack authority over a particular decision.

Why Trust Situs is Important

Under 12 Del. C. § 3332(b) and § 3340, a trust will be treated as administered in Delaware if it has a qualifying Delaware trustee. This requirement is satisfied if either (1) the sole trustee resides in Delaware or is a Delaware trust company, or (2) one of multiple trustees is a Delaware trust company. If this requirement is met, the trust will be treated as administered in Delaware, and Delaware law will generally govern matters relating to trust administration.

Delaware statutory law does not indicate how much fiduciary activity within the state is sufficient to create a nexus for administrative situs purposes. However, in Lewis v. Hanson, 128 A.2d 819 (Del. 1957), aff’d sub nom. Hanson v. Denckla, 357 US 235 (1958), the Delaware Supreme Court provided guidance regarding the level of trustee activity occurring in Delaware that may be sufficient to support Delaware situs. 

In that case, the trust had investment and distribution direction advisers serving along with a Delaware trustee; however, the Court found that the Delaware trustee’s activities were sufficient to support Delaware administration of the trust. The case is still generally used as a guidepost today by Delaware practitioners.

As mentioned above, Delaware law does not prescribe a comprehensive list of duties that must be performed by a Delaware trustee. In practice, however, in accordance with the Court’s guidance from the Hanson decision, Delaware Administrative Trustees are often given the following responsibilities to the exclusion of other fiduciaries:

1. Arranging for the custody of assets and trust accounts;
2. Preparing, facilitating and reviewing trust accountings and reports with grantors, beneficiaries, advisers, and third parties;
3. Performing annual trust reviews;
4. Preparing or arranging for the preparation of trust tax returns;
5. Maintaining an office for Trustee meetings in the state;
6. Responding to inquiries from the grantor, beneficiaries, advisers and third parties; 
7. Executing documents in connection with the performance of its duties; and
8. Maintaining trust records.

Practitioners generally view these duties as part of a broader analysis rather than as standalone requirements. While many of the responsibilities are familiar, others are frequently misunderstood. The questions below are among those most commonly raised by prospective and existing clients and practitioners.

1. How does a non-custodial institution like Commonwealth Trust Company arrange for the custody of trust assets and accounts?
2. What is the Administrative Trustee’s responsibility when reviewing documents before signing them? 
3. What is included in the trust records maintained by the Administrative Trustee?

The following section examines several of these duties in greater detail and addresses common questions raised by clients and practitioners.

Delaware Administrative Duties

Arranging for the custody of assets and trust accounts

The duty to arrange for the custody of assets and trust accounts does not necessarily require the trustee to maintain direct custody of trust assets; however, the Administrative Trustee is often given the power in the trust instrument to execute any bank or brokerage account opening documents, a reflection of both practitioner preference and industry best practices. This authority provides the Administrative Trustee with a level of control over those accounts and unfettered access to account activity.

Because the Administrative Trustee does not have investment authority over trust assets, brokerage accounts will often grant the investment direction adviser direct trading authority over the account, with the trustee’s involvement limited to executing transactions involving the disbursement of funds, including the payment of trust expenses, distributions to beneficiaries, and payments to tax authorities. This allows the trustee to review such disbursements to ensure they are permitted under the terms of the trust instrument and appropriate direction has been obtained and documented.

Preparing, facilitating, and reviewing trust accountings and reports with the beneficiaries, fiduciaries and other third parties

An Administrative Trustee must maintain clear and accurate records of trust-level activity to assist with the performance of key record keeping functions and to provide relevant parties with accurate and complete information regarding the trust’s activities. As a matter of common trust administration practice, trust accountings often include: (1) principal and income accounting records; (2) cost basis and fair market value of all trust assets; and (3) transactional activity at the trust level, such as contributions of assets to the trust and the disbursement of trust funds and other assets, in addition to trading activity within any trust accounts.

A trust agreement may require or permit the trustee to provide periodic trust accountings to beneficiaries (or in the case of a silent trust, to their designated representatives) or to other fiduciaries. This is intended to give other parties to the trust a full representation of the trust’s activity and value. An accurate trust accounting allows all parties involved to make fully informed decisions regarding the trust.

Executing documents in connection with the performance of its duties

The Administrative Trustee is responsible for the execution of all legal documents that bind the trust. Although the scope of review will depend on the trustee’s authority under the governing instrument and applicable law, trustees commonly review documents before execution to confirm that the trustee is authorized to take such action, and that the document is consistent with the direction received. A trustee may also review the document to understand any tax implications resulting from a transaction or to ensure the transaction is accurately recorded for trust accounting purposes.

Maintaining trust records

Maintenance of trust records includes retaining original trust documents in a safe and secure manner, including trust agreements, amendments, any original stock certificates and other original documents relating to the trust creation, modification, or termination.

 In today’s environment, this also includes the maintenance of a trust’s digital records. This includes scanned copies of original trust documents, governing instruments for any entities of which the trust holds an ownership interest, copies of tax filings, account opening documents and statements, and copies of documents executed by the trustee in connection with its duties.

Conclusion

As trust laws evolve and fiduciary functions become more specialized and bifurcated, the role of the Administrative Trustee remains important both because it helps establish and maintain a trust’s connection to a trust-friendly jurisdiction and because of its role within the directed trust structure. In serving as a knowledgeable and reliable fiduciary partner, an experienced Administrative Trustee can promote efficient administration, support effective governance, and contribute to the long-term success of the trust.