Course 9 — Lesson 1 The Facts for Failure to Diversify Trust Assets

[Music] In this chapter we addressed a trustees failure to diversify trust investments as required under California's prudent investor Act as usual let's start with a basic understanding of the trust law we will apply to this problem under California's prudent investor Act a trustee has a duty to diversify the trust investments unless it is prudent not to do so the duty to diversify applies to all trustee investment decisions unless the trust document expressly limits or eliminates this duty let's consider a hypothetical situation to demonstrate the problems that arise and the options you have when confronted with a California trustee who fails to diversify trusts investments after the hypothetical we will discuss trusts diversification in more detail in 1994 Linda Hamilton creates a revocable living trust and transfers her ten unit apartment building her personal residence and her brokerage account into the trust Linda is named the sole trustee during her lifetime and her CPA Ben is named successor trustee Linda has one son Sam Sam has physical handicaps that make it difficult to walk but he has full mental capacity Sam is named as the sole beneficiary of Linda's trust after Linda dies in 2005 Linda creates a trust amendment that requires Sam's share to be held in trust for Sam's lifetime Sam is named Co trustee of the his trust to act with Ben the Sam trust requires all income from the trust estate to be distributed to Sam and as much of the principal as Sam needs for his health support maintenance and education in 2010 Linda dies and Ben takes over as successor trustee of her trust Ben reviews the trust document and 2005 trust amendment but he decides not to create the Sam trust Ben fails to tell Sam he is a co trustee of the Sam trust instead Ben chooses to administer the trust as if he were the sole trustee Ben determines that the apartment building is in disrepair Ben can either sell the apartment building and reinvest the proceeds for invest substantial money from the trust to improve the properties Ben does not consult a financial planner instead he simply spends over half of million dollars repairing the apartment building Ben also charges the trust both trustees fees and management fees to act as a property manager of the apartment complex even after the repairs are completed the apartment building encouraged substantial expenses every month for cost of operation the apartment generates net income of less than $50,000 per year after Linda's death Sam asked Ben if he can live in Linda's home which is part of the trust estate Ben says no instead Ben spends $100,000 of the trust money to fix up the home and then rents it for 2,500 per month nearly two thousand below the fair market value rent after the repairs to the real estate and Linda's home the trust only has a hundred fifty thousand dollars in investments left in the brokerage account Ben claims this money cannot be used for Sam's benefit because it must be kept in reserve to fund expenses on the apartment building after all the costs and fees incurred by the trust every year Sam only receives $3,000 per month from that money Sam was paid his rent by his food and pay for a part-time caregiver currently the apartment building is valued at 6.5 million and the personal residence is valued at 2 million Ben refuses to sell any of the real estate until Sam he must do with the 3,000 per month because that is all the net income the trust produces when Sam consults with a lawyer and financial planner he is told that he is being abused the financial planner believed the trust assets should be diversified to protect the principle and increase the amount of income available for Sam's benefit the lawyer is shocked to learn that Sam is named a co trustee but has never been told he had a right to co-manage the trust estate it now appears that Ben has ignored his duty to diversify the trust assets and cause substantial harm to the trusts estate what can Sam do to recoup the losses he has sustained and to properly correct the trust investments so no further harm comes to the trust assets here are the options option 1 petitioned for removal file a petition to remove Ben as trustee and ask the court to suspend Bend immediately pending his permanent removal option number 2 petition for accounting file a petition to force Ben to prepare and file a proper trust accounting option number 3 petition for surcharge file a petition to surcharge Ben for the lost profits to trust to suffer option number 4 trust contest file a petition to invalidate the 2005 trust amendment option number 5 request resignation asked Ben to resign and appoint a professional trustee [Music] [Applause] you.