One of the first reported Surrogate’s Court decisions of 2011 comes from Monroe County.  The decision is interesting in that the court addresses various legal issues in the context of what it describes as “a power-sharing arrangement that is rather unconventional, even by today’s standards of Trust and Estate practice.”   The decision addresses an exoneration clause, the delegation of investment responsibility, the overriding duty of loyalty of fiduciaries, the Prudent Investor Act, the construction of wills and trust instruments, and the status of an “advisor” as a de facto trustee.

The inter vivos trust at issue was created in 1945, in conjunction with the grantor’s outright gift to the University of Rochester to create a clinic under the auspices of the University’s Department of Psychiatry. The grantor directed that Trust income be used to operate and maintain the clinic. The grantor named an institutional trustee (“Trustee”) and also created an “Investment Advisory Committee” comprised of three individuals, two to be named by the University of Rochester and one by the Trustee.

By the provisions of the Trust instrument, the Advisory Committee has considerable power and control over the investment of Trust assets. The Advisory Committee was granted “sole and exclusive power and control over the investments making up this trust fund, the sale of securities, and the reinvestment of any funds at any time in the trust estate” and given the power to direct the Trustee in writing in connection with such power and control. The Trust instrument also contains an exoneration clause, and provides that “[t]he Trustee shall be charged with no responsibility or duties with respect to the investment or reinvestment of trust funds, other than to carry out the written directions or communications received by it from the Committee.”

Approximately 65 years after the Trust was created, a disagreement arose between the Advisory Committee and the Trustee that required judicial attention. Specifically, the Advisory Committee directed the Trustee to invest all of the Trust assets in the University’s long-term investment pool, and the Trustee sought advice from the Court. 

The Court made clear that its task was to determine whether the proposed investment in the long term investment pool would frustrate the intent of the grantor.  It first addressed the intent of the grantor and the purpose of the Trust. Reading the Trust instrument as a whole, the Court found that that the Advisory Committee and Trustee were required to work in concert to promote the goals of the grantor to fund the operation of the Psychiatry Department. Although the terms of the Trust instrument quoted above confer broad authority upon the Advisory Committee, the Court held that such authority could not be used in contravention of the stated purpose of the Trust, and that the Trustee and the Advisory Committee, as a de facto co-trustee, share the fiduciary obligation to invest and manage the assets in a manner consistent with the purpose of the Trust. 

In reaching this conclusion, the Court noted the limits of the Trust instrument’s allocation of investment responsibilities to the Advisory Committee and the concomitant exoneration clause. The Court found that the exoneration clause employed in the Trust instrument, an attempt to render the Trustee completely unaccountable in deference to the Advisory Committee, is inconsistent with the nature of a trust, and void as against public policy.   If the Advisory Committee’s control over investment decisions was completely dispositive, there would be little sense in having a trustee.   According to the Court, while the Trustee is under a duty to comply with the directions of the Advisory Committee with respect to investment decisions, the Trustee cannot ignore its fiduciary responsibility; the Trustee could be held liable for abiding by the direction of the Advisory Committee where there may be reason to believe that the Advisory Committee is not fulfilling its fiduciary duty. 

The Court had several problems with the proposed investment in the long term investment pool. The investment would remove both the Trustee and the Advisory Committee from any role in administering the Trust assets. Trust funds would be transferred to the University’s custodian bank, and such bank would have no fiduciary obligation to the Trust. The funds would be managed by numerous investment management firms under the oversight of a subcommittee of the University’s Board of Trustees.   Once the Trust’s funds were invested in the long term investment pool, neither the Advisory Committee, nor the Trustee, would have input concerning asset allocation, or the discretion to select, retain or sell off any individual assets. Such decisions would be overseen by the subcommittee of the University’s Board of Trustees. 

Quoting Meinhard v. Salmon, the Court first noted that two of the three members of the Advisory Committee were employed by the University, and that the proposed investment would place the majority of the Advisory Committee, owing a duty of loyalty to both the University and the Trust, in a position of conflict if questions were to arise as to the handling of Trust funds in the long term investment pool.   The Court was “hard-pressed” to allow the majority of the Advisory Committee to be allowed to direct the investment of Trust assets in the long term investment pool under these circumstances. The Court acknowledged that the third member of the Advisory Committee was also in a potential position of conflict as an employee of the Trustee, but found that this third member’s conflict was less of a concern considering the minority status.

The Court also held that while delegation of investment and management functions is permissible under the EPTL, the proposed investment constituted a delegation far afield from what is permitted by statute (EPTL § 11-2.3(c)), and would be inconsistent with the Trust instrument.

This case is certainly worth a read.