TAX BREAK

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

 

· The bank never attempted to prospectively define any triggering criteria which might constitute a compelling reason for sale or which might at least raise a red flag for more in-depth review.

 

· The bank held itself as being pre-eminent in the field and offering special expertise in the area of trust administration.

 

· The bank did not re-review trust investment decisions upon the death of a beneficiary which converted discretionary income payouts to remainder beneficiaries to mandatory income payouts.

 

· The bank did not engage in regular discussions with the beneficiaries to ensure that the trust was fulfilling its purposes.

 

In finding the bank liable, the Court concludes that although retention clauses can be valid, they do not authorize a “do nothing” strategy. However, the Court does not hold that the trustee should have sold the stock in advance of a drop in price as this would have amounted to simply diversification. Instead, the Court holds that the failure to monitor the trust investment as described above was a breach of fiduciary duty. The Court concludes  that the bank should have made a determination to sell 95% of the stock following a sizeable drop in stock trading prices during the 1973 year at a time when the  income yield was less than half that of equities generally.

 

As a final road map concerning dealing with beneficiaries, the Court chastised the bank for relying upon brief verbal discussions with the beneficiary. The Court holds that such conversations do not constitute informed consent by the beneficiary to authorize the bank to continue to retain stock. The Court also notes that the beneficiary comments were not reduced to writing.

 

Recommendations

 

As the many corporate trustees with whom we have the opportunity to work know, this office has often given the opinion that a Court Order confirming proposed trustee decisions is the best insurance policy in questionable or uncertain circumstances. In light of the new emphasis in the Uniform Trust Code for ease of trust reformation, another equally available tool would be trustees seeking reformation of a trust to more adequately conform with the presumed goals of the decedent. A trustee who chooses not to use these remedies takes on a heavy burden that the administration choices they make are correct. Obviously, failing to do so under particular circumstances can result in substantial, and avoidable, liability.

 

 

 

 

 

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