Opinion ID: 1892003
Heading Depth: 1
Heading Rank: 3

Heading: trustee's investment strategy

Text: The Vice-Chancellor also held that the Trustees breached their duty of impartiality owed to the Remaindermen by investing the Trust's assets in government tax free fixed-income securities that only produced income for Mr. Law, as opposed to pursuing an investment strategy that would have increased the Trust's corpus. [10] The will provides: For and during the lifetime of my husband, William A. Law, if he survives me, my said Trustees shall pay the net income of the trust to and for the use of my said husband and, in addition, if necessary to insure the comfortable support, maintenance and general welfare of my said husband, my said Trustees shall invade the principal of the trust for such purpose. The Trustees argue, therefore, that they fully complied with the terms of the Trust. [11] The Trust's assets were invested in tax-free government bonds and all the income from these bonds was paid to Mr. Law annually. The Trustee's investment strategy therefore, although not increasing the Trust's corpus, guaranteed that it be preserved while producing tax-free income for Mr. Law. The Remaindermen argue that the Trustees had a fiduciary duty to ensure that the Trust's corpus grew, relying on Gans v. MDR Liquidating Corp. [12] Gans however, in the context of a liquidating trust, held only that a trustee, in the interests of safety, has a duty to diversify trust assets, except when it would be imprudent to diversify. [13] Delaware law does not provide a set monetary figure that requires a trustee to diversify a trust's corpus. The Remaindermen at trial produced two expert witnesses who testified how a professional trustee would have correctly invested the Trust's assets. [14] The Vice-Chancellor primarily relied on the testimony of P.M. Snyder, in holding that the Trustees should have invested either 50% or 60% of the Trust's corpus in a Standard & Poor's 500 index fund while paying the dividends to the life beneficiary, Mr. Law. [15] This would likely have been less favorable to Mr. Law. The Vice-Chancellor's holding resulted in his award to the Remaindermen of $276,855 [16] in damages based on a hypothetical scenario in which the Trustees, during the duration of the Trust, invested the Trust's corpus based on a 50/50 split between investments representing equity and debt. [17] As this Court held in Wilmington Trust Co. v. Coulter [18] , trustees are held to a prudent investor standard in the management and investment of a trust's assets or property. In managing trust property, trustees must act with skill, care, diligence and prudence in light of the circumstances. [19] A non-professional trustee's duty to the beneficiaries in administering a trust is to exercise the skill and care that a man of ordinary prudence would exercise in dealing with his own property in light of the situation existing at the time. [20] In addition to correctly administering the trust, a trustee also must ensure the integrity of the corpus. [21] A trustee, however, is not liable to a beneficiary for following a specific investment strategy to the extent that the trustee acted in reasonable reliance on the terms of the trust. [22] And in reviewing the administration of a trust, we must consider the trustor's intent when the trust was created. [23] The conduct of a trustee in administering the trust is generally not determined to be a violation of a fiduciary duty if it was based on hindsight knowledge of subsequently developed facts and circumstances. [24] The Court of Chancery's determination that the Trustee's breached their fiduciary duty because they invested the Trust's assets in tax-free government bonds relied on hindsight. The hindsight review of a trustee's investments of the assets of a trust is difficult because an investment strategy may involve numerous value judgments in a Trustee's attempt to balance the safety of the investment against its return and no one can predict with certainty how particular investments will turn out. In the past, trustees were expected to preserve principal as their primary strategy for investment and many courts have held that a trustee was not allowed to invest in stocks, bonds or other securities of a private corporation without permission in the terms of a trust or in a statute. [25] This would have been considered the essence of prudence. [26] The testimony of the experts that was based on a hypothetical analysis of what investment strategy the Trustees should have used for the Trust's assets is not persuasive. The Trustees cannot be held to the same standard of care as suggested by the Remaindermen's expert witness because they are not professional trustees or investors. [27] The Trustees were selected by their mother who knew they did not have a greater skill than a person of ordinary prudence. [28] Their acts therefore must be reviewed under the duty to exercise such reasonable care and skill as a man of ordinary prudence would exercise in dealing with his own property. [29] The Remaindermen rely on 12 Del. C. § 3302 to bolster their argument that the Trustees breached a fiduciary duty by not investing the Trust's assets for the purpose of increasing its corpus. When the Trustees began administering the Trust, 12 Del. C. § 3302 provided: In acquiring, investing, reinvesting, exchanging, retaining, selling and managing property for the benefit of another, fiduciaries shall exercise the judgment and care under the circumstances then prevailing which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital. Within the limitations of the foregoing standard, fiduciaries may acquire and retain every kind of property, real, personal or mixed, and every kind of investment, specifically including but not by way of limitation, bonds, debentures and other corporate obligations and stocks, preferred or common, shares or interests in common funds or common trust funds, and securities of any open-end or closed-end management type investment company or investment trust registered under the Federal Investment Company Act of 1940, which men of prudence, discretion and intelligence acquire or retain for their own account and within the limitations of the foregoing standard, fiduciaries may retain property properly acquired, without the limitation as to time and without regard to its suitability for original purpose. In 1982 the Trustees began investing the Trust's assets in compliance with the then existing statute and Delaware case law. [30] In 1986, the Delaware General Assembly amended 12 Del. C. § 3302 to add in part: (c). The propriety of an investment decision is to be determined by what the fiduciary knew or should have known at the time of the decision about the inherent nature and expected performance of the investment, the attributes of the portfolio, the general economy, and the needs and objectives of the beneficiaries of the account as they existed at the time of the decision. Any determination of liability for investment performance shall consider not only the performance of a particular investment, but also the performance of the portfolio as a whole. (d). Any fiduciary acting under a governing instrument shall not be liable to anyone whose interests arise from the instrument for the fiduciary's good faith reliance on the express provisions of such instrument. The standards set forth in this section may be expanded, restricted or eliminated by express provisions in a governing instrument. The focus of the statute appears to be the protection of the trustee. In today's economic environment, much can be said for an approach that broadens the ability of a trustee to balance considerations of safety with a desire to increase principal. We find, however, that the amended statute did not preclude the continuing of the investment decisions made by the Trustees, when all the facts and circumstances are considered. After viewing all the facts and circumstances, including the size of the trust, the language of the will, the intent of Mrs. Law, the family nature of the Trust, the family relationship of the Trustees and beneficiaries to Mrs. Law, and that the Trustees were the beneficiaries of a two-thirds remainder interest in the Trust, we find that the Trustees acted with the same care and skill as a man of ordinary prudence would have exercised in dealing with his own property and the investment strategy chosen did not constitute a breach of trust. [31]