There is a central tension in the law of trusts between the rights of the settlor and of the beneficiaries. On the one hand, the organizing principle of the law of donative transfers, as stated in Section 10.1 of the Restatement 3d of Property (Wills and Other Donative Transfers), is that the “donor’s intention is given effect to the maximum extent allowed by law.” On the other hand, the Restatement 3d of Trusts emphasizes in Section 27(2) that “a private trust, its terms, and its administration must be for the benefit of its beneficiaries.” A similar benefit-the-beneficiaries rule is codified in Section 404 of the Uniform Trust Code (UTC) and made mandatory in UTC Section 105.
This essay, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments, by one of America’s leading scholars of trust law, Professor John Langbein of the Yale Law School, explores the limits that trust law places on the power of the settlor, as the author of the trust’s terms, to direct the trustee’s investment decisions. The essay is a response to an earlier article in the Boston University Law Review by Professor Jeffrey Cooper, in which Professor Cooper criticized the benefit-the-beneficiaries rule, instead proposing greater deference to the intentions of the settlor, for example where the settlor “intentionally and thoughtfully impaired beneficiaries’ economic rights.” See Jeffrey A. Cooper, Empty Promises: Settlor’s Intent, the Uniform Trust Code, and the Future of Trust Investment Law, 88 B.U. L. Rev. 1165, 1166 (2008).
Professor Langbein’s response begins with an “arresting example” (p. 378) provided several years earlier by Professor Gareth Jones of Cambridge University: “A settlor may destroy his own Rembrandt. But he cannot establish a trust and order his trustees to destroy it.” See Gareth H. Jones, The Dead Hand and the law of Trusts, in Death, Taxes and Family Property 119, 126 (Edward C. Halbach, Jr., ed, 1977). Using this example, Professor Langbein explores the reasons why trust law limits the “unilateral dominion” (p. 379) of the settlor. He points to the need for dead hand control and also for the recognition and enforcement of the equitable property rights of the beneficiaries (and the corresponding fiduciary duties of the trustee). As he explains, “A transferor who chooses to use the trust form . . . must accept that minimum regime of fiduciary obligation that defines a trust” (p. 380).
One of the many innovations of the UTC, promulgated in 2000 and amended in subsequent years, was to organize in one place—Section 105—the rules of trust law that are mandatory. These rules apply irrespective of the settlor’s contrary intent. As Professor Langbein rightly emphasizes, however, the content of the mandatory rule that the trust must be for the benefit of the beneficiaries is not much of an innovation. Trust law has long insisted that the settlor cannot “countermand the trustee’s duty to act in good faith” (p. 383). There is an “irreducible core,” as Professor David Hayton has written, to the trustee’s fiduciary duty. See David Hayton, The Irreducible Core Content of Trusteeship, in Trends in Contemporary Trust Law 47, 48-49 (A.J. Oakley ed. 1996). I have explored this irreducible core with respect to the trustee’s duty to keep beneficiaries informed of the trust and its administration. See Thomas Gallanis, The Trustee’s Duty to Inform, 85 N.C. L Rev. 1595 (2007). In this Essay, Professor Langbein explores the irreducible core of prudent investment.
The Restatement 3d of Trusts has much to say about the duty of prudent investing, as does the Uniform Prudent Investor Act, incorporated into the UTC as Article 9. Relying on the economic insights of modern portfolio theory, the duty of prudent investment is, for the most part, default law. The settlor is given great latitude to use the terms of the trust to direct the trustee’s investment decisions. There is an outer limit to the settlor’s power, however. As with other core duties of the trustee, the duty of prudent investment cannot be eliminated entirely. This idea, in a related context, is expressed well in the Comment to UTC Section 412(b), on the modification of the trust’s administrative terms where “continuation of the trusts on its existing terms would be impractical or wasteful or impair the trust’s administration.” The Comment states in pertinent part: “Although the settlor is granted considerable latitude in defining the purposes of a trust, the principle that a trust have a purpose which is for the benefit of its beneficiaries precludes unreasonable restrictions on the use of trust property. An owner’s freedom to be capricious about the use of the owner’s property ends when the property is impressed with a trust for the benefit of others.” (Emphasis added.)
In this Essay, Professor Langbein explains why the benefit-the-beneficiaries rule appropriately places an outer limit on the settlor’s authority to direct investments, and he responds to Professor Cooper’s concerns that this limit will adversely affect settlor or trustee behavior or increase litigation.
The Essay is well worth reading, and I commend it highly.