Function of Investment
Prudent Investor
In re Estate of Janes
681 N.E.2d 332 (N.Y. 1997).
Facts
Janes was a wealthy statesman who passed away and left his estate in three trusts. The first trust was for the benefit of his wife, paying her from it until her death and consisted of about 50% of the estate assets. The second trust consisted of about 25% of the estate and went to a charitable organization. Finally, the last trust was for his wife, and the remainder would go to a charitable organization after her death.
About 71% of the trust assets were based in Kodak stock. While the trustees were managing the trusts, the price per share of the stock decreased dramatically over 7 years. When the trustees gave an accounting of the trust assets, Ms. Janes and the charitable organization realized the finances in the trust was nearly half of what it had been at the beginning of the trust. Thus, Ms. Janes and the charity sued, saying the trustees were imprudent investors.
Analysis
Yes, these were imprudent investors. The prudent investor rule examines how a reasonably prudent person would manage the assets to maintain and grow their assets. Although this does not always mean that having a lack of diversity automatically causes one to be an imprudent investor, it could over time lead to that conclusion.
Here, the trustees did not follow their procedures in evaluating the diversity of the trusts. Also, the trustees had a standard amount of percentage a portfolio should consist of one stock, ownership of the Kodak stock exceeded that amount. Add in the lack of accounting and evaluation of when to pull out of the Kodak stock, it becomes clear that the trustees were imprudent investors.
Ultimately, the trustees should have divested at the beginning, when they realized the percentage of the portfolio was excessive. As a result, damages is the value of the lost capital (there was no self-dealing, so there was no lost profits). Thus, the value of the stock at the time it should have been sold should be subtracted by the total sale of the stock. Interest may be added after that.
Additional Notes
Essentially, a prudent investor must diversify the investment as soon as it is practical. The only exception seems to be if the trust expressly mandates the trustee to hold onto the stock. Even if that situation, the trustee is expected to ask the court for permission to diversify.
Currently, the prudent standard for diversification is around 5% max of the portfolio being invested in one stock.
Function of Custodian and Administration
The following are responsibilites of the fudiciary to fulfill the function of being a custodian and managing the administration of the trust.
- Collect and Protect trust assets.
- Earmark Trust Property. That is, distinguish trust property from trustee property.
- Not Mingle Trust and Trustee Property.
- Maintain Adequate Records.
- Bring and Defend Claims on behalf of the trust.
Trustee Selection and Divided Trusteeship
Choosing Trustee
Either an individual or a corporate trustee. Individuals may be trusted but have little to no experience while a corporate trustee will not waive the fee but be well experienced.
Delegation Power
Trustees have the ability to delegate responsibilities to third parties in accordance with the delegation statute of the state. Most states adopt § 807 of the Uniform Trust Code.
Division by Settlor
The settlor can divide responsibilities of the trust by: appointing co-trustees, giving one individual the power of appointment, or creating a directed trust
