We’ve all heard of the “Prudent Investor” rule for Trustees and Executors of estates. But just how “prudent” does a Trustee have to be? Does a Trustee have a duty to do some possibly risky planning to avoid estate taxes on the death of the income beneficiary of a trust? Or is that something the Trustee should avoid? And whose opinion matters more, the lifetime beneficiary (in many cases, the surviving spouse) or the remainder beneficiaries (the kids)?
An interesting article in Trusts & Estates Magazine reviews a Minnesota case where the kids sued the corporate Trustee because it did not pursue an aggressive estate tax planning strategy with regard to Mom’s Trust assets. The kids disputed the requirement that they pay nearly half of their $25 million inheritance to Uncle Sam. (Spoiler alert: the kids lost.)
The court found that the corporate Trustee had no duty to invest the Trust assets in tax-avoiding vehicles. Of particular importance to the court was that during Mom’s lifetime, she made it clear that she was concerned with maximizing her own income stream and didn’t care much whether taxes would be due upon her death.
What may concern Trustees and other fiduciaries when reading this article is that the court took 177 pages of opinion to reach this conclusion. The authors of the article, Samantha E. Weissbluth and Erika Alley, both of Foley & Lardner, end by urging Trustees to document all estate planning and tax planning meetings with clients, in order to forestall additional litigation.