Trustee Investments (Portfolio 861)

Tax Management Portfolio, Trustee Investments, No. 861, provides detailed coverage of the rules governing the different types of investments available to trustees, some basic income tax consequences of those investments, and some of the economic theory behind investing.

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Tax Management Portfolio, Trustee Investments, No. 861, provides detailed coverage of the rules governing the different types of investments available to trustees, some basic income tax consequences of those investments, and some of the economic theory behind investing. It discusses the laws applicable to trustees when investing trust assets.
The Detailed Analysis provides comprehensive coverage of the principles of investing enumerated in the Restatement (Third) of Trusts: Prudent Investor Rule (1992), the Uniform Prudent Investor Act (1994), the Uniform Principal and Income Act (2000), as well as changes to the income tax definition of “income” and “principal.” This analysis includes a discussion of the extent to which trustees are required to diversify their investments and notify beneficiaries of those investments, and how to manipulate those investments in order to exercise the trustee's duty of loyalty to the beneficiaries. It sets forth some criteria for the creation by the trustee of an investment plan that takes into consideration all of the requirements discussed in the analysis.
This portfolio may be cited as Cline, 861 T.M., Trustee Investments.

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Christopher P. Cline, B.A., San Francisco State University; J.D., Hastings College of the Law; fellow, American College of Trust and Estate Counsel; adjunct professor of law, Northwestern College of Law, Lewis & Clark College (1997); member and officer, Executive Committee of Estate Planning and Administration Section, Oregon State Bar; member, Board of Directors, Estate Planning Council of Portland, Inc.; member, Editorial Advisory Board, Tax Management Estates, Gifts & Trusts Journal; contributor to Tax Management Estates, Gifts & Trusts Journal; author, 825-2nd T.M., Powers of Appointment — Estate, Gift, and Income Tax Considerations; author, 838 T.M., Dynasty Trusts; author, 847 T.M., Disclaimers — State Law Considerations; author, 848-2nd T.M., Disclaimers — Federal Estate, Gift and Generation-Skipping Tax Considerations; and numerous other professional publications.


Detailed Analysis

I. Introduction

II. Defining “Investments”

Introductory Material

A. Stocks

B. Bonds

C. Mutual Funds

D. Futures

E. Derivatives

1. Options

a. Equity Options

b. Nonequity and Index Options

2. Puts

3. Calls

4. General Concepts Applicable to Options

5. Collars

6. Prepaid Variable Forward

F. Life Insurance

1. Insurance Product Types

2. The Problem with Illustrations

III. Income Tax Consequences of Investments

Introductory Material

A. Ordinary Income Tax Rates

B. Special Rate Structures

C. Taxation of Derivatives

1. Taxation of Options

2. Tax Straddle Rules

3. Constructive Sales

4. Contracts Marked to Market

5. Some Conclusions

D. Taxation of Retirement Plans and Individual Retirement Accounts (IRAs)

E. Taxation of Trusts

IV. Basics of Economic Theory of Investments

A. Modern Portfolio Theory - The Basics

1. Calculation of Present Value

2. Opportunity Cost of Capital

3. Risk

B. Elements of Modern Finance Theory

1. Portfolio Theory

2. Measuring Risk: Beta Coefficients

3. The Capital Asset Pricing Model

4. Market Efficiency

5. Behavioral Finance and Investor Psychology

V. Restatement (Third) of Trusts: Prudent Investor Rule

Introductory Material

A. Standard of a Prudent Investment - Restatement 227

B. Investment Provisions of Statute or Trust - Restatement 228

C. Duty with Respect to Original Investments - Restatement 229

D. Other Restatement Sections Affected by the Prudent Investor Rule

VI. The Uniform Prudent Investor Act

A. Analysis

1. Trustee Standard of Care

2. Duty to Diversify

3. Duty to Review Original Assets

4. Duties of Loyalty and Impartiality

5. Duty to Avoid Excessive Costs

6. Standard of Review

7. Power to Delegate

B. Prudent Investor Litigation

1. How to Lose by Gaining

2. Janes and its Progeny: Measuring Damages

3. When Exculpation and Asset Retention Clauses Don't Work

4. An Absolute Duty to Diversify?

5. Aggressive Investing and Day Trading

6. Relieving Trustees of Liability

7. Interpreting Intent when Determining Investment Strategies

C. Problems with the Prudent Investor Act

VII. The Uniform Principal and Income Act

A. Introduction

B. General Principles, Duties and Definitions

C. Trustee's Power to Adjust

1. Factors in Determining Whether to Adjust

2. Prohibitions on Adjustment Power

D. Judicial Control of Discretionary Powers

E. Decedent's Estate or Terminating Interest

F. Apportionment at Beginning and End of Income Interest

G. Allocation of Receipts During Trust Administration

1. Character of Receipts from Entities

2. Distributions from Trusts or Estates

3. Business and Other Activities Conducted by the Trustee

4. Principal Receipts

5. Rental Property

6. Obligation to Pay Money

7. Insurance and Similar Contracts

8. Insubstantial Allocations

9. Deferred Compensation, Annuities and Similar Payments

10. Liquidating Assets

11. Minerals, Water and Other Natural Resources

12. Timber

13. Unproductive Property

14. Derivatives and Options

15. Asset-Backed Securities

H. Allocation of Disbursements During Trust Administration

1. Disbursements from Income or Principal

2. Adjustments for Depreciation and Taxes

I. Conversion to Unitrust

J. Problems with the UPIA

VIII. Changes to the Income Tax Definition of “Income”

Introductory Material

A. Definition of Income

B. Capital Gains and Distributable Net Income

C. Trusts Qualifying for the Marital Deduction

D. GST Tax Exempt Trusts

E. Charitable Remainder Trusts

F. Pooled Income Funds

G. Effective Dates

H. Summary and Conclusions

IX. The Total Return Trust

A. Reasons for the Total Return Trust (or Unitrust)

B. Problems with the Total Return Trust

X. Drafting Suggestions

Introductory Material

A. Drafting for (and Around) the Current Legislation

B. Some Alternative Approaches

XI. Developing the Investment Plan

Introductory Material

A. Step One: Analyze the Current Position

B. Step Two: Diversify and Allocate the Portfolio

C. Step Three: Create a Formal Investment Policy

D. Step Four: Implementing the Investment Policy Statement

E. Step Five: Monitor and Supervise the Performance


Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Uniform Prudent Investor Act*

Worksheet 2 Decision Checklist for Trustee Holding Concentrated Assets



Statutes, Acts & Authorities

Revenue Rulings: