Trustees, Under Pressure from Beneficiaries Affected by COVID-19, Face Legal Risks

For many Trustees, the current economic environment is probably the most challenging they have ever faced. As the coronavirus epidemic sweeps across the country and throughout much of the world, the stock markets have experienced unprecedented volatility not seen since the Crash of 1929.¹ Treacherous. Unpredictable. Hysterical. These are just some of the words that financial commentators have used in recent weeks to describe the current state of the equity markets. Losses have significantly lowered the value of many Trusts.

At virtually the same time, Trustees may be faced with panicked phone calls from cash-strapped Beneficiaries, looking to the Trust for help.

What’s a Trustee to do?

First, be proactive. Get professional help. A Trustee is required under the Prudent Investor Act (Section 11-2.3 of the Estates, Trusts and Powers Law [EPTL]) to “exercise reasonable skill, care and caution” when investing and managing property entrusted to him. The Act specifically provides that conduct, not performance, is what will matter in the eyes of the law in determining if a Trustee has met his fiduciary obligations. New York courts generally have held that a Trustee who “walks the walk” – in other words, complies with the Prudent Investor Act – will not be liable for a “mere error” in investment judgment, or be required to predict future market conditions with talismanic certainty. As the Appellate Division, Fourth Department, aptly pointed out, “Our courts do not demand investment infallibility, and a fiduciary is neither insurer nor guarantor of the value of a trust’s assets.”² That means that isolated poor investment decisions, or perhaps even sudden decreases in the overall value of an investment portfolio caused by unforeseeable events completely beyond the Trustee’s control (think terrorist attack or a pandemic), may not result in trustee liability, provided he or she has substantially complied with the Prudent Investor Act.³  

Compliance is therefore critical in this current environment. Now is not the time for complacency or for burying your head in the sand. Consult with a trusted professional investment advisor and a reputable trusts and estates attorney as soon as possible. With a recession almost a near certainty at this point, Trustees must anticipate Beneficiaries questioning their investment strategies (with the benefit of hindsight). The advisor and the attorney should collectively review the holdings for performance, diversification, and projected income as well as short-term and long-term growth. Investment strategies should be re-assessed. Potential opportunities explored. Liquidity, tax-loss harvesting, and asset rebalancing should be discussed, depending on each trust’s circumstances, keeping in mind that the Prudent Investor Act requires a Trustee to diversify trust assets, unless otherwise directed by the trust agreement or if the Trustee reasonably determines that doing so runs contrary to the Beneficiaries’ interests. The Trustee, working with his or her investment advisor or attorney, should also obtain updated near- and long-term income and growth projections of the trust assets, using the best available assumptions.

Second, the Trustee must anticipate needs of the Beneficiaries, and – using data obtained in step one, including the income and growth projections – decide the cash payments the Trust can reasonably offer under the terms of the Trust Agreement to the Beneficiaries who might need it. If further financial support is needed, there may be options available to the Trustee. The question is whether court intervention is necessary.

For example, a Trustee may have the power under EPTL 11-2.3(b)(5) to make adjustments to increase the amount currently paid to an income Beneficiary. Say the Trustee projects a 50% reduction over the next six months in anticipated income (i.e., dividends, interest and rent) as a result of the coronavirus pandemic, he or she may decide to what extent it may be necessary to transfer funds from trust principal to income, to partially restore the income stream to the income Beneficiary. Caution here: A careful review of the Trust Agreement and applicable law is necessary to determine whether the Trustee has this “Power To Adjust,” and whether it’s appropriate to exercise.

A Trustee may also have discretionary authority under the trust agreement to assist the Beneficiary, but that discretion may be tied to what’s known as an ascertainable standard (i.e., pay the Beneficiary’s health, education, maintenance and support expenses). The Trustee should consult with his or her advisers to determine what expenses may fall under which categories; the level of support that the Trust can reasonably provide; and when, and how, to consult with the Beneficiary about his or her and the Trust’s respective financial situations and obligations.

If the Trustee lacks the tools to address a Beneficiary’s needs, court relief may be an option. EPTL 7-1.6, for example, empowers the court under certain circumstances to invade the trust for the support of a Beneficiary who is not adequately provided for, unless the trust instrument says otherwise.

Armed with the knowledge of the financial support the Trust may be able to offer over the next six-to-twelve months, and the options at the Trustee’s disposal, the Trustee is now ready. Communication with the Beneficiaries is absolutely essential. While communication styles may vary, all Trustees must keep in mind two hard-and-fast rules: 1. Stay objective, and 2. Remember that a Trustee’s conduct matters. In other words, a Beneficiary’s poor conduct is no excuse for a Trustee’s poor conduct. If a Beneficiary contacts a Trustee demanding money, the Trustee should take the request seriously and respond in a timely, appropriate and objective manner

Now more than ever, Trustees must be fully aware of the substantial responsibilities and risks associated with serving as a fiduciary. Following the steps outlined above will help Trustees to be better prepared to fulfill their obligations. With a team of trusted professionals at their side, Trustees should be empowered to develop greater confidence in managing these very difficult times and perhaps position themselves to take advantage of new economic opportunities that will likely develop in what is quickly becoming the most volatile stock market of our lifetimes.

[1] https://www.marketwatch.com/story/stock-market-investors-have-to-go-back-to-1929-to-find-daily-swings-this-wild-2020-04-07.
[2] In re Estate of Janes, 643 N.Y.S.2d 972 (4th Dept. 1996) (internal citations and quotations omitted).
[3] See, e.g., Janes, supra (“Additionally, a fiduciary will not be held liable for a mere error in investment judgment.” [citation omitted]); Matter of Kopec, 25 Misc. 3d 901 (Sur. Ct., Monroe Co.) (Sept. 8, 2009) (absolving executor of liability for post-9/11 losses to estate investments).