Trusts and Future Interests Flashcards
Trust condition
A trust condition that provides for the termination of a beneficiary’s interest upon marriage is void as against public policy, except when the beneficiary is the trust creator’s spouse. Thus, the son’s interest would not terminate upon his marriage.
Did the trustee violate his duty of loyalty by purchasing the stock of the closely held corporation from the trust and, if so, what damages or other remedies are the trust beneficiaries likely to obtain?
The trustee breached his duty of loyalty by purchasing stock from the trust, an act of self-dealing. In such a case, trust beneficiaries may obtain an order setting aside the transaction or seek damages based on the difference between the purchased assets’ fair market value at the time of purchase and the sales price paid by the trustee.
Duty of loyalty
A trustee owes a fiduciary duty of loyalty to a trust; self-dealing, such as a purchase of trust assets by the trustee in his individual capacity, violates this obligation. RESTATEMENT(SECOND) OFTRUSTS § 170(1) (1959);UNIF. TRUST CODE§802. Under the “no further inquiry” rule, there is no need to inquire into the motivation for the self-dealing transaction or even its fairness.
Any trust beneficiary can cause a self-dealing purchase by a trustee to be set aside or obtain a damages award. See UNIF. TRUST CODE§802. If a beneficiary elects to set aside the transaction, the trust property purchased by the trustee is returned to the trust and the amount the trustee paid for the property is refunded by the trust. If a beneficiary seeks damages, those damages are based on the difference in the fair market value of the trust assets at the time of the self-dealing transaction and the amount paid by the trustee. Id. Where, as here, the assets purchased by the trustee have declined in value since the self-dealing transaction, trust beneficiaries are likely to seek damages instead of setting aside the transaction.
The trustee also breached his duty of care when selling the stock because of his failure to test the market.
Prudent Investor rule
A trustee shall administer “the trust as a prudent person would . . . [using] reasonable care, skill, and caution.” See UNIF.TRUST CODE§804. One of the hallmarks of prudent investing is diversification. A balanced portfolio reduces aggregate risk by investing in different investment categories. Diversification thus is strong evidence of prudent investing. Indeed, failure to diversify is likely the reason why the trustee in this case was advised to sell the closely held corporate stock.
“A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.” UNIF.PRUDENT INVESTOR ACT § 2(b); accord, RESTATEMENT (THIRD)OF TRUSTS:PRUDENT INVESTOR RULE § 227(a). The trustee should consider the purposes, terms, distribution requirements, and other circumstances affecting the trust. UNIF.PRUDENT INVESTOR ACT§ 2(a). The prudent investor rule applies to both investment and management decisions. Management includes monitoring; thus, the trustee has a duty to monitor investments prudently made to assure that retention of those investments remains prudent. If retention is not prudent, the trustee should sell the imprudent investments and reinvest the proceedsin prudent investments. A trustee, however, is not liable for declines in value due to a downturn resulting from general economic conditions. See generally, UNIF.PRUDENT INVESTOR ACT § 2, cmt.
Application
Here, the trustee’s investment of the sale proceeds seems to satisfy the diversification requirement. The trustee selected a balanced group of mutual funds; the portfolio included both stock and bond funds; it contained both growth and income funds. The trustee also appears to have considered the needs of both the income beneficiary and remainderman; growth funds are aimed at achieving principal appreciation and income funds at producing current income. The funds’ decline in value during a period of general economic decline—when most types of investments may well have fallen in value—does not evidence lack of prudence, and there are no facts to show any failure to monitor the portfolio.
