Trusts February 2004 Flashcards
(4 cards)
Summary
The bequest to great-grandchildren under Testator’s will is invalid under the common-law Rule Against Perpetuities but valid under the wait-and-see doctrine because it actually vested before the perpetuity period had expired. Friend, as trustee of the revocable trust, breached the duty not to delegate and the duty to diversify trust investments and is liable for the resulting losses.
The bequest under Testator’s will would be void under the common-law Rule Against Perpetuities. However, the bequest is valid under the governing wait-and-see doctrine because it vested two months after Testator’s death. Thus, the estate passes to Testator’s great-grandchildren who are alive when the will is probated.
Under the common-law Rule Against Perpetuities, “no interest is good unless it must vest, if at all, no later than twenty-one years after some life in being at the creation of the interest.” John C. Gray, RULE AGAINST PERPETUITIES § 201 (4thed. 1942). Furthermore, under the common-law rule, if there was any possibility, however improbable, that an interest might vest too remotely, that interest would be invalid even though in fact it actually vested in a timely manner.
For testamentary bequests, as here, the nonvested interest is deemed created at Testator’s death. Thus, the testamentary gift to great-grandchildren is void if there is any possibility it could become possessory more than 21 years after the death of any of Testator’s issue who survived him, a possibility that could occur here. For example, within one year after Testator died all of his issue who survived him except the 27-year-old grandchild could die. While that is improbable, it is certainly possible. Then the 27-year-old grandchild who survived Testator could have a child who would be a great-grandchild of Testator. And, then the 27-year-old grandchild could die. At this point, all of Testator’s issue who survived him are dead, leaving only the later born great-grandchild. Then, 22 years later (more than 21 years after the death of all relevant lives) Testator’s will could be probated. This would result (but for the Rule) in the gift vesting in Testator’s great-grandchildren living when his will was probated. However, since this vesting occurs, as hypothesized, beyond the permissible period, the gift is invalid. It bears repeating that a nonvested interest is invalid if it might have vested too remotely even if, in fact, as here, that did not occur because Testator’s will was probated two months after Testator died.
An invalid residuary gift is stricken from the will, and absent an alternative valid gift, the residue passes to the Testator’s heirs, here Angela and Brian, his only two children.
This jurisdiction, however, has enacted the wait-and-see rule. Under the wait-and-see rule, the gift to the great-grandchildren is valid if it in fact vests within the perpetuity period. Here the will was probated two months after Testator died. Thus, the gift to the great-grandchildren vests in a timely manner. See generally Merchants National Bank v. Curtis, 97 A.2d 207 (N.H. 1953).
A trustee is responsible for administering the trust. Accordingly, at common law it is a breach of trust to delegate to a third party significant and discretionary duties, such as the duties to make distributions and investments. Under one or more Uniform Acts, however, at least the trustee’s investment duty is delegable to a third party, although a breach of trust for that delegation could nonetheless occur for failing to properly supervise the third party.
The selection by the settlor of a trust of another person to act asa trustee evidences the settlor’s trust and confidence in the designated trustee to properly administer the trust, including deciding what, if any, discretionary distributions of trust property should be made to beneficiaries, and how trust assets should be invested. Flowing from this confidence is the duty to exercise due care and the duty not to delegate those duties that the trustee can reasonably be expected to perform. See RESTATEMENT (SECOND)OFTRUSTS § 171.
According to the Restatement, a trusteecannot “delegate to another power to select investments.”RESTATEMENT (SECOND)OFTRUSTS, § 171, cmt. h. According to Scott, “if . . . [the trustee] entrusts funds to the agent for this purpose and through the . . . negligence of the agent the funds are lost, the trustee is personally liable.”SCOTT’S ABRIDGEMENTOFTHE LAW OF TRUSTS § 171.2 (1960).
Similarly, Friend, as trustee, cannot delegate such an important function as determining how the trust property shall be distributed among the named beneficiaries, because this is an act that, in light of all the circumstances, it would appear Testator expected Friend to perform. Thus, Friend’s discretionary power, as trustee, to distribute trust principal to the income beneficiaries cannot be delegated to Bank. See generally RESTATEMENT (SECOND)OFTRUSTS § 171, cmt. d.
Under the Uniform Trust Code, however, a trustee can delegate such duties that “a prudent trustee of comparable skills could properly delegate under the circumstances.” Unif. Trust Code §807. Accord RESTATEMENT (THIRD)OFTRUSTS § 171 (1992). Likewise, under § 9 of the Uniform Prudent Investor Act and § 3(2) of the Uniform Trustee’s Powers Act, a trustee is given broad authority to delegate trust duties, effectively abrogating the common-law and Second Restatement nondelegation rule, at least where a delegation would be deemed prudent under the circumstances. Nonetheless, it is highly unlikely that a prudent trustee who was a longtime friend of Testator’s family and who presumably best knew how to make discretionary distributions among Testator’s issue would delegate that function to a corporate agent that had no familiarity with Testator’s family.
On the other hand, the Uniform Trust Code and Uniform Prudent Investor Act clearly contemplate the complete delegation of the trustee’s investment responsibilities so long as the trustee exercises reasonable care, skill, and caution in selecting the agent and “periodically . . . [reviews] the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.” Unif. Trust Code § 807(a)(3). Accord RESTATEMENT (THIRD)OF TRUSTS § 171 (1992). Here, there may have been a proper delegation but there is also lack of supervision, which brings Friend outside of the protection of the Third Restatement’s black letter rule. See also Point Three.
Friend probably acted imprudently with respect to the trust investments by failing in her oversight responsibilities to require that the trust investments be diversified.
“A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.” Unif. Prudent Investor Act § 3. Accord RESTATEMENT (SECOND)OFTRUSTS § 228. This rule reflects the time-honored principle that it is inappropriate to put all of your eggs into one basket. While in a limited number of instances diversification may not be necessary, none of them appear relevant here.
The rationale for diversification is clear. “Diversification reduces risk . . . [because] stock price movements are not uniform. They are imperfectly correlated. This means that if one holds a well-diversified portfolio, the gains in one investment will cancel out the losses in another.” Jonathan R. Macey, AN INTRODUCTION TO MODERN FINANCIAL THEORY 20 (American College of Trust and Estate Counsel Foundation, 1991).
Even though it was Bank that failed to diversify, Friend, as trustee, is liable for this failure because (1) Bank was Friend’s agent and (2) Friend, as trustee, had a duty to oversee the acts of the agent, including the duty to assure that investments were made in a prudent manner. See Unif. Prudent Investor Act § 9(a)(3) (trustee must exercise care, skill and caution in “periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation”). Friend can be liable for the failure to diversify even though Friend committed no breach of trust by initially delegating her investment duties to Bank.
