AM I ETHICAL?
In 1963, a successful entrepreneur created a trust for her 14 grandchildren. Trust documents did not provide instructions on how trust assets should be invested. However, a scrapbook created by this business owner contained several handwritten letters in which she proclaimed her “hatred for the tax devil's visit every April 15.” The scrapbook also contained a 1963 newspaper article that correctly reported that the United States had a 91% top income tax rate and 77% top estate tax rate.
As the trustee in charge of this trust, you now have to decide between two courses of action. Choice Number 1 is to invest trust assets in a very conservative manner. This is the choice preferred by eleven of the grandchildren. Choice Number 2 is to invest trust funds in riskier, growth-oriented assets. This choice will greatly minimize the beneficiaries' income and estate taxes, but only three of the grandchildren favor this choice. Which course of action should you select?
- You should select Choice 1 because a majority of the beneficiaries favor this approach
- You should select Choice 1 because a trustee has a duty to conservatively protect trust assets
- You should select Choice 2 because a trustee has a duty to maximize after-tax returns
- You should select Choice 2 because a trustee has a duty to carry out the wishes of the party who creates a trust
The SOLUTION is revealed at end of the chapter.