Estate Planning Newsletter – August 2016 Edition

TRUSTEES SHOULD KNOW THE PRINCIPLES OF DIVERSIFICATION UNDER THE UNIFORM PRUDENT INVESTOR ACT

Diversification in investing has been a watchword for all investors for a lengthy period of time.  Tennessee has specific statutory provisions dealing with diversification by trustees of a trust.  Specifically, the most pertinent provisions are set out in TCA Section 35-14-105 (a) which provides that a trustee shall diversify the investments of a trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversification; or if the Trustee, in the exercise of good faith and reasonable prudence, discretion, and intelligence, considers that retention of an asset is in the best interest of the trust and its beneficiaries or in furtherance of the goals of the trustor as determined from that instrument.

The case of Glass v. Suntrust Bank provides a good example of the exception to the diversification requirements under the Uniform Prudent Investor Act.  In the Suntrust Bank case, Suntrust Bank became Trustee for Mrs. Glass’s Living Trust in 2004, three years before she died.  Suntrust Bank accepted the Trust with only four assets:  stock in Suntrust Bank, stock in First Tennessee Bank, stock in Security Bancorp of Tennessee (a non-publicly traded corporation), and a large farm in Dyer County, Tennessee.  Mrs. Glass died in January, 2007.  The Trustee did not liquidate the stocks and continued to maintain the same portfolio in the Trust.  Before deciding to hold the same stocks in the portfolio, the Trustee sent a letter to the Trust beneficiaries advising that it intended to liquidate all securities and invest those securities in investment grade bonds until a distribution could be made.  However, the letter gave the beneficiaries the alternative to receive a distribution of securities in kind and advised of the assumption of market risks and fluctuation of security values.  One of the beneficiaries of the Trust (being the Plaintiff in the lawsuit) signed the letter and checked that he wanted an in-kind distribution.  By the time the distribution was made in December, 2007 (almost one year after Mrs. Glass’ death), the value of Suntrust Bank stock and First Tennessee Bank stock had dropped from approximately $1,800,000.00 to $240,000.00.

The Court of Appeals ruled in favor of Suntrust Bank in holding that it did not have a duty to diversify the assets in the trust because of the direction from the beneficiary (who was well educated (including an MBA and law degree) and well versed in investing).  The Court of Appeals made a thorough analysis of the Uniform Trust Code and the Uniform Prudent Investor Act and discussed factors regarding requirements for a trustee for diversification.

The Court of Appeals pointed out several important factors in the Prudent Investor Act related to diversification.  It wrote that:  (1) management decisions involving individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole;  (2) the trustee may refrain from diversifying trust assets if the trustee reasonably determines that because of special circumstances, the purposes of the trust are better served without diversification;  (3) it is appropriate for a trustee to consider an express direction from a beneficiary when deciding whether to sell and diversify the trust’s assets; and (4) a trustee may consider if an asset has a special relationship or special value to one or more of the beneficiaries.

MY RECOMMENDATION:  If you act as a trustee, or one of your clients acts as a trustee, be sure and understand the rules of diversification.  There are frequently reasons not to diversify, but be sure the trust instrument allows for lack of diversification or a provision under the Uniform Prudent Investor Act allows for lack of diversification.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law