FIRMA National Risk Management Training Conference
Ft. Worth, Texas ~ March 28, 2012FIDUCIARY LITIGATION
ByWilliam Campbell Ries, Esquire
412-594-5646Tucker Arensberg, P.C.
Pittsburgh, PA
DUTIES RE: LIFE INSURANCE TRUSTS
Background• Insured creates trust• Trustee purchases life insurance• Insured gifts to trustee to pay premiums
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DUTIES RE: LIFE INSURANCE TRUSTS
Trustee Duties• Monitor• Needs• Carrier solvency• Comparison to illustration• More innovative products
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DUTIES RE: LIFE INSURANCE TRUSTS
In Re: Matter of Stewart Cochran Irrevocable Trust v. KeyBank, N.A.
(Indiana)
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DUTIES RE: LIFE INSURANCE TRUSTS
Practice Tips• Clearly define duties in governing instrument• Conduct analysis under Prudent Investor Rule• Use experts as required
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DUTY TO INVEST TRUST ASSETS
Background
• A trustee has a duty to invest trust assets within a reasonable time after receipt
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DUTY TO INVEST TRUST ASSETS
Background (continued)
• What constitutes a reasonable time is based upon all relevant facts and circumstances including distribution requirements and current economic and market conditions
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DUTY TO INVEST TRUST ASSETS
Practice Tips• Clearly document the basis for investment
decisions• Provide explicit notice to beneficiaries of
investment actions• Damages should not be based on hindsight
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DUTY TO LIQUIDATE TRUST ASSETS
Background • Upon the death of the life tenant of a trust, the
trustee has a duty to liquidate the securities held in trust and distribute the proceeds to the remaindermen unless the remaindermen execute an election to take “in kind”
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DUTY TO LIQUIDATE TRUST ASSETS
Practice Tips
• Liquidate trust assets immediately unless the remaindermen agree to take “in kind”
• Determine the status of the beneficiary prior to executing a new investment program to ascertain whether the purchases are prudent
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CONFLICTS OF INTEREST
Background
• Trustee owes duty of loyalty to beneficiaries
• Duty to avoid conflicts
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CONFLICTS OF INTEREST
Practice Tips
• Conflicts are not always obvious
• When in doubt, obtain court approval
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DUTY TO DIVERSIFY
Background
• Under the Prudent Investor Rule, a trustee has a duty to diversify the assets unless under the circumstances it is prudent not to diversify
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DUTY TO DIVERSIFY
Practice Tips• Establish a diversification standard• Justify exceptions such as large capital gains• Disclose risks of continued non-diversification to
beneficiaries• Be particularly careful of potential self-interest• Obtain written consent from beneficiaries
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POWERS OF ATTORNEY
Background
• Agency relationship whereby principal appoints an agent to act upon the principal’s behalf within the scope of the authority granted
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POWERS OF ATTORNEY
Background (continued)
• Durable powers are utilized as a planning tool to avoid guardianships
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POWERS OF ATTORNEY
Background (continued)• Certain abuses have occurred:
Undue influence Gifting abuses Self-dealing Improper commingling
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POWERS OF ATTORNEY
Practice Tips• Take steps to ensure Power of Attorney is
properly executed with witnesses• Only appoint trusted agent• Review delegation of powers and limit gifts if
appropriate
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FAILURE TO GIVE NOTICE
Background
• Trustees and executors have a duty to give notice to trust beneficiaries
• Failure to do so may lead to liability
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FAILURE TO GIVE NOTICE
Practice Tips
• Be aware of Trustee’s duty to communicate with beneficiaries
• Uniform Trust Code provides specific duties
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COMMON TRUST FUNDS
Background• Common Trust Funds are authorized under
Regulation 9.18(a)(1) of the Comptroller of the Currency to permit the commingling of assets held by a bank serving as trustee, executor, administrator, guardian, and custodian under the Uniform Transfers to Minors Act
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COMMON TRUST FUNDS
Background (continued)
• Exempt from the registration requirements of the Securities Act of 1933 under Section 3(a)(2)
• Exempt from the Investment Company Act of 1940 under Section 3(c)(3)
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COMMON TRUST FUNDS
Background (continued)
• Exemption language provides:
Common Funds cannot be advertised
Cannot be offered for sale to the general public
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COMMON TRUST FUNDS
Practice Tips
• Ensure that Common Funds are used for existing accounts incidental to trust services
• Do not advertise Common Funds• Do not market interests in Common Funds to
general public as an investment vehicle
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DUTIES OF DIRECTED TRUSTEES
Background
• A trustee of a directed trust has a duty to follow the direction of a powerholder unless the direction is contrary to law
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DUTIES OF DIRECTED TRUSTEES
Practice Tips• Ensure that governing instrument does not
impose discretionary authority on trustee• Request and review all relevant documents• Review “Chinese Wall” policies• Clearly allocate fiduciary duties
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Ten Things You Can Do To Avoid Liability
1. Establish Investment Policy
2. Review Investments
3. Follow Prudent Investor Rule
4. Balance Beneficiaries’ Interests
5. Review diversification issues
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Ten Things You Can Do To Avoid Liability
6. Communicate with Beneficiaries
7. Disclose Fees
8. Maintain Adequate Records
9. Review Advertisements
10.Avoid Conflicts of Interest
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QUESTIONS?
William Campbell Ries, EsquireTucker Arensberg, P.C.1500 One PPG PlacePittsburgh, PA 15222
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