FIRMA National Risk Management Training Conference Ft. Worth, Texas ~ March 28, 2012 FIDUCIARY LITIGATION By William Campbell Ries, Esquire Tucker Arensberg, P.C. Pittsburgh, PA

DUTIES RE: LIFE INSURANCE TRUSTS 2

Background Insured creates trust Trustee purchases life insurance Insured gifts to trustee to pay premiums 3

DUTIES RE: LIFE INSURANCE TRUSTS Trustee Duties Monitor Needs Carrier solvency Comparison to illustration More innovative products 4

DUTIES RE: LIFE INSURANCE TRUSTS In Re: Matter of Stewart Cochran Irrevocable Trust v. KeyBank, N.A. (Indiana) 5

DUTIES RE: LIFE INSURANCE TRUSTS Practice Tips Clearly define duties in governing instrument Conduct analysis under Prudent Investor Rule Use experts as required 6

DUTY TO INVEST TRUST ASSETS 7

Background A trustee has a duty to invest trust assets within a reasonable time after receipt 8

DUTY TO INVEST TRUST ASSETS Background (continued) What constitutes a reasonable time is based upon all relevant facts and circumstances including distribution requirements and current economic and market conditions 9

DUTY TO INVEST TRUST ASSETS In the Matter of Trust B Under the Last Will of X [Record Under Seal] 10

DUTY TO INVEST TRUST ASSETS Practice Tips Clearly document the basis for investment decisions Provide explicit notice to beneficiaries of investment actions Damages should not be based on hindsight 11

DUTY TO LIQUIDATE TRUST ASSETS 12

DUTY TO LIQUIDATE TRUST ASSETS Background Upon the death of the life tenant of a trust, the trustee has a duty to liquidate the securities held in trust and distribute the proceeds to the remaindermen unless the remaindermen execute an election to take “in kind” 13

DUTY TO LIQUIDATE TRUST ASSETS McCall v. Harris Bank, N.A. (Indiana) 14

DUTY TO LIQUIDATE TRUST ASSETS Practice Tips Liquidate trust assets immediately unless the remaindermen agree to take “in kind” Determine the status of the beneficiary prior to executing a new investment program to ascertain whether the purchases are prudent 15

CONFLICTS OF INTEREST 16

CONFLICTS OF INTEREST Background Trustee owes duty of loyalty to beneficiaries Duty to avoid conflicts 17

CONFLICTS OF INTEREST Estate of Rothko (New York) 18

CONFLICTS OF INTEREST Wiggins v. PNC Bank (Kentucky) 19

CONFLICTS OF INTEREST Practice Tips Conflicts are not always obvious When in doubt, obtain court approval 20

DUTY TO DIVERSIFY 21

DUTY TO DIVERSIFY Background Under the Prudent Investor Rule, a trustee has a duty to diversify the assets unless under the circumstances it is prudent not to diversify 22

DUTY TO DIVERSIFY Hitz v. Sun Trust (Georgia) 23

DUTY TO DIVERSIFY Practice Tips Establish a diversification standard Justify exceptions such as large capital gains Disclose risks of continued non-diversification to beneficiaries Be particularly careful of potential self-interest Obtain written consent from beneficiaries 24

POWERS OF ATTORNEY 25

POWERS OF ATTORNEY Background Agency relationship whereby principal appoints an agent to act upon the principal’s behalf within the scope of the authority granted 26

POWERS OF ATTORNEY Background (continued) Durable powers are utilized as a planning tool to avoid guardianships 27

POWERS OF ATTORNEY Background (continued) Certain abuses have occurred:  Undue influence  Gifting abuses  Self-dealing  Improper commingling 28

POWERS OF ATTORNEY In Re: Winthrop 29

POWERS OF ATTORNEY Estate of Alice G. Novosielski (Pennsylvania) 30

POWERS OF ATTORNEY Clarence Smith, Jr. v. Bank of America (Florida) 31

POWERS OF ATTORNEY Vine Case (Pennsylvania) 32

POWERS OF ATTORNEY Practice Tips Take steps to ensure Power of Attorney is properly executed with witnesses Only appoint trusted agent Review delegation of powers and limit gifts if appropriate 33

FAILURE TO GIVE NOTICE 34

FAILURE TO GIVE NOTICE Background Trustees and executors have a duty to give notice to trust beneficiaries Failure to do so may lead to liability 35

FAILURE TO GIVE NOTICE Tulsa Professional Collection Services v. Pope 36

FAILURE TO GIVE NOTICE Shriners Hospital for Crippled Children v. First Security Bank of Utah 37

FAILURE TO GIVE NOTICE McNeil v. PNC 38

FAILURE TO GIVE NOTICE Practice Tips Be aware of Trustee’s duty to communicate with beneficiaries Uniform Trust Code provides specific duties 39

COMMON TRUST FUNDS 40

COMMON TRUST FUNDS Background Common Trust Funds are authorized under Regulation 9.18(a)(1) of the Comptroller of the Currency to permit the commingling of assets held by a bank serving as trustee, executor, administrator, guardian, and custodian under the Uniform Transfers to Minors Act 41

COMMON TRUST FUNDS Background (continued) Exempt from the registration requirements of the Securities Act of 1933 under Section 3(a)(2) Exempt from the Investment Company Act of 1940 under Section 3(c)(3) 42

COMMON TRUST FUNDS Background (continued) Exemption language provides:  Common Funds cannot be advertised  Cannot be offered for sale to the general public 43

COMMON TRUST FUNDS Commercial National Bank 44

COMMON TRUST FUNDS Dunham & Associates 45

COMMON TRUST FUNDS Practice Tips Ensure that Common Funds are used for existing accounts incidental to trust services Do not advertise Common Funds Do not market interests in Common Funds to general public as an investment vehicle 46

DUTIES OF DIRECTED TRUSTEES 47

DUTIES OF DIRECTED TRUSTEES Background A trustee of a directed trust has a duty to follow the direction of a powerholder unless the direction is contrary to law 48

DUTIES OF DIRECTED TRUSTEES Moench v. Robertson 49

DUTIES OF DIRECTED TRUSTEES Rambo v. WorldCom 50

DUTIES OF DIRECTED TRUSTEES Practice Tips Ensure that governing instrument does not impose discretionary authority on trustee Request and review all relevant documents Review “Chinese Wall” policies Clearly allocate fiduciary duties 51

Ten Things You Can Do To Avoid Liability 1.Establish Investment Policy 2.Review Investments 3.Follow Prudent Investor Rule 4.Balance Beneficiaries’ Interests 5.Review diversification issues

Ten Things You Can Do To Avoid Liability 6.Communicate with Beneficiaries 7.Disclose Fees 8.Maintain Adequate Records 9.Review Advertisements 10.Avoid Conflicts of Interest

QUESTIONS? William Campbell Ries, Esquire Tucker Arensberg, P.C One PPG Place Pittsburgh, PA