Speak Clearly and Listen Well: Negating the Duty to Diversify Trust Investments

Abstract

In American trust law, the settlor's intent is the polestar governing all aspects of trust management, including investment management of trust funds. By their own terms, the Uniform Prudent Investor Act (the UPIA) and other modern laws governing the prudent investment of trust funds take a secondary position to the intent of the settlor, merely providing default rules that the trust document may negate.

Despite this backdrop, a recent series of cases have demonstrated that trust settlors often fail in their efforts to trump default provisions of trust law and establish customized guidelines for the management of investments. A number of these recent cases share a common fact pattern: a settlor funded a trust entirely or disproportionately with his most successful lifetime investment, such as common stock in his former employer or another favored company. In all of these cases, courts held that the settlor did not effectively negate the trustee's default duty to diversify the trust's investment assets. These recent cases raise the question of how a modern trust settlor who wishes to override default provisions of trust investment law can do so most effectively. My answer is that both settlors and judges can take steps to better effectuate settlors' intent on investment management issues. Trust settlors (and their counsel) must do a far better job of clearly documenting decisions to override default investment law. Judges must accord greater deference to trust settlors' freedom to reject default trust laws and be far more proactive in their efforts to understand, and evaluate, the significance of trust language.

Put simply, trust settlors must speak with clearer voices, while judges charged with trust interpretation and oversight must listen more carefully.

Keywords: diversification, portfolio, fiduciary, trust, investment, management, Wood, Dumont, Rowe, Janes, Saxton, UPIA, prudent, default, modern portfolio theory, MPT

JEL Classification: G1, G10, G11, G23, K11