Around The Water Cooler this morning, we’re talking about impact investing, family business succession planning, and estate tax liens.

  • The rise of impact investing poses unique concerns for trustees.  Impact investments are designed to align environmental, social, governance and faith-based goals with an investment portfolio.  Casey Clark and Andy Kirkpatrick examine whether impact investing is compatible with the Uniform Prudent Investor Act in Impact Investing Under the Uniform Prudent Investor Act.
  • The succession of a family business can often be akin to Odysseus’ passage through Charybdis, a treacherous whirlpool, and Scylla, a man-eating, cliff-dwelling monster in Homer’s Odyssey.  Approximately 70% of family businesses fail to successfully transition to the second generation, and 90% fail to successfully transition to the third generation.  In Advising Family Businesses in the Twenty-First Century, Scott Friedman, Andrea HusVar, and Eliza Friedman apply new insights from the fields of social neuroscience and positive psychology and offer a new approach to the succession of family businesses.
  • The IRS has issued Interim Guidance which clarifies the process for obtaining a Release of an Estate Tax Lien.  At the moment of death, an automatic estate tax lien is imposed on a decedent’s property, and the lien attaches to all property of the estate.  If an estate wishes to sell property before receiving closing letters from the IRS, the estate would prepare and file IRS Form 4422, “Application for Certificate Discharging Property Subject to Estate Tax Lien.”  In the summer of 2016, the IRS began requesting additional documentation and requiring that the net proceeds of the sale be paid over to the IRS or held in escrow until IRS closing letters are issued.  In Update on New IRS Release of Estate Tax Lien Requirements, Shaina Kamen and Michael Schwartz detail the Interim Guidance and new requirements.

Around The Water Cooler this morning, we’re talking about investing trust assets, trust distributions for health and education, generation skipping transfer taxes, and the Uniform Fiduciary Principal and Income Act.

  • Emily Bruner offers considerations for investing assets of Grantor Trusts, Non-Grantor Trusts, Insurance Trusts and Charitable Trusts in Investing for Trusts.
  • Griffin Bridgers and Christopher Harrison provide practical insights on trust distributions for the purposes of health and education in Health and Education in Trust Administration.
  • In Diagnosing the GST Tax Status of a Trust, Nathan Brown and Brandon Ross offer an outstanding analysis at the intersection of trusts and generation skipping transfer taxes.
  • A drafting committee of the Uniform Law Commission has been hard at work on the Uniform Fiduciary Principal and Income Act (“UFIPA”), a revised act to the Uniform Principal and Income Act (“UPIA”).  UFIPA retains the power to adjust and the default income and principal allocation rules in UPIA, and UFIPA includes a broad unitrust provision.  The drafting committee should complete its work this summer.



Court Awards Punitive Damages in Breach of Fiduciary Duty Suit Against Regions

A Chancery Court in Mississippi has entered a final Order (as amended) awarding punitive damages to the Plaintiffs in their suit against Regions Bank for breach of fiduciary duty, a case we’ve looked at in the past (see Regions Hit with $4M Judgment over Trust Mismanagement).  The total damage award is $6,464,254 as follows:

  • $3,363,326 actual damages;
  • $1,000,000 punitive damages;
  • $966,740 attorneys’ fees;
  • $175,867 expenses;
  • $958,321 pre-judgment interest at 8% from date suit was filed through the date the Court’s Order on liability was entered;
  • In addition, the Court awarded post-judgment interest at 8% from the entry of its Final Judgment.

Some of the compelling findings of the court include:

  • “[T]his Court finds that the overall breach of duty to be reprehensible.”
  • “Regions knew they were required to conduct a needs analysis, yet they never did.  There were hundreds of transactions conducted over the course of 11 years and not once did Regions take into consideration the needs of Mrs. Sheppard to maintain her present standard of living.  They were giving her money any time she asked for it, distributing principal when income was available in the trust, and they never swept the account.  They violated their own policies and this rises to the level of reckless behavior.”
  • “The court also notes that Regions’ actions and intentional concealment regarding the Trust really set the family on a course that would have been very different if Regions had performed its duties. . .  Evidence reveals that [Regions’] actions had a severe impact on the family and the Trust.  Ironically, the impact on the family Trust was exactly what Mr. Sheppard was trying to ensure never happened.”
  • “A substantial punitive damages verdict would send Regions the message that it cannot utilize a ‘let the buyer beware’ mentality when it serves as a fiduciary.”
  • The trust officer’s supervisor testified that he didn’t properly supervise the trust officer “because he knew very little about trusts.”
  • “Evidence revealed that [the investment manager assigned to the Trust] took orders from Birmingham (Regions’ headquarters) and she never questioned why the entire principal was being disbursed from the trust in such a manner.”

Trustees and Proprietary Products

Elsewhere, over at Bloomberg BNA, Daniel Hauffe looks at another case in Mississippi involving Regions Bank.  In his article, Prudence in Violating the Prudent Investor Act, Hauffe offers some precautionary measures when a Trustee invests trust assets in its own proprietary financial products.


At Wealth Management, David Silvian and Phyllis Johnson ask, Do Trustees Have a Duty to Consider Decanting?

High Investment Concentration

Finally, one of the largest banks in the world, Fifth Third Bank, has found itself in the middle of a claim that it failed to diversify the assets of a trust settled by one of the founders of the Standard Register Company.  Margarida Correia explains in Fifth Third Battles heirs of Standard Register Founders.


This is the second installment of a series of posts that examine recent litigation against bank trustees in Mississippi.  To read the first, please see Regions Hit with $4M Judgment over Trust Mismanagement.


Thomas Longnecker was the long-time owner and president of The Amory Garment Company, a garment manufacturing business based in Amory, Mississippi.  At the time of Thomas’ death, the company was the oldest industry and the largest employer in Amory.  After Thomas’ death and in the wake of NAFTA, the company experienced large scale layoffs and was eventually sold for $20 million.

Thomas’ Last Will and Testament created a number of trusts for his wife, daughter, and grandchildren, and Thomas’ widow, Margaret, established a trust for their daughter and grandchildren and a partnership with their grandchildren.

As a result of its 60-year history with the Longnecker family, The Peoples Bank and Trust Company (now Renasant Bank) was appointed to serve as a trustee of the various trusts created by Thomas and Margaret.  One of the fundamental duties of a trustee is to prudently invest the assets of the trust.  Based on the testimony of the bank’s representative (its “30(b)(6) designee”), in the 1980’s Renasant saw the use of investment managers as a way to grow the bank.  The bank thought it could avoid the costs and contingent liabilities of a fiduciary by delegating its investment responsibility as a trustee to outside investment advisors.  At the same time, the bank thought it could split fees with the outside investment advisors and still recognize substantial income from its trust department.

Based on this philosophy, Renasant recommended to Lisa Donovan and her children (Thomas and Margaret’s daughter and grandchildren and the beneficiaries of the various trusts) that Oakwood Capital Management, an investment management firm based in Los Angeles, handle the investment of the trust assets.  Oakwood recommended its Concentrated Value Equity Strategy, and Renasant employees claimed that the Oakwood Strategy would be “very conservative” and “very safe.”  Renasant then entered into Investment Management Agreements which delegated its trust investment duties to Oakwood who would have full power “to supervise and direct the investments” of the various trusts.

A large portion of the trust assets were invested in Oakwood’s Concentrated Value Equity Strategy.  The majority of the assets in the Concentrated Value Equity Strategy were invested in Doral Financial Corporation, whose primary asset was Doral Bank, a bank based in Puerto Rico that originated and securitized mortgages.  After revelations surfaced that Doral Bank was engaged in accounting fraud (described by Renasant as “a massive Enron-style fraud”), the price of Doral Financial Corporation shares collapsed (from $49 per share to $15 per share) and the value of Oakwood’s Concentrated Value Equity Strategy plummeted.  As a result, the various trusts and related entities lost approximately $1.8M.  Doral Bank was later closed by government regulators and Doral Financial Corporation filed for Chapter 11 bankruptcy.

The trust beneficiaries filed suit against Renasant (and Oakwood) and claimed that Renasant breached its duty to prudently invest the trust assets, breached its duty to diversify the trust assets (55% of the stocks owned by the trusts were invested in one company, Doral Financial Corporation), and breached its duty to monitor Oakwood.

Since the litigation settled halfway through trial, there is no ruling on liability issues like lack of diversification, imprudent delegation and monitoring, and failure to prudently invest the assets of the trusts.  However, several facets of the litigation are worth highlighting:

  • As Trustee of the trusts established for the grandchildren of Thomas and Margaret Longnecker, Renasant made a number of distributions to the grandchildren.  Those distributions were subject to generation-skipping transfer taxes (“GSTT”).  However, as seen all too often with other trusts, Renasant never provided annual notices to the grandchildren that the distributions were subject to GSTT and failed to provide the annual IRS forms.  Renasant admitted as much in its publicly filed pleadings.  In fact, at that time, Renasant did not even know that the distributions were subject to GSTT, and one trust officer went so far as to testify that he did not remember addressing GSTT on any of the trusts administered by Renasant from 1999-2004.
  • The attorney for the beneficiaries adroitly subpoenaed the reports of all relevant examinations of Renasant Bank from both the FDIC and the Mississippi Department of Banking and Consumer Finance.  The Commissioner of the Mississippi Department of Banking and Consumer Finance resisted the subpoena by filing a Motion to Quash.  The FDIC, on the other hand, did comply with the Subpoena and although it took approximately two years, the FDIC did in fact produce the reports of all relevant examinations of Renasant Bank.
  • The Investment Management Agreements contained an arbitration clause.  The beneficiaries first filed a claim for arbitration against Oakwood and Renasant in Los Angeles.  The beneficiaries then filed suit against Oakwood and Renasant in the Chancery Court of Monroe County, Mississippi.  Renasant promptly filed a petition for injunctive relief.  The Chancery Court granted Renasant’s petition and ordered the beneficiaries to pursue claims against Renasant solely in the Chancery Court of Monroe County.  Likewise, Oakwood filed a Motion for an Order Compelling Arbitration.  After the Chancellor denied Oakwood’s Motion, Oakwood took an interlocutory appeal to the Mississippi Supreme Court which reversed the Chancellor’s ruling and entered a judgment compelling arbitration and staying litigation of all claims against Oakwood in Monroe County Chancery Court.  So, in essence, the beneficiaries were put in the unenviable and expensive position of having to maintain the arbitration claims against Oakwood in California while at the same time pursuing claims against Renasant in Monroe County Chancery Court.
  • Among other arguments, Renasant actually maintained that it “delegated investment advisory and management functions to Oakwood, and is therefore not responsible for any damages suffered in whole or in part by the [beneficiaries].”  Even if the delegation was prudent, Renasant had a continuing duty to monitor Oakwood.
  • Finally, in what might best be characterized as travelling “through the looking glass,” outside counsel who defended Renasant Bank in the matter was also a member of the bank’s Board of Directors.

Courthouse Columns with The Statue of Justice

This is the first in a series of posts that will examine recent litigation against bank trustees in Mississippi.

After five years of litigation, last week a Chancery Court in Mississippi found that Regions breached numerous fiduciary duties with respect to the administration of the Patricia Hall Sheppard Trust and ordered Regions to pay in excess of $4M.  (for full text of Court Orders, see Order and Opinion on liability and Order and Opinion on damages)


J. E. (“Buddy”) Sheppard, Sr. departed this life in 1997 leaving behind his wife, Patricia, and two children, Victoria and Bud. Buddy’s Last Will and Testament established a trust for the benefit of Patricia, and he appointed Deposit Guaranty National Bank, which through mergers and acquisitions became Regions, as the Trustee. The terms of the Last Will and Testament require that the Trustee distribute all of the net income, at least annually, to Patricia.  In addition, the Trustee may distribute trust principal only if one of three conditions were met: (1) the net income is insufficient to enable Patricia to maintain her standard of living, (2) an emergency arises, or (3) Patricia has any health care needs.  Upon Patricia’s death, 80% of the remaining trust property would be held in trust for the benefit of the children, Victoria and Bud.

The trust established for Patricia’s benefit was funded in 1998 with approximately $2.5M in liquid assets and 33 residential rental properties, which the court characterized as “the largest rental property portfolio in Mississippi.”  Regions served as trustee from 1998 to 2011 when Patricia removed the bank as trustee and brought suit against Regions.

While the Court found many breaches of fiduciary duty, two are particularly concerning; those concerning distributions of principal and management of the real estate.

Distributions of Principal

The regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.

During the time that Regions administered the trust, Patricia thought that she was receiving only distributions of income from the trust.  In fact, Regions began distributing principal from the very outset of the trust, in 1998.  In 2009, a trust officer informed Patricia that the trust principal had been severely eroded and that the liquid assets were worth less than a million dollars at the time.  In fact, in the 13 years that Regions administered the trust, the trustee distributed trust principal 765 times in a total amount of $3,617,250.  What makes matters worse is that while Regions was distributing trust principal, it was not even distributing all trust income, as mandated by the Last Will and Testament, in a number of years.

None of the distributions of trust principal were for emergency needs and only $10,898 were for health care related expenses.  Presumably, the other distributions were to enable Patricia to maintain her standard of living.  However, as the Court notes in its Opinion, “Regions never ascertained what [Patricia’s] standard of living consisted of”; that is, Regions never performed a needs analysis or determined what expenses Patricia had.  As the trust officer testified, the regular operating procedure was to give Patricia anything she asked for and he had no idea how Patricia spent the money that was disbursed.  The investment officer assigned to the trust testified that “we’d make distributions whenever she asked.”  As the Court observed, Regions could never determine if the principal disbursements were maintaining Patricia’s standard of living because Regions never knew what her standard of living actually was.

Management of the Real Estate

The words reasonable and prudent are not synonymous with loosey-goosey.

Shortly after Regions began administering the trust, the bank delegated management of the real estate to Orville Hall, Mrs. Sheppard’s brother.  As such, Orville was responsible for collecting rent, making repairs, and documenting vacancy rates.  In delegating one of its functions as the trustee, Regions had a duty to exercise reasonable care in delegating management of the real estate and had a duty to review and monitor the agent’s actions.  Regions’ failure in this regard is alarming.  The Bank’s own in house trust real property manager testified that he:

  • Did not know if anyone at the Bank was checking to ensure all rental payments were accounted for;
  • Did not review Orville’s invoices;
  • Did not know if Orville’s invoices for services and repairs were reasonable;
  • Never monitored the net income of the rental property;

When asked if Regions’ management of the real property could be described as “loosey-goosey”, the Bank’s in house trust real property manager replied, “some of the procedures seemed to be a little on the lax side.”  The court found that “the words reasonable and prudent are not synonymous with loosey-goosey.”  Regions own expert witness testified that Regions did not have definitive rules, but testified that that was not necessarily a bad thing and that only the bottom line counts.  As the court noted, “that sentiment is not correct in the terms of the duties that a trustee has with its beneficiary.”

In 2010, Regions began an investigation into the trust to determine if someone within the trust department was stealing money.  The Bank’s internal investigator determined that Orville was reporting that rent was collected but that the rent was not accounted for in the bank’s records.  In his report, the Bank’s internal investigator determined that the real estate was not being handled properly and that there was a failure of institutional controls.  The investigator submitted his report to the Bank’s Human Resources department and assumed that Human Resources would meet with the trust department to discuss the report and make necessary changes within the trust department.  However, the Human Resources Department never forwarded the report to the trust department and the Bank’s own in house trust real property manager testified that he saw the report for the first time on the witness stand.  Not surprisingly, Orville, who in fact was not a licensed real estate broker, had little to no experience managing real estate, and spent most of his time in Tennessee while all of the real property was located in central Mississippi, disappeared while the Bank’s internal investigation was ongoing.


After entering its Order finding liability, the Court appointed two special masters to assess damages.  One of the special masters resigned, and the other special master amended his report a number of times before submitting a final report.  The Court adopted the special master’s final report and awarded damages in the amount of $3,363,026 plus prejudgment interest in the amount of 8%, for a total of over $4M.


In a fascinating case involving a trust established by President John Adams, a recent opinion of the Massachusetts Supreme Judicial Court follows a long line of cases holding that it is not prudent for a trustee to put all trust assets in one type of investment.


In almost every state and the District of Columbia, the Uniform Prudent Investor Act (“UPIA”) governs the actions of a trustee with respect to investment of trust assets.  Section 2 of the UPIA requires a trustee to “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”  Among the “other circumstances” that a trustee must consider in investing and managing trust assets are (1) general economic conditions; (2) the possible effect of inflation or deflation; (3) the expected tax consequences of investment decisions or strategies; (4) the role that each investment or course of action plays within the overall trust portfolio; (5) the expected total return from income and the appreciation of capital; (6) other resources of the beneficiaries; and (7) needs for liquidity, regularity of income, and preservation or appreciation of capital.  [As an aside, it is critical that a trustee DOCUMENT the factors that it considers when investing trust assets.  As one trust scholar and professional has noted, “If an action or decision is not documented, it didn’t happen.”]

But, what about professional trustees, like banks or other corporate trustees?  The general standard stated in Section 2 of the UPIA does apply to professional trustees, but the UPIA makes clear that “A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.”

One of the bedrock principles of the UPIA is the principle of diversification which is based on modern portfolio theory.  Section 3 of the UPIA provides that “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”  As the Prefatory Notes and Comments to the UPIA instruct, “the long familiar requirement that fiduciaries diversify their investments has been integrated into the very definition of prudent investing” and “case law overwhelmingly supports the duty to diversify.”

Another bedrock principal of investing trust assets is the duty of impartiality.  Where a trust names one individual as the beneficiary of income and another individual as the beneficiary of principle, the interest of the income beneficiary and the principle beneficiary may conflict.  The income beneficiary typically wants more income; the principle beneficiary wants growth.  The duty of impartiality requires a trustee to balance the interests of income beneficiaries to generate income with the interests of principle beneficiaries and remaindermen for growth.  Section 6 of the UPIA states that “If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.”


In 1822, President John Adams established a trust and transferred a portion of his real estate holdings to the trust.  The City of Quincy was named as the trustee. As a result of a cy pres petition, the Woodward School for Girls became the beneficiary of the trust and was entitled to receive all the net income from the trust.

By 1973, all of the real estate President Adams contributed to the trust had been sold, and the assets were invested in a portfolio consisting of 90% fixed income and 10% equity securities.  In April of 1973, the trustee, the City of Quincy, received investment advice about how the assets of the trust should be invested.  The City was advised by South Shore National Bank that the assets should be diversified and invested in a portfolio consisting of 60% equities, 35% fixed income, and 5% cash.  The trustee voted to adopt the bank’s recommendation but the trustee never implemented the recommendation.  By 1990, nearly 100% of the trust assets were invested in fixed income.  As a result, the value of the trust assets in 2008 were exactly the same as the value of the assets in 1973; $321,932.43.  So, in a 35 year period which saw the S & P 500 grow approximately 1,200%, the value of the trust assets did not increase since the assets were invested almost exclusively in fixed income.

In 2005, the school requested an accounting from the trustee.  After a year and a half, the trustee had not produced a complete accounting, so the school petitioned a court for an accounting.  Ultimately, the school filed a complaint against the trustee for breach of fiduciary duty, and the trial court held that the trustee breached its fiduciary duties by failing to keep adequate records, failing to obtain appraisals for real estate and sell it at fair market value, failing to prudently invest the assets of the trust, and failing to diversify the investments of the trust.  [It is interesting to note that during the trial, the judge said “It is inconceivable to me that the value of the portfolio has not doubled, tripled, quadrupled over 60 years.”  The Court hit the trustee with a $3 million judgment, $1.1 million of which was for unrealized gains that should be in the trust had the trustee prudently invested the trust assets.

On appeal, the Massachusetts Supreme Judicial Court applied Massachusetts’ version of the Uniform Prudent Investor Act and held that the trustee failed to prudently invest the trust assets by investing the assets almost exclusively in fixed income.  Specifically, the Court held that the trustee failed to properly diversify the trust assets between fixed income and equity and failed to protect the trust assets from the effects of inflation.

Throughout the 50 page opinion, the Court reflected the central tenets of the Uniform Prudent Investor Act:

On the trustee’s duty to diversify:

Diversification is a central component of prudent investment” and “trustees are discouraged from investing a disproportionately large part of the trust estate in a particular security or type of security.”

On the trustee’s duty of impartiality:

A trustee must necessarily consider both the generation of income and the growth and maintenance of the principal.

On protecting the trust from inflation:

At a minimum, a trustee must consider how best to guard the principal against inflation, if not how to grow the principal while simultaneously generating income to support the beneficiary.

A trustee must accordingly invest with a view both to safety, seeking to avoid or reduce loss of the trust estate’s purchasing power as a result of inflation, and to securing a reasonable return.”