Unconventional Beneficiary Investments
Beneficiaries’ Wacky Investment Ideas
It’s one thing if an amazing businessperson with an enviable track record of creating successful startups provides you with a limited opportunity to get in on the ground floor of a new business venture. Similarly, if you have access to the finest private equity funds, or hedge funds, or venture capital funds, these are unique investment opportunities that warrant consideration and evaluation. It is quite another story, however, when an unaccomplished trust beneficiary requests a large trust distribution in the guise of an “investment”.
Trust beneficiaries are notorious for becoming real estate experts overnight – and asking for trust money for their “flyers”. Consider a Florida corporate trustee receiving a request for $1 million from a beneficiary to “invest” in a bed and-breakfast down in the Florida Keys. The beneficiary has found an old, beautiful “fixer upper” in the Keys, and wants to renovate it, and open a bed-and-breakfast. The beneficiary suggests that this would be a great investment for the trust.
The problem with that, of course, is that the beneficiary doesn’t work, is a spoiled rich kid, has never operated a business, has no business plan, and really just wants the money to move to the Keys, walk Duval Street and bask in the sun. Of course, the trustee has to ask itself, or better yet, ask the beneficiary: “Since I have dozens of investment options
at my fingertips, tell me why I should invest the trust assets with you in a fixer upper? If we wanted the trust to be further exposed to the real estate market, why would I invest with you, and not in a low cost REIT index fund?”
What Is Required To Be A Prudent Investor?
Being prudent is more than just having a diversified portfolio. The prudent investor rule requires a trustee to have a plan or strategy which considers both the production of income and the growth of capital, the income or lifetime beneficiaries, as well as those beneficiaries who take later in time. Investments should not be made haphazardly. An analysis should be conducted. Opportunities should be considered and weighed. The trustee must be able to justify each and every holding in the trust portfolio, how long they anticipate holding such an investment, and what expected range of returns they hope to achieve. In essence, a trustee needs to clearly enunciate why each and every investment was purchased and retained.
Inherited Assets And The Acts Of The Prior Trustee
Trustees have a duty to monitor, on an ongoing basis, the trust’s individual holdings. Assets which a trustee “inherits” from a prior trustee need to be evaluated, and you’ll need to justify retaining those assets – or selling them. If you cannot justify retaining those, you need to sell them and reinvest the proceeds.
Consider: You are a successor trustee and read a trust statement and see that the prior, outgoing, trustee invested in a smattering of stocks and bonds. So: if you had 100% cash, would you, right now, purchase those assets which the prior trustee invested in? If your answer is “no”, then sell. If your answer is “yes”, then keep them.
A decision to retain assets is tantamount to a decision to “buy.” Whether an investment was purchased yesterday, two years ago, or even 20 years ago, does not matter.
If you don’t want an investment or it does not fit into your plan, then sell it.
While income taxes attributable to a sale may be one factor in considering whether to sell or retain a security, don’t let the tax tail wag the dog.
Don’t rely on what was done in the past. Analyze and draw your own conclusions now, during your tenure. No finger pointing at the prior trustee.
A successor trustee has a duty to examine the actions of the prior trustee. If a prior trustee did something wrong, consider bringing an action for surcharge or damages against the prior trustee, if the prior trustee has not already been discharged and released.