Wills, Trusts, and Estates

Fact pattern

A settlor is an 18-year-old woman with two siblings: a brother, age five, and a sister, age three. The settlor’s parents recently died, leaving a substantial inheritance to the settlor. The settlor wishes to establish a trust fund to support her two younger siblings. The settlor creates an irrevocable trust, naming her brother and sister as beneficiaries, and her uncle as trustee. The terms of the trust provide that the trustee is to make monthly payments of trust income to the brother and sister for the next 25 years. After 25 years, the remaining corpus of the trust is to be distributed equally to all living descendants of the brother and sister.

When the settlor establishes the trust, its entire assets are cash. The uncle, as trustee, decides to invest half of the trust assets in the stock market and half of the assets in government bonds, a combination reasonably calculated to provide a steady return on investment over the next 25 years.

The uncle is a 45 percent shareholder in a publicly traded technology company. The company’s stock has performed well over the last several years, but the uncle believes the company can achieve even greater growth and profits if it follows a more aggressive business strategy. The uncle decides to invest 5 percent of the trust assets in the company’s stock, purchasing 10 percent of the outstanding shares. Now holding a majority of shares in the company, the uncle is able to control the leadership of the company and pursue his more aggressive strategy for the company. 

The uncle invests 45 percent of the trust assets in an index fund, which tracks the performance of the stock market as a whole. The trust assets are now divided as follows: 45 percent in an index fund, 5 percent in the technology company, and 50 percent in government bonds. The uncle’s new strategy for the technology company works. The company’s stock, which had appreciated at a rate of 8 percent for the last several years, appreciates 20 percent in the next year. However, the stock market as a whole performs poorly. The index fund, which holds 45 percent of trust assets, drops 25 percent over the next year.

Questions

1. Analyze the validity of the trust under the common-law rule against perpetuities, the Uniform Probate Code’s statutory rule against perpetuities, and the cy pres doctrine. Explain.
2. Has the uncle violated any of his duties as trustee? Explain.