1(a). Is investing $1,000,000 in a bank account a breach of fiduciary duty? TNT has probably not violated the duty of loyalty by investing $1,000,000 in the bank. The duty of loyalty consists of self-dealing and conflict of interest. Assuming Second National Bank has no connection to TNT, there are no indications of self-dealing or conflict here.

On the other hand, TNT has violated several aspects of the duty of care. First of all, by placing $1,000,000 into a single bank, TNT may have failed to comply with its duty with respect to bank deposits. I believe that federal deposit insurance covers substantially less than $1 million, so TNT should not have placed more than the insured amount in a single bank.

The trustee must also be a prudent investor, which includes the duty to diversify. All of the trust’s assets (aside from the coin collection) are invested in the bank account. Even if we consider the collection a separate investment, there are only two investments, which seems too few. With a trust corpus of this size, at the least some of the principal should probably have been invested in the stock market, because the trust will miss out on investment opportunities when the stock market rises in the future.

TNT has also violated another aspect of the modern prudent investor rule, which requires the trustee to take into account the income needs of the beneficiary when investing. The bank deposit clearly produces too little income for Hugh’s needs—the trustee should have found other investments that produce more income, even if that required taking some risk.

Thus, while having a certain percentage of the trust in a bank account might be prudent given the volatility of stocks, it is a breach to have such a large proportion of the assets in one bank.

1(b). Is retaining the coin collection a breach? It is true that retaining the collection diversifies the trust somewhat, because otherwise it would be invested in only the bank deposit, but the portfolio is still not sufficiently diversified.

In addition, a prudent investor should hesitate to keep trust funds invested in coins. Most trustees would not have the specialized knowledge needed to evaluate the coins or decide which coins, if any, to buy or sell. As mentioned above, the modern prudent investor standard requires that the trustee also take into account the income requirements of the beneficiary, and in light of Hugh’s needs for income, coins seem a particularly bad investment, because they not just underproductive, but completely unproductive. Investing in coins thus also violates the trustee’s duty to be impartial, favoring the remainder beneficiary and giving nothing to the income beneficiary (see also 1(c) below).

It is true, as TNT will argue, that the collection was an initial asset of the trust and that the trust instrument allows the trustee to retain any assets. The collection might also have had some special value to the beneficiaries (there is no evidence on this). Yet if retaining assets will violate the trustee’s fiduciary duties, the trustee must sell, even if the asset was originally placed in the trust by the settlor (see the Wood case).

In conclusion, TNT should probably have sold the coin collection or found some other solution that is fair to Hugh. Alternatively, if the $1 million in the bank had been diversely invested in ways that produce more income, the trustee’s decision to keep the coin collection—which was apparently going up greatly in value—might be prudent in light of the total portfolio.

1(c). Did TNT breach its duty to Hugh by not paying him enough money? The trustee has a duty to pay income to the beneficiary. Here, TNT did pay all the net income to Hugh, as required by the trust, but it was not enough for his needs. As in Cappy’s case, the trustee has a duty to inquire whether the beneficiary’s needs are being met. Not only did TNT not inquire, it ignored Hugh’s requests for assistance.

In addition, the duty of impartiality requires that the trustee not favor one class of beneficiary (i.e., the income beneficiary=Hugh) over another class (the remainder beneficiary=Catherine). Having all trust assets in a bank account and coin collection violates this duty because it results in a corpus that is probably safe (which benefits the remainder beneficiary), but produces little income for the income beneficiary. The bank account is underproductive and the coins are completely unproductive (like gold). The trustee thus breached its duty to be impartial.

One way to solve the partiality problem is to sell some or all of the assets and re-invest them in assets that produce more income. This would also diversify the trust (see 1a above).

Under the UPAIA, the trustee might be able to reallocate to solve the problem, which in this case would involve allocating some of the principal to income and giving it to Hugh. Of course, Catherine might object, because it might violate the terms of the trust.

A safer alternative for TNT is to elect to convert it to a unitrust, which is specifically allowed by the UPAIA. It involves adding the income to the principal each year and, at the beginning or end of the year, paying Hugh 4% of the combined value of income and principal (see Heller case).

The trust does not give the trustee the power to invade principal for Hugh, so this does not help him.

2. Can Victor compel TNT to pay the judgment that Catherine owns him? To answer this question, we first need to figure out what Catherine’s interest in the trust fund is, because a creditor stands in the shoes of the beneficiary.

One interest of Catherine is in the remainder—she is to receive the entire remainder when Hugh dies. Unfortunately for Victor, Hugh is still alive. Catherine cannot force TNT to pay her the principal because she is not entitled to it until Hugh dies. Consequently, Catherine has no interest in the remainder that Victor can currently reach. Of course, Victor can always wait until Catherine receives the remainder and then try to attach it, but he cannot compel the trustee to pay it directly to him.

Catherine also has an interest in the principal in case of emergency. This interest is clearly discretionary, however, so Catherine is not entitled to the money. Creditors cannot reach a debtor’s discretionary interest in a trust. With discretionary trusts, there is an exception for creditors who provide necessities to the beneficiary, but Victor does not fit in this category.

In some jurisdictions a creditor can place a lien on a debtor’s discretionary interest, so that if the trustee decides to pay out to the beneficiary, the lien attaches and the money goes to the creditor. But unless TNT decides to pay some of the principal to her, a lien might do Victor no good. Because Catherine is able to get by, there is no emergency justifying a payment to her from principal, so Victor (who stands in her shoes) will also get nothing.