Week 15 Flashcards
What does the duty of prudence require? (2)
diversification of the portfolio
if you delegate, have to supervise
What should trustees do with permissive retention clauses?
if gives discretion to waste assets (allows non-diversifying), trustee must ignore this clause
What should a trustee do with a mandatory retention clause?
If not?
Ask for permission from the court to ignore it
Have to follow it
In 1990, T conveys 1,500 shares of Enron stock in trust to X. The trust instrument provides that the trust may be revoked or amended by written instrument delivered to X. T then instructs X in writing to retain the Enron stock, and X does so. In 2001, Enron files for bankruptcy in the wake of public disclosure of sundry accounting frauds at the company. The stock price drops to zero. In 2002, T sues X for breach of the duty of prudence, arguing that X should have diversified the portfolio or at least warned T of the inherent danger in failing to diversify.
What are the arguments on both sides? (2)
What result?
- Trustee needs to tell the trustor that they should diversify
- The person is still alive; should just listen to him; no duty to advise
Latter wins
Suppose the beneficiary consents, in writing, to an undiversified portfolio and agrees not to seek to surcharge the trustee for losses from a lack of diversification.
Should such an agreement be enforced?
yes, as long as it’s informed consent
In 1999, T devises a fund in trust to X for the benefit of A. At A’s suggestion, X delegates responsibility for managing the trust’s investment portfolio to Y, a reputable investment advisor. Y, also acting at A’s suggestion, invests the trust fund exclusively in technology stocks. In 2000, the technology bubble bursts and the value of the trust fund collapses. A sues X for improper delegation to F. At the trial, X testifies that “when I put somebody in charge of something, I don’t second guess them. You either get rid of them or let it go. I let it go.”
What result? Using what case?
Does A’s role in the delegation and portfolio selection undermine A’s case?
X is on the hook; have duty to supervise delegee
Rothko case
Yes
Suppose the trustee lacks particular skills such that under the circumstances a prudent person would normally delegate to an expert.
Does the trustee’s duty of prudence require the trustee to delegate in such a case?
Yes
What are the two innovations in resonse to MPT that trustees have to use?
Describe each.
Preferred method?
- equitable adjustment - compensate either income or principal beneficiaries for disproportionately
- unitrust - trustee will invest as he/she sees fit; net value of corpus will hopefully increase, but at the end of the day 4% of the value of the trust will be paid as income to the income beneficiaries (if more than that, then extra income goes to the principal, for remainder beneificiaries)
Unitrust
What are the requirements of delegation? (3)
- Select an agent
- Establish the scope and terms of the delegation
- Supervise periodically the actions of the delagee
What are the scenarios equitable adjustment is not allowed?
- No adjustment if trust instrument explicitly forbids it
- If the trustee is also a beneficiary, no equitable adjustment when it would benefit the trustee/beneficiary
What is “In re Matter of Heller” about?
Facts?
Issue?
Holding?
Rationale?
What does this tell us about unitrusts?
How could family harmony have been preserved?
Unitrusts
Appellant daughter moved to annul appellee trustees’ unitrust election and revoke their letters of trusteeship, and sought a finding that the election could not be retroactive. The trial court voided the retroactive election, but declined to annul it. Unitrust would result in signficiantly less for appellant daughter.
Is the unitrust OK?
Yes
Statute allows it
Maybe unitrusts are not always the best option, depending on the family structure
Make Jacob and Bertha co-trustees; upon death of one of the two, becomes irrevocable
When is a unitrust not allowed?
When the trust instrument forbids it
What is the duty to inform and report?
Give an at least annual accounting of the trust to all beneficiaries
What is “Fletcher v. Fletcher” about?
Facts?
Issue?
Holding?
Rationale?
Duty to inform
Elinor J. Fletcher created several trusts for the benefit of her children. The trustees refused to let the children see all of the portions of the trust. The trustee claimed that the grantor orally instructed them to keep the terms and the dealings of the trust confidential.
Do you get to know what’s going with trusts created by the same instrument your trust was created by?
Yes
Without access to the agreement, the beneficiaries were not able to assure the Trustees were discharging their duty to deal impartially with all the beneficiaries in regards to the trust agreement, in regards to their duty to use reasonable care and skill to make the trust property productive, or in regard to whether the trustees’ investment decisions made with respect to the assets revealed on Schedule “A.”
