A version of this article appeared in the March 2011 issue of Estate Planning, Volume 38, Number 3, © 2011, Thomson Reuters.
Joseph was a successful businessman during his lifetime
and died owning a majority stake in a newspaper empire. Joseph
provided for his estate to be held in trust for the benefit of his sons
and then the remainder to be distributed among his descendants.
Joseph's Will authorized the Trustees to sell any asset; however, the
Trustees were expressly prohibited from selling the stock of one
specific entity – the Press Publishing Company, publisher of The World and two other newspapers. In his Will, Joseph stated:
I particularly enjoin upon my sons and my
descendants the duty of preserving, perfecting and perpetuating 'The
World' newspaper (to the maintenance and upbuilding of which I have
sacrificed my health and strength) in the same spirit in which I have
striven to create and conduct it as a public institution, from motives
higher than mere gain, it having been my desire that it should be at
all times conducted in a spirit of independence and with a view to
inculcating high standards and public spirit among the people and their
official representatives, and it is my earnest wish that said
newspaper shall hereafter be conducted upon the same principles.2
The newspaper empire continued to do well following
Joseph's death; however, approximately fifteen years later, the
newspapers started to decline. The newspapers were operating at a
dramatically increasing loss over the seven years preceding the
Trustees' action seeking construction of Joseph's Will to determine if
it authorized them, despite the instrument's explicit language, to sell
the Press Publishing Company. Although the Trustees demonstrated
evidence in the instrument that Joseph contemplated the sale of Press
Publishing Company's stock in certain emergencies, the Court opted to
use its equitable powers to, in emergencies, "protect the beneficiaries
from serious loss or total destruction of a substantial asset of the
The Court held that in the event of a necessity, there is an implied
power to sell despite express language prohibiting such sale, and
therefore authorized the Trustees of Joseph's Trust to sell the stock
of Press Publishing Company. The Court derived this "implied power to
sell" on the law's assumption that "a testator had sufficient foresight
to realize that securities bequeathed to a trustee may become so
unproductive or so diminished in value as to authorize their sale where
extraordinary circumstances develop, or crisis occurs."4
The Court concluded that Joseph's dominant purpose in establishing the
Trust was to support his children and to preserve the trust corpus for
his remaindermen, and not to retain the newspapers, out of pure
vanity, under all circumstances, including the complete destruction of
the trust corpus. Although Joseph may have hoped that the newspapers
would continue to be successful, the Court determined that "he must
have contemplated that they might become entirely unprofitable and
their disposal would be required to avert a complete loss of the trust
The example of Joseph Pulitzer reminds us as estate
planners that despite our attempted skillful memorialization of our
clients' expressed intent, there remain forces outside our control,
namely the Courts, the beneficiaries, the Trustees, and legislation,
which may work against our clients' wishes. Such intervention is often
appropriate, e.g., enabling flexibility when unanticipated
circumstances arise. However, there remains the possibility that our
client's intent, something that was so clearly expressed to us during
our meetings with him, will be abandoned after he dies.
This article is intended to provide estate planning
practitioners with a guide to best accomplishing our client's intent
for the administration and disposition of his estate after his death.
In particular, I will focus on planning and drafting for the client
whose estate is mostly comprised of a business owned and operated by
the client and his family. Because this business is the source of the
client's wealth and success, often significantly changing the client's
family's circumstances, the client may have specific objectives
regarding the business's operation and management after his death. As
planners, it is our responsibility to articulate and memorialize his
intent in the documents we prepare and the estate planning we
The article will first briefly highlight specific areas
of the law, common and statutory, that currently exist to construe the
instruments we draft, and therefore should be familiar to the estate
planning practitioner. This universe is comprised of case law, the
Uniform Prudent Investor Act and the Uniform Trust Code. Because
these uniform laws are enacted in varying versions among the states, the
model uniform laws, as promulgated by the National Conference of
Commissioners on Uniform State laws, will be used unless specifically
referenced otherwise. Following this overview, the article presents a
fact pattern for a sample entrepreneurial client. The subsequent
analysis will discuss the potential problems and proposed solutions for
my sample client's planning.
Three scenarios permitting a judicial override, or "equitable deviation,"6 of the Settlor's expressed intent are notable in case law – (1) an implied intent to sell in an emergency;7 (2) invalidity of the Settlor's expressed intent because it is contrary to (economic) public policy;8 and (3) modification because of unanticipated circumstances.9
As described above, the Pulitzer case was
decided based on the Court's equity power to intervene when an
emergency, i.e., the eminent failure of the enterprise funding the
Trust, was posing a serious threat to the trust corpus. The Court
took the position that it needed to "protect the beneficiaries" from
such loss and held there was an implied power to sell because of the
emergency, despite express language in the instrument to the contrary.10
The Court analyzed Pulitzer's intent and determined that his "dominant
purpose" in establishing the Trust was to benefit his family, and
language imploring his sons and more remote descendants to retain Press
Publishing Company, and in particular, The World newspaper, was
determined to be only a precatory direction to his descendants.
In Colonial Trust, another entrepreneur,
Robert Brown, died owning real estate in Waterbury, Connecticut. In
his Will, Brown made several specific directions regarding the
management of real estate: (i) the Trustees were forbidden to sell
either Brown's homestead or the "Exchange Place" property; (ii) no lease
of any of Brown's real estate could exceed one-year; and (iii) no
building constructed on any of Brown's land could exceed three stories.11
The Court agreed that it was Brown's intent to have the Trustees
retain the Exchange Place property and his homestead; nonetheless, it
held the prohibition from selling the properties invalid because it was
an impermissible attempt to restrain alienation until the termination
of the Trust, which may exceed the expiration of the lives in being
plus twenty-one years.12
The Court also held invalid the restriction on leasing and
constructing buildings greater than three stories. The Court concluded
that these "imprudent and unwise" limitations were contrary to be
interests of the beneficiaries.13
However, the Court based its invalidation of these restrictions on
their negative effect to the neighborhood, stating such restrictions:
. . . make it impossible to obtain from [the
properties] proper income return or to secure the most desirable and
stable class of tenants, requires for the maintenance of the buildings a
proportion of income greatly in excess of that usual in the case of
such properties, and will be likely to preclude their proper
development and natural use. The effect of such conditions cannot but
react disadvantageously upon neighboring properties, and to continue
them, as the testator intended, for perhaps seventy-five years or even
more, would carry a serious threat against the proper growth and
development of the parts of the city in which the lands in question are
Because of the harm these restrictions caused to the
public welfare, namely the economic development of the neighborhood,
they were held to be invalid violations of public policy.
The third case, Donnelly, did not involve a
business owner, but a wealthy testator, D. I. Cornell, whose Will
provided for an annual payment of $750 to be made to his grandson
provided he was enrolled and in good-standing as a student in a
degree-granting college, university or post-graduate school.15
The Will also provided for the payments to cease no later than
December 31, 1945. While Cornell's grandson was pursuing his law
degree, he was ordered to active duty as a U.S. Marine for the following
three years. The Trustees refused to reinstate the grandson's
payment following his return from WWII and to law school because the
time limit of December 31, 1945 had passed. Sitting in Cornell's
shoes, the Court stated that it must determine "what it conceives would
have been done by the creator had he foreseen the situation of his
beneficiary in a substitution of another course in order to the
complete realization of the settlor's purposed bounty."16
The Court determined that Cornell's intent was to give his grandson
$750 a year to complete his college and professional education, and
that Cornell neither foresaw WWII nor his grandson being called to
active duty during his post-graduate education.17
The Court concluded that because of this unforeseen circumstance, and
despite the express language in the Will, the Trustees were to continue
to make the annual payments to his grandson in order to fulfill
The Court's willingness to intercede and deviate from
the express terms of a Trust in the event of emergency, a violation of
public policy, or unanticipated circumstances demonstrates that the
Settlor's intent, as it is explicitly stated in our instruments, may not
be enforced under all circumstances.
The Uniform Prudent Investor Act (the "Act") was
intended to reform existing trust investment law and addressed, in
part, the Trustee's (i) duty to diversify, (ii) determination of "risk
and return" objectives for the Trust; and (iii) delegation of
investment responsibilities.19 The Act specifically states that its rules are default rules that the Settlor can "alter or abrogate."20 Let us examine the Trustee's "duty to diversify" under the Act as it relates to the Settlor's expressed intent.
Section 3 of the Act states, "A trustee shall
diversify the investments of the trust unless the trustee reasonably
determines that, because of special circumstances, the purposes of the
trust are better served without diversifying."21 The Comment to Section Three of the Act continues by stating:
Circumstances can, however, overcome the duty to
diversify. For example, if a tax-sensitive trust owns an
underdiversified block of low-basis securities, the tax costs of
recognizing the gain may outweigh the advantages of diversifying the
holding. The wish to retain a family business is another situation
in which the purposes of the trust sometimes override the conventional
duty to diversify.22
For example, a Trustee, after determining that the sale
of the Trust's high concentration of illiquid, low-basis stock in a
closely-held business would not generate sufficient liquidity to
produce an income equal to or in excess of the dividends being
generated by such stock, and who decided not to diversify the trust's
investments, was held not to have violated the New York Prudent Investor
The client's intention to opt-out of the Act is
generally evidenced by trust language that supplants the Act's duty to
diversify, such as authority for the Trustees to "retain any stock or
other interest in any business, irrespective of the fact that such
stock or other interest may constitute what otherwise might be regarded
as an unduly large portion of the trust estate." Even without such
language, the Trustee's retention of the client's business may be a
"special circumstance" under which the Trustee is not required to
diversify under the Act; however, it leaves uncertainty in the
administration of the Trust after the client's death if the Settlor's
intention to override the Act is not expressly stated.
Unlike the Act, the Uniform Trust Code (the "UTC") is not a purely "default rule" in the jurisdictions24 in which it has been enacted.25 Section 105 of the UTC sets out fifteen mandatory rules for Trusts,26
including provisions which may be inconsistent with the client's
intent, such as (i)"the requirement that a trust and its terms be for
the benefit of its beneficiaries, and that the trust have a purpose
that is lawful, not contrary to public policy, and possible to
achieve;"27 and (ii) "the power of the court to modify or terminate a trust under Sections 410 through 416 [of the UTC]."28
The first mandatory rule, the "benefit the beneficiary"
rule, has been cited as setting "outer limits on the Settlor's power
to abridge the default law."29
Other than provisions which are unlawful, contrary to public policy or
impossible which Section 105(b)(3) lists, when would the Settlor's
expressed intent not benefit the beneficiary? Most often, our clients'
primary objective is to benefit their beneficiaries. Language governing
the retention and operation of the client's business is usually a
means to an end – the ultimate benefit of his beneficiaries. As the
Court in Pulitzer concluded, it is rare to have a client so
vain as to want, following his death, his failing business to continue
despite the catastrophic detriment to his family.30 However, the continued ownership and operation of the client's successful business is also not per se
for the "benefit of the beneficiary," especially if it is an objective
"best economic interests of the beneficiary" test. For example,
client's daughter requests Trustee to sell the family business because
diversifying the investment of the net proceeds would produce more
liquidity and less risk for the beneficiaries of the Trust. Is the
client's expressed direction to retain the family business violative of
the "benefit the beneficiary" rule because of the economic benefit a
sale of the businesses may produce? Some, who are well versed in the
"benefit the beneficiary" rule, say "yes."31
Assuming the answer is "yes," this is a noteworthy erosion of our
client's ability to govern the ownership and operation of his business
after the client's death.32
Nonetheless, this risk should not discourage the practitioner from
expressing the Settlor's intent to retain the business throughout the
instrument. Even in a state that has adopted the UTC, the Court
reviewing the Trust may refuse to apply such a broad application of the
"benefit the beneficiary" rule and instead enforce the Settlor's
intent as expressed.
The UTC also prohibits a Trust from limiting the Court's power to modify or terminate as provided by Sections 410 through 416.33 Section 411 of the UTC provides:
A noncharitable irrevocable trust may be terminated
upon consent of all of the beneficiaries if the court concludes that
continuance of the trust is not necessary to achieve any material
purpose of the trust. A noncharitable irrevocable trust may be
modified upon consent of all of the beneficiaries if the court
concludes that modification is not inconsistent with a material purpose
of the trust.34
Both judicial proceedings require the Court to
determine the "material purpose" of the Trust. This standard is
derived from the holding in Claflin, in which the Court
refused to accelerate a young beneficiary's inheritance because it was
not the testator's intent for his son to receive the entirety of his
share at age twenty-one, but in three installments at ages twenty-one,
twenty-five and thirty as his Will specified.35
The Court determined that the "purposes of the trust" would not be
accomplished if it permitted a modification to the trust instrument
contrary to the Settlor's intent.36
A procedure to modify or terminate the Trust often
allows for some desired flexibility in the administration of the Trust,
such as in the event the needs of a beneficiary unexpectedly change
because of a disability. To maintain this flexibility, but still to
protect the client's intent, the practitioner would be wise to expressly
state the "material purpose" of the Trust in the instrument.
Alternatively, a client may be concerned by this perceived "easy"
avenue to override his choices regarding the administration and
dispositive provisions of his Trust, including its premature
termination. To protect the client's intent, the practitioner may want
to include language expressly stating that a termination or
modification would be contrary to the Trust's "material purpose."37
Planning Strategies for Sample Client
Mr. Client, a seventy-five year old widower, is a
successful entrepreneur. During his lifetime, he has amassed a large
commercial real estate empire. Despite his age, Mr. Client is still
very active in the management of the enterprise, Family Co., which
purchases, sells, develops and leases commercial properties. Mr.
Client has four adult children, but his sole daughter is the only
offspring involved in the family business. The success of Family Co.
has provided a very comfortable lifestyle for Mr. Client's family. Mr.
Client's three sons receive a generous salary from Family Co. for
their 'consulting" services, which supports their respective families.
Mr. Client has an existing estate plan, drafted prior to his wife's
death and the accumulation of the majority of his wealth, which provides
for his estate to be divided into equal shares for his children. Each
child's trust share will continue in trust for his or her lifetime and
will then be distributed to the deceased child's children upon his or
her death. Mr. Client's brother, seventy-two years old, is currently
named as successor Trustee to serve upon Mr. Client's death or
incapacity. There are no specific directions in Mr. Client's estate
plan to provide for the retention and management of Family Co.;
however, there is a general provision that authorizes the Trustee to
retain the stock in any business owned by Mr. Client at his death,
irrespective of the portion such stock comprises of the entire trust
Mr. Client is aware of the void in his estate plan to
provide for the succession of Family Co., but is paralyzed to make any
changes because a solution is not obvious to him. Mr. Client simply
wants the status quo – the operation of the business and the support of
his family – to continue after his death. During an initial meeting
with Mr. Client, he expressed the following un-prioritized goals: (1)
provide for the continued financial support of his sons and their
families so they can maintain their current standard of living; (2)
provide for his daughter to succeed him in managing Family Co. and
authorize her to make all decisions, without any limitation, regarding
its operation and management; and (3) provide for the continued
operation and ownership of Family Co. by the Trust for the ultimate
benefit of his children and future descendants.
There are a number of apparent problems in Mr. Client's
current estate plan: (1) selection of successor Trustee; (2) silence
as to intent for continued ownership and operation of Family Co.; (3)
silence as to delegation of decision-making concerning Family Co. to
Mr. Client's daughter; and (4) silence as to intent to provide for sons
and their families. If Mr. Client died tomorrow without updating his
estate plan, his brother, as successor Trustee, may not be aware of Mr.
Client's objectives. The Trustee would likely, with the advice of
counsel, analyze if diversification of the trust investments was
necessary, and may consider and pursue a sale of Family Co. to generate
liquidity to provide for the needs of Mr. Client's children and
grandchildren. Until the sale of Family Co., or if Family Co. is
retained, Mr. Client's daughter would not have any express authority
under the trust instrument to operate the business. Mr. Client's
brother, as Trustee, will likely rely on his niece's advice and
expertise concerning the operation of the enterprise; however, he will
have to balance the needs of the business with the needs of all of his
beneficiaries and may decide, against his niece's advice, to declare a
large dividend to provide liquidity for the Trust. Mr. Client's
brother is also not aware of Mr. Client's concern to support his sons
and may decide not to made distributions necessary to continue their
lavish lifestyle, especially when his niece protests to the
extraordinary large distributions made to them and the smaller
distributions made to her. The silence in Mr. Client's estate plan as
to his intent will lead in an unpredictable mess to be sorted out by
his Trustee and his children. The death or resignation of an elderly
Trustee, possible pre-existing resentment among his family, and
turbulence with Family Co. after Mr. Client's death may exacerbate the
problem and lead to costly litigation.
Although every client is different, the following is a
list of considerations and possible solutions for Mr. Client's estate
1. Clearly express Mr. Client's intent for the Trust
to own and operate Family Co., including his wishes for the business
during his children's lifetimes and after they are all deceased.
Understanding and correctly expressing Mr. Client's
intent is not as easy as it sounds. As discovered during the initial
meeting, Mr. Client is paralyzed from making a decision because he
doesn't know how his goal of "maintaining the status quo" can be
effected after his death. The practitioner should continue the
conversation with Mr. Client to help him identify and prioritize his
goals. As mentioned above, generally the client's primary goal is to
provide for his family, which will need to be refined depending on the
varying circumstances of the beneficiaries. However, the practitioner
will not discover these nuances unless she has an in-depth discussion
with Mr. Client. In the trust instrument, the practitioner should
state whether Mr. Client wants a complete prohibition of the sale of
Family Co., or if Mr. Client wants the ownership of Family Co. to
continue only under certain circumstances. The practitioner should
review with Mr. Client whether there are any "do's" or "don't's"
regarding the retention of the business, and whether these rules vary
depending on which children, if any, are alive. The practitioner
should identify which directions are appropriate for the trust
instrument versus a "side letter" (discussed below). Mandatory
directions generally fall into the former category, while
discretionary, albeit important, directions generally fall into the
latter category. The practitioner should also discuss the stark
reality that Family Co. may not succeed after Mr. Client's death and
memorialize Mr. Client's intent for Family Co. under those
2. Establish an Investment Advisor or Committee to
made decisions regarding Family Co. and clearly identify how the
responsibilities of this investment fiduciary are to interact with the
duties of the Trustee.
Mr. Client would like his daughter to handle all
matters relating to Family Co. after his death. However, having her
serve as Trustee and also make decisions regarding trust distributions
to her siblings, nieces and nephews may not be appropriate. The
bifurcated delegation of these two roles to an Investment Advisor and a
Trustee may meet Mr. Client's goals. However, a problem may arise
concerning the overlap and inconsistencies between the duties of each
fiduciary. For example, the following issues should be anticipated and
dealt with in the trust instrument: (i) if the Trustee determines that
there is a need for liquidity, can he compel the Investment Advisor to
liquidate Family Co. or declare a dividend; (ii) can the Investment
Advisor appoint herself as a director or officer of Family Co., and are
any related conflicts of interests waived; (iii) does the Investment
Advisor have to consider the needs of the beneficiaries when making a
decision to liquidate or pay a divided; (iv) can any of the Investment
Advisor's decisions regarding the retention or sale of Family Co. be
challenged; and (v) should the Trustees have a "put" on Family Co.
stock to force the redemption of such stock to create liquidity.
As an alternative to establishing a separate office to
manage Family Co., the Trustee can delegate this responsibility to Mr.
Client's daughter. Section 9 of the Act permits the Trustee to
delegate his investment and management responsibilities provided the
Trustee exercises "reasonable care, skill and caution" in (i) selecting
the agent; (ii) establishing the terms and scope of the delegation;
and (iii) periodically reviewing the agent's actions to monitor the
agent's performance and compliance with the delegation.38 If the Trustee's delegation meets these requirements, he is not liable for his agent's actions.39
3. Clearly express what provisions of the Act and
the UTC will not apply, especially as to the Trustee's duty to
diversify, as well as the "material purpose" of the Trust to address
possible judicial actions to modify or terminate the Trust.
As discussed above, the Act serves as the default law for trust investments unless the Settlor provides otherwise.40
In particular, to ensure that the duty to diversify under Section 3 of
the Act will not apply, the practitioner should include specific
language authorizing the retention of Family Co. notwithstanding it may
comprise a large percentage of the Trust.41
In addition, if consistent with Mr. Client's intent, language
relieving the Trustee (or Investment Advisor) of liability for any loss
resulting from a decision to retain Family Co. would be appropriate.
To address the provisions of the UTC which are mandatory, the
practitioner should consider articulating the "material purposes" of
the Trust, such as "to protect trust property from the future creditors
of Mr. Client's descendants and to continue the Trust for as long as
permitted by law," and "to continue the ownership and operation of
Family Co., provided it is operating at a minimal profit necessary to
support the needs of Mr. Client's descendants, whatever those needs
are, as determined in the sole discretion of the Trustee." Drafting
to discourage modification or termination under all circumstances is not
recommended because of the inevitable need for flexibility in the
event of unanticipated circumstances that may arise with a long-term
4. Prepare a "side letter" for Mr. Client's Trustees to provide them guidance regarding administration of the Trust.
While not legally binding, a "side" letter may provide
Mr. Client's Trustee helpful insight into Mr. Client's wishes.
Examples of information for the "side letter" include: (i) circumstances
under which Family Co. should be sold or liquidated, such as a medical
emergency of a beneficiary; (ii) continued retention of Family Co.
provided its dividends generate sufficient liquidity to make
distributions to the beneficiaries to maintain their standard of
living; and (iii) specific provisions concerning Mr. Client's sons, and
that larger distributions may be made to them, versus their sister, to
ensure the sons and their families are sufficiently supported to
maintain their current standard of living. As stated above, provisions
concerning the administration of the Trust that Mr. Client intends to
be mandatory should be drafted into the trust instrument; the "side
letter" is more appropriate for Mr. Client's precatory wishes.
5. Involve, either at Mr. Client's death or at the
election of the beneficiaries, an independent third party to
participate in decision-making regarding the operation and ownership of
Family Co., ministerial administration of the Trust, and/or
distributions to beneficiaries.
The presence of a neutral third party may defuse a
brewing family dispute relating to the administration of the Trust.
However, the selection of an appropriate third party is important for
this strategy to be successful. A large institution, such as a national
bank, may not have the flexibility or the interest to manage the
Trust, which is largely comprised of stock in Family Co. A large
institution may also not be familiar with the unique circumstances of
Mr. Client's beneficiaries. The large institution's trust committee,
which is generally conservative in exercising its discretion, may not
be willing to support Mr. Client's sons' extravagant lifestyles.
It may also be appropriate to allow the children, or a
majority of them, to name an independent professional to serve as
co-Trustee of the Trust (and their respective trust shares). By
allowing the children to appoint, remove and replace the third party
among a discrete universe of professionals, such as an attorney, CFO or
CPA, there is flexibility to select the appropriate independent
person(s). The practitioner should discuss with Mr. Client the class
of potential third parties who may serve as co-Trustee of the Trust –
e.g., whether Mr. Client would want to allow a child to name his
college roommate or the child's spouse to serve as his co-Trustee.
Finally, instead of having a single Investment Advisor
manage Family Co., Mr. Client may consider naming an Investment
Committee, comprised of his daughter, the Trustee, the CFO of the
Family Co. and a member, independent or not, appointed by Mr. Client's
sons, as the entity making decisions concerning the retention,
recapitalization, borrowing, expansion, sale and liquidation of Family
6. Provide for non-business assets, such as life
insurance or income-producing real estate owned separately from the
development and management company, to fund Mr. Client's sons' shares.
Mr. Client may be concerned about separating the
control of Family Co. from its ownership. Considering Mr. Client's
daughter is devoting her life to Family Co., is it fair for her
"non-participating" siblings to share in its success? The practitioner
should engage in an analysis to determine whether, net of estate
taxes, there are sufficient assets to allocate non-business assets to
Mr. Client's sons and business assets to his daughter, i.e., a "who
get's what and when" chart to review with Mr. Client. If there are not
sufficient non-business assets to equally divide Mr. Client's estate
among his children, an alternative is to segregate the commercial
rental properties from the real estate development and management
component of Family Co. The revenue from the rental properties may be a
source of liquidity for the sons' trust shares and will allow Mr.
Client's daughter to benefit from the appreciation in Family Co. that
results from her efforts.
An alternative strategy involving the reallocation of
business assets among Mr. Client's children's trust shares is for the
practitioner to draft a mechanism for the Trustees of the children's
trust shares to have a "put" or "call" right over the stock in Family
Co. and rules regarding the "trigger events' for the exercise of these
rights and the payment for such stock. As the "participating child,"
Mr. Client's daughter may want the option to purchase the stock owned
by her brothers' trust shares; conversely, her brothers may want the
option to sell their stock to generate liquidity and to diversify their
trust share investments. The practitioner should discuss with Mr.
Client whether these rights should be unlimited as to their exercise,
or only under specific trigger events. For example, the Trustee of a
trust share for each of Mr. Client's sons may want to exercise his
respective "put" right in the event the Trustee determines additional
liquidity is necessary to pay for the college education of Mr. Client's
grandchildren. Or, for example, the Trustee of Mr. Client's daughter
trust share may want to exercise her "call" right if the value of
Family Co. appreciates twenty percent since Mr. Client's death. In
addition to the trigger events, the practitioner should discuss with
Mr. Client the timing and method of payment for the stock, e.g., a
ten-year promissory note with adequate interest and security.
7. If affordable insurance is available, plan for
Mr. Client and his daughter to enter into a buy-sell agreement by which
she may purchase some or all of Family Co. upon Mr. Client's death.
Another solution for Mr. Client's concern about
separating the control of Family Co. from its ownership is to have Mr.
Client and his daughter enter into an insurance-funded buy-sell
agreement. Assuming obtaining affordable insurance on Mr. Client's
life is not an issue, he and his daughter would enter into a binding
arrangement whereby upon Mr. Client's death, his estate will sell and
his daughter will purchase (with the life insurance proceeds she
receives on Mr. Client's death) some or all of Mr. Client's stock in
Family Co. To ensure that this strategy has a fair result, the
practitioner should pay particular attention to valuing Family Co. at
both the commencement of the agreement and subsequent annual appraisals
of the business. It would not be consistent with Mr. Client's intent
for his daughter to overpay or underpay for his stock.
8. Recapitalize the capital structure of Family Co. to separate voting control from equity ownership.
If Mr. Client is concerned about the potential overlap
and conflict of having both an Investment Advisor (or Committee) and
Trustee administer the Trust, the practitioner should consider a
recapitalization of Family Co.'s capital structure to create two
classes of stock – voting and non-voting. The control of Family Co
would be represented by the voting stock and could be held as a
separate "voting" trust (the "business trust") of which Mr. Client's
daughter would serve as sole Trustee. The equity ownership of Family
Co. would be represented by the non-voting stock and would be
distributed equally among all of Mr. Client's children's trust shares.
The business trust would require all distributions from Family Co.,
including dividends and sale proceeds, to be immediately distributed to
the children's trust shares. Therefore, the sole asset owned by the
business trust would be the voting stock in Family Co. This proposed
recapitalization of Family Co.'s stock would clearly put all matters
relating to Family Co., including its retention, sale or liquidation,
into Mr. Client's daughter's hands (with appropriate authorization
language in the Trust). In the event Family Co. was sold, the ownership
of the business would cause distribution of the proceeds among the
non-voting stockholders, i.e., the children's trust shares.
9. Create a disincentive to challenge Mr. Client's Trust by including an "in terrorem" clause in the trust instrument.
The practitioner may consider drafting an in terrorem (i.e., no-contest or forfeiture) clause, such as:
If any of the children or issue of the Settlor, or
any other person by or on behalf of any children or issue of the
Settlor shall contest the probate or validity of Settlor's Will or the
validity of this Trust or any provisions herein, then all benefits and
distributions provided for said child or such child's issue hereunder
shall thereupon terminate and such benefits and distributions shall
instead be allocated to the other beneficiaries of this Trust (other
than the child whose benefits are terminated) as if the said child
whose benefits are terminated had predeceased the Settlor leaving no
For this provision to work, Mr. Client has to leave the
potentially contesting beneficiary a sufficient inheritance so the
risk of losing such inheritance discourages him or her from contesting
Mr. Client's estate plan. Also, before proceeding, the practitioner
should confirm whether the state in which Mr. Client is domiciled will
enforce an in terrorem clause.43
Finally, although the advantage of an in terrorem clause is that it is
a powerful and effective tool to discourage and penalize a
beneficiary's challenge to Mr. Client's estate plan; that is also its
disadvantage. The practitioner should review with Mr. Client, and
document the discussion, that, if the in terrorem clause works as
intended, it will completely disinherit a child and his or her family.
10. Deliberately select the jurisdiction whose laws will govern and interpret the Trust based on Mr. Client's goals.
While the practitioner is not expected to be an expert
in the laws of all fifty states, she should still determine if the laws
governing Mr. Client's domicile are adequate to protect his expressed
intent, or if another jurisdiction would be more appropriate. Although
it may be tempting to dodge the mandatory rules of the UTC by selecting
a state in which the law has not been enacted, such avoidance may be
short-lived.44 However, some states have enacted a version of the UTC that is more protective of the Settlor's intent than others.45
Furthermore, if a state that has enacted the UTC has any relationship
to the Trust, the UTC may still apply. Section 107 of the UTC provides:
The meaning and effect of the terms of a trust are
determined by: (1) the law of the jurisdiction designated in the terms
unless the designation of that jurisdiction's law is contrary to a
strong public policy of the jurisdiction having the most significant
relationship to the matter at issue; or (2) in the absence of a
controlling designation in the terms of the trust, the law of the
jurisdiction having the most significant relationship to the matter at
However, the Comment to Section 107 of the UTC provides
some reassurance as to Mr. Client's ability to select the law
governing his Trust regardless of the connections, if any, including
its physical situs, with the selected jurisdiction or any other
Even if the practitioner finds the perfect jurisdiction to protect Mr.
Client's expressed intent, in light of changes in local laws, the
practitioner should include a provision in the trust instrument that
will permit the Trustee to change the jurisdiction governing the
administration and interpretation of the Trust.
Although a parent's declaration, "because I said so,"
may have been all of the explanation a parent felt he needed to provide
when his children were young, today, clients owning family businesses
and their advisors need to provide a more detailed explanation of their
intent regarding the future ownership and operation of the family
enterprise. Lack of clarity in memorializing the client's intent can
lead to a confusing trust administration at best, and family disharmony
and costly litigation at the worst. However, even with proper
clarity, careful attention must be given by the practitioner as to how
case law, the Uniform Prudent Investor Act and the Uniform Trust Act
may affect, by protecting or overriding, the written expression of the
client's intent with possibly surprising and frustrating results for
those clients who own and operate a family business.
About the Author: Richard P. Breed, III
is a founding shareholder of Tarlow, Breed, Hart & Rodgers, P.C., a
law firm located in Boston, Massachusetts. Attorney Breed
concentrates in business succession planning for owners of
privately-held enterprises. In addition, Attorney Breed counsels high
net worth families in the preservation and protection of their
children's inheritances from excessive transfer taxes and from possible
interference by third parties, including creditors and divorcing
spouses. Attorney Breed also counsels fiduciaries and beneficiaries in
matters of trust and estate administration, and has testified as an
For their assistance on earlier drafts of this article, I thank my
colleagues, Jennifer A. Civitella Hilario, Esq. and Matthew S. Furman,
2 In re Estate of Joseph Pulitzer, 249 N.Y.S. 87, 92 (Sur. Ct. 1931).
6 Restatement (Third) of Trusts § 66 cmt. 1 (1992).
7 Pulitzer, 249 N.Y.S. at 93.
8 Colonial Trust Co. v. Brown, 135 A. 555, 564 (Conn. 1926).
9 Donnelly v. Nat'l Bank of Washington, 179 P.2d 333, 336 (Wash. 1947).
10 Pulitzer, 249 N.Y.S. at 93.
11 Colonial Trust, 135 A. at 561, 564.
15 Donnelly, 179 P.2d at 333.
John H. Langbein, The Uniform Prudent Investor Act and the Future of
Trust Investing, 81 Iowa L. Rev. 641, 645-46 (1996). Forty-four states
and the District of Columbia have enacted a form of the Act since its
completion in 1994. See National Conference of Commissioners on
Uniform State Laws, A Few Facts About The . . . Uniform Prudent
20 Uniform Prudent Investor Act § 1 cmt. 1 (1995).
21 Uniform Prudent Investor Act § 3 (1995).
22 Uniform Prudent Investor Act § 3 cmt. (1995) (emphasis added).
23 In re Matter of Hyde, 44 A.D.3d 1195, 1200 (N.Y. App. Div. 2007).
A form of the UTC has been adopted in 22 states and the District of
Columbia. See National Conference of Commissioners on Uniform State
Laws, A Few Facts About The . . . Uniform Trust Code,
25 John H. Langbein, Mandatory Rules in the Law of Trusts, 98 NW. U. L. Rev. 1105, 1106 (2004).
26 Uniform Trust Code § 105(b) (2005).
27 Uniform Trust Code § 105(b)(3) (2005).
28 Uniform Trust Code § 105(b)(4) (2005).
29 Langbein, supra note 25, at 1112.
30 Pulitzer, 249 N.Y.S. at 94.
31 Langbein, supra note 25, at 1116-17.
See Jeffrey A. Cooper, Empty Promises: Settlor's Intent, the Uniform
Trust Code, and the Future of Trust Investment Law, 88 B.U. L. Rev.
1165, 1177 (2008).
33 Uniform Trust Code § 105(b)(4) (2005).
34 Uniform Trust Code § 411(b) (2005).
35 Claflin v. Claflin, 20 N.E. 454, 455 (Mass. 1889)
Alan Newman, Elder Law: The Intention of the Settlor Under the
Uniform Trust Code: Whose Property Is It, Anyway?, 38 Akron L. Rev.
649, 663 (2005).
38 Uniform Prudent Investor Act § 9(a) (1995).
39 Uniform Prudent Investor Act § 9(c) (1995).
40 Uniform Prudent Investor Act § 1 (1995).
41 Uniform Prudent Investor Act § 3 (1995).
42 Uniform Trust Code § 411(b) (2005).
See, e.g. Fla. Stat. ch. 732.517 (2010) (invalidating any provision in
a Florida Will that penalizes any interested person from contesting a
provision in a Will).
44 Cooper, supra note 32, at 1170.
See, e.g. Mich. Comp. Laws § 7404 (2010) (omitting "benefit of the
Beneficiaries" in Michigan's enactment of Uniform Trust Code §
46 Uniform Trust Code § 107 (2005).
47 Uniform Trust Code § 107 cmt. (2005).