TAX BREAK

IN DEPTH: Trust Administration – Road Map for Disaster? By Nick R. Taylor

 

A lower court New York case is attracting the attention of corporate trustees, attorneys, and trust beneficiaries nationwide. It can be debated whether this case shows the heavy responsibility of trustees and the need for competent, professionals or whether it stands as a road map for disaster as  how not to administer a trust. In either situation, the case is extremely instructive to anyone having any connection with trust administration, whether as a professional service provider, an individual establishing such a trust for his or her own estate planning, or a beneficiary of such trust.

 

 The Case And Its (Surprising?) Holding

 

Charles Dumont signed a Last Will and Testament in June of 1951 and died in 1956. His testamentary trust was funded with 4,746 shares of Eastman Kodak Company stock and 375 shares of Mobil Oil Corporation stock. The decedent provided the following instructions to the trustee: 

 

 “It is my desire and hope that said stock will be held by my said executors and by my said trustee to be distributed to the ultimate beneficiaries under this Will, and neither my executors nor my said trustee shall dispose of such stock for the purpose of diversification of investment and neither they or it shall be liable for any diminution in the value of such stock.”

 

As will be discussed below, the holding of the Court was that the trustee should have sold 95% of Eastman Kodak stock in January of 1974. The sale of such stock, after capital gains tax, would have left the trust holding approximately $2,700,000. Because the trustee did not sell such stock, the Court awarded not only the recovery of the net after-tax sale proceeds, plus statutory interest from February, 1974 until September, 2003, plus forfeiture of fees paid to the trustee during such entire period, plus statutory interest. The result was trustee liability of approximately $21,000,000!

 

How could a Court enter such a ruling in light of the language of the Will quoted above? The Court focused most of its attention on the following statement in the decedent’s Will:

 

 “The foregoing provisions shall not prevent my said executors or my said trustee from disposing of all or part of the stock of Eastman Kodak Company in case there shall be some compelling reason other than diversification of investment for doing so.”

 

The Trustee Defense

 

The corporate trustee, a noted national bank, argued that it was unable to sell the concentrated Kodak stock holding at any time without diversifying the portfolio, something which the decedent had in effect prohibited the bank from doing. The bank also argued that it monitored the trust over the long term and that not only a plunge in stock value, but also a low income return on the stock, did not constitute a compelling reason for sale because the income beneficiary had more than enough in their personal assets. The bank also pointed to the love the decedent had for the stock. New York newspaper articles describing this case mention that the father of the decedent’s wife was actually one of the original Kodak directors at the time George Eastman incorporated in 1889.

 

Legal Background

 

The Court notes that over the long accounting period at issue, the Trustee was at one time subject to the prudent person rule (which did not require diversification but included diversification as a

 

Continued

 

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IN DEPTH: Trust Administration – Road Map for IN

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Nick Taylor is a member of our Tax Department who practices in the fields of estate planning, charitable giving and business succession.

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