Friday, November 26, 2010
This Essay considers the trust investment management implications of Section 105(b)(3) of the Uniform Trust Code (UTC), which codifies an unwaivable requirement that a "trust and its terms must be for the benefit of its beneficiaries" (hereinafter the "benefit-the-beneficiaries rule"). The Restatement (Third) of Trusts contains similar language.
This is the third in a series of Articles on this topic published by the Boston Univerisiy Law Review. The series began with my 2008 Article on the subject and continued with Professor John Langbein's 2010 Essay. In this third work, I emphasize two major themes that distinguish my viewpoints from Professor Langbein's. First, while the benefit-the-beneficiaries rule does have deep historical roots, it is more than simply a clarification of a single traditional rule against capricious purposes. Instead, it is a composite of multiple rules and interacts in complex ways with other principles and provisions of modern trust law. Second, when applied to a variety of potential trust provisions in the manner Professor Langbein's writings appear to advocate, the rule proves to be overly rigid in its practical effect. Whereas trust law historically has endeavored to balance the competing demands of settlors’ intent and beneficiaries’ rights, the new formulation of the benefit-the-beneficiaries rule is too absolutist in application. By categorizing settlor-imposed trust investment directives as either completely prudent or so capricious as to offend public policy, this rule seemingly offers no middle ground. It lacks the flexibility to differentiate wantonly destructive investment directives from more well-intentioned provisions that deviate from widespread, but not universal, theories of portfolio construction.
While scholarly discourse on this subject has served and will continue to serve a vital function, the ultimate impact of the benefit-the-beneficiaries rule will not be decided in the pages of law reviews. Rather, judges interpreting the UTC and the Restatement, state legislators considering adoption – or modification – of state trust law, and trust settlors and trust lawyers wrestling with the ensuing implications will be the ones to resolve this issue. Accordingly, this Essay is intended to clarify the nature of the issues confronting those various parties and inform their future decisions.