That investment boilerplate matters, especially in blended families!!!


EXECUTIVE SUMMARY:

The Illinois appellate court affirmed the trial court’s granting of a motion for summary judgment on a claim for breach of fiduciary duty and unjust enrichment that a step-daughter brought against her step-mother, who was the income beneficiary of a QTIP trust that the step-mother-trustee had invested solely in municipal bonds. The appellate court was significantly swayed by the overall estate plan of the deceased father, who had created two other testamentary trusts for the benefit of his daughter and her descendants without including his surviving wife. The appellate court also was influenced by the language in the QTIP trust instrument that expressly negated the duty of investment diversification. The Illinois Supreme Court denied further appeal.

FACTS:

The decedent trust grantor, Luther, created a revocable living trust that divided into three trusts at his death, which occurred in 2003. Two of these resulting trusts solely provided for the decedent’s daughter, Tiffany, and her descendants. The QTIP trust benefitted the decedent’s surviving widow, Audrey, with Tiffany, Audrey’s step-daughter, and her descendants as the principal beneficiary. As trustee of the QTIP trust, which expressly negated the trustee’s duty to diversify trust investments, Audrey solely invested the trust corpus in municipal bonds. Luther didn’t give Audrey any right to make principal distributions for her own benefit from the QTIP trust.
Tiffany sued Audrey for breach of fiduciary duty and for unjust enrichment, alleging that the decision to solely invest the QTIP trust corpus in municipal bonds instead of in a diversified portfolio had damaged the value of the trust principal to the tune of approximately $300,000. Audrey filed a motion for summary judgment on all four counts, pointing to the express language in the trust instrument that negated the duty to diversify investments in the QTIP trust. In finding in Audrey’s favor, the trial court was swayed by the overall estate plan, which significantly benefitted Tiffany and her descendants, as well as the language in the QTIP trust that expressly negated the duty to diversify trust investments.
On appeal, Tiffany argued that the trial court had erroneously interpreted Luther’s intent regarding the QTIP trust and further that Audrey’s actions had violated the fiduciary duties of impartiality and prudent investment, neither of which had been negated in the QTIP trust. The appellate court disagreed and upheld the trial court’s granting of summary judgment in favor of Audrey on all counts. The Illinois Supreme Court denied further appeal.
COMMENTS:
It strikes me as somewhat surprising that neither court focused very much attention on the trustee’s duty of impartiality, which certainly would seem to have been violated by Audrey’s purposeful investment of 100% of the corpus of the QTIP trust in municipal bonds, which solely benefitted her at Tiffany’s expense. In my opinion, this decision could just as easily have gone the other way, but the Illinois Supreme Court denied further appeal.

It seems clear to me that the trust investment language was boilerplate. I would have probably gone the other way and found that the fact that Luther didn’t give Audrey any rights to principal from the QTIP trust to have been more important than either court found it to be. Instead, the courts seemed to be more significantly influenced by two facts other than that the trust instrument indeed negated the trustee’s duty to diversify the trust’s investments. The first fact was that Luther set up two other trusts in his estate plan for the sole benefit of Tiffany and her descendants, excluding Audrey. The second was that somehow the court believed Audrey’s testimony and that of her son that she actually sought out the best investment advice and was not wedded to tax-free municipal bonds.

Estate planning for blended families requires very fine distinctions as it is heavily nuanced in ways that typically aren’t required to be addressed or even considered in estate planning for single relationship couples. Even otherwise irrelevant boilerplate has to be carefully rethought and recalibrated in the blended family situation. In this case, it is hard to believe that the investment of 100% of the corpus of the QTIP trust in municipal bonds was somehow not a breach of the duty of impartiality. However, the boilerplate language concerning investment, which may not have even been considered important by Luther, was dispositive.

CITES:

Carter v. Carter, 2012 IL App (1st) 110855 (Feb. 7, 2012).

About lpaulhoodjr

I am an inactive lawyer who practiced almost 20 years as a tax and estate planning lawyer. Today, I am the Director of Planned Giving for The University of Toledo Foundation. I am the co-author of four books, the sole author of another book and a frequent speaker and writer on estate planning, planned giving and business valuation.
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