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Baker Boyer National Bank v. Garver

Wednesday, January 01, 1997 5:00:00 PM

A Washington State appellate court decision from 1986 found Corporate Fiduciary was liable for not considering equity investments and instead investing exclusively in bonds and real estate.  Damages were assessed based on the premise that at least a 40 percent of trust assets should have been invested in equities.  Again given this precedent, little imagination is needed to foresee how Irrevocable Life Insurance Trust (ILIT) trustees will be liable to trust beneficiaries for the difference between death benefits received from ONLY Universal Life (UL) and/or Whole Life (WL) policies where invested assets underlying policy cash values must be invested predominantly in high-grade corporate bonds and government-backed mortgages, versus the death benefits the beneficiaries “should have been received” from a diversified portfolio of UL, WL, AND Variable Life (VL) holdings where cash values can be diversified, unless reasons for lack of diversification are documented.

A case commentary in The Quinnipiac Probate Law Journal (Kevin DiAdamo,  IN RE ESTATE OF COOPER: WASHINGTON'S REVISED PRUDENT INVESTOR RULE, 1997) summarizes:

"The Washington Court of Appeals recently applied Washington's prudent investor statute to the facts of In re Estate of Cooper. The court held the trustee liable for failing to pursue an appropriate investment strategy under Revised Code of Washington section 11.100.020. The revised statute measures a trustee's investment duties under the total asset management approach ("the total asset approach"). This new prudent investor rule requires the trustee to consider the role of a particular investment in the context of the entire portfolio. One of the main goals of this approach is to protect long-term beneficiaries from trustees who construct investment portfolios that fail to account for the effects of inflation. The requirements of the new rule may be modified or restricted by the terms of the trust instrument.

The court in In re Estate of Cooper had to decide if a co-trustee, Fermore Cooper, breached his fiduciary duty under the new rule. A remainder beneficiary, Joyce Johnston, claimed that Cooper's investment strategy led to a decline in the trust's purchasing power. The trial court found that Cooper weighed trust assets too heavily in current income rather than capital appreciation, and held Cooper liable under Revised Code of Washington section 11.100.020. Cooper appealed, arguing that the trust's overall performance is the proper measure of investment duties, rather than the role of a specific group of assets. The court, however, rejected this argument."

 
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