Tax Facts Q: 521. What deductions are allowed from the gross estate in arriving at the taxable estate for federal estate tax purposes?
Carter v. Carter, 965 N.E. 2d 1146 (2012)
The court in this case found that the trustee-income beneficiary's liability for her investment decisions was properly limited by a trust clause that specifically permitted investment of trust assets without regard to diversification or whether the investment would ordinarily be considered a proper trust investment. The prudent investor rule, common in all states, did not require the imposition of liability because the trustee's investment decisions here were not wholly unreasonable or arbitrary.
The trust settlor in this case created a marital trust for the benefit of his wife, whom he appointed to serve as trustee. The trustee was permitted to make all trust investment decisions, and was also given the right to receive all trust income over the course of her life. Upon the trustee's death, the principal balance of the trust was to pass to the settlor's daughter, the plaintiff in this case.
The plaintiff argued that the trust settlor had created the trusts primarily for estate tax purposes--so that he could pass the property to his wife and take advantage of the marital deduction, while ultimately leaving the property to his daughter. She argued that the trustee's strategy of investing trust assets solely in tax-free municipal bonds was a violation of the trustee's fiduciary duty to preserve the value of the trust principal for the remainder beneficiary.
The court rejected these arguments, finding that the primary purpose of the trust was to provide income to the settlor's wife for her lifetime. The court further found that the trust document permitted the trustee to engage in a conservative investment strategy if she chose, and that investing solely in municipal bonds was not so unreasonably self-serving as to violate the prudent investor rule.