$24,076,937.31 Judgment v. Chase Manhattan Bank Reversed on Appeal
It is not unusual for the family wealth to be the product of one or two extremely successful investments or stock holdings. In those cases any testamentary trusts created by the decedent will obviously be funded with large blocks of one or two very valuable stock holdings. Not surprisingly the family will probably want the trustee to hold on to the large blocks of stock that made them all wealthy to begin with.
As Chase Manhattan Bank learned in this case, the family's desire to remain concentrated in one or two stock holdings may conflict directly with the trustee's duty to diversify the trust fund's stock portfolio. In Florida, the duty to diversify is required under Florida's prudent investor statute. See F.S. § 518.11(1)(c); see also F.S. § 737.302.
The duty to diversify may, however, be excused by the person creating the trust. It is exactly this type of direction that got Chase Manhattan off the hook for a $24+ million judgment! Here is the language focused on by the New York appellate court in In re Chase Manhattan Bank, 809 N.Y.S.2d 360 (N.Y.A.D. 4 Dept. Feb 03, 2006):
The trust was funded with a concentration of Kodak stock. Decedent's will provided that "[i]t is my desire and hope that said stock will be held by my said Executors and by my said Trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said Trustee shall dispose of such stock for the purpose of diversification of investment and neither they [n]or it shall be held liable for any diminution in the value of such stock." Decedent's will further provided that "[t]he foregoing *** shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of [Kodak] in case there shall be some compelling reason other than diversification of investment for doing so."
Deep-pocket trustees (read: corporate trustees) need to ensure proper language is included in the trusts they administer if the family's desire is to hold on to one or two key stock holdings. The provision I include in my documents is the following:
I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in [XYZ STOCK], or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as "XYZ STOCK"), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ STOCK because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust's portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ STOCK that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called "uncompensated risk") incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ STOCK, and nothing in this paragraph will be interpreted in any manner to limit the Trustee's authority to do so.