Release of Trustee from Liability for Retaining an Investment

Trusts

It is not uncommon for trustees of trusts to encounter beneficiaries that pressure them into retaining a particular asset or investment even though the retention thereof might pose an unreasonable risk with respect to the performance of the overall portfolio and subject the trustee to potential liability to the beneficiaries for breach of the fiduciary duty to diversify the trust’s investments. P.G. Guthrie, Annotation, Duty of Trustee to Diversify Investments, and Liability for Failure to Do So, 24 A.L.R.3d 730 (1969). In such a situation, the trust instrument itself may contain a provision that expressly or impliedly relieves the trustee from liability for retaining certain assets that might pose a risk to the performance of the overall trust portfolio. M.L. Cross, Annotation, Construction and Effect of Instrument Authorizing or Directing Trustee or Executor to Retain Investments Received Under Such Instrument, 47 A.L.R.2d 187 (1956). But, in a case where a trust instrument does not excuse the trustee from potential liability for retaining risky investments, such as an overconcentrated position in a particular stock or class of investments, is there anything that the trustee can do to avoid liability to a beneficiary that is exerting extreme pressure on him or her to retain a favored parcel of real estate, stock, or class of stocks?

“It is a well-established rule in the law of trusts that a beneficiary may, by his [or her] consent, acquiescence, or ratification, be estopped to complain of a breach of trust by the trustee.” P.M. Dwyer, Annotation, Effect of Beneficiary’s Consent to, Acquiescence in, or Ratification of, Improper Investments or Loans (Including Failure to Invest) by Trustee or Other Fiduciary, 128 A.L.R. 4, Part II.a (1940)(citing George Gleason Bogert, George Taylor Bogert & Amy Morris Hess, Bogert’s The Law of Trusts and Trustees§§ 941-44). According to Bogert’s The Law of Trust and Trustees treatise, “[a] beneficiary who in advance approves an investment, or the retention or change of an investment, one which would otherwise be nonlegal, cannot thereafter complain of the trustee’s action, and the rule may be applied to many other types of transactions, for example, approval of a sale of trust property under certain terms and conditions.” Bogert’s The Law of Trusts-and Trustees§ 941 (footnotes omitted).

When obtaining from a trust beneficiary a letter of retention or similar written consent to an otherwise impermissible investment or transaction by a trust, “[n]ot only must the beneficiary be informed as to the facts surrounding the transaction to be approved, but he [or she] must also be made cognizant of the legal effect of his [or her] consent, for example, that it will validate an investment which would otherwise be nonlegal, or will settle an income and principal problem as to which there was doubt.” Id. (footnotes omitted). “This involves explaining to the beneficiary why his consent is being requested, where the trustee is taking the initiative.” Id. (footnotes omitted).

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The principles and rules that are described above are set forth in the Uniform Trust Code,

which has been adopted in various forms by many states:

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§ 1009. Beneficiary’s Consent, Release, or Ratification.

A trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach, unless:

  • the consent, release, or ratification of the beneficiary was induced by improper conduct of the trustee; or
  • at the time of the consent, release, or ratification, the beneficiary did not know of the beneficiary’s rights or of the material facts relating to the breach.

Unif. Trust Code§ 1009 (2000). See also Restatement (Third) of Trusts§ 97 (2012) (Westlaw current through October 2019 update), which sets forth similar requirements for establishing a trust beneficiary’s consent to, ratification of, or release of the trustee from liability for an act or omission that might otherwise constitute a breach of trust.

The authorities cited suggest that if a trustee decides to acquiesce in a trust beneficiary’s

strong desire to retain an otherwise improper asset or investment of trust assets, the trustee must make sure to obtain the written consent of all of the beneficiaries of the trust and that all of the trust beneficiaries are fully informed as to the downside risks that are associated with retaining the asset or investment in question. It is also essential that the trustee carefully documents the fact that the beneficiaries were fully informed as to the risks presented by the retention of the asset or investment.