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Delaware’s 2018 Trust Act Allows Trustees to Better Respond to Beneficiaries’ Investment Values

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In Trusts and Estates | On October 5, 2018

When investing trust funds, trustees of a Delaware trust must abide by a statutory “prudent person” standard (unless expressly released from doing so in the trust instrument) that requires the trustee to act with “the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use to attain the purpose of the account.”  When investing as a prudent person, a trustee may take into account certain circumstances, including the tax consequences of a transaction, the overall health of the economy, and the investment horizon of the beneficiaries of the trust.  The 2018 Trust Act added to the list of circumstances a trustee may consider “the beneficiaries’ personal values, including the beneficiaries’ desire to engage in sustainable investing strategies that align with the beneficiaries’ social, environmental, governance or other values or beliefs of the beneficiaries.”

This modification to Delaware’s version of the prudent person standard for trust investments now allows a trustee to consider beneficiaries’ personal values when managing trust assets. This opens lots of doors among fiduciaries.

Having evolved from the divestment movements of the 60s, 70s and 80s where socially-minded portfolios intentionally excluded investments in certain industries like weapons manufacturing, tobacco and fossil fuels, values-based investors now purposefully seek out investments in companies that align with ESG measures of environmental, social, and governance ratings. These measures raise the bar on corporate responsibility by looking at all things “green”—from buying clean electricity to waste disposal; examining the social impact from employee benefits to profit sharing with community groups; and rating governance from diversity in upper management to avoiding conflicts of interest in board selection.

Most trusts in existence today were created years ago and would be subject to the prudent person standard by default.  Beneficiaries of these trusts may have been disappointed to learn that the traditional “prudent investor” rules governing how trustees must invest limited their options with respect to investing in high-ESG-rated companies.

As it turns out, ESG ratings not only offer a better match for many values, they are proving to be a north star for sound, profit-driven business practices in general. Companies watching their green stewardship are less likely to have environmental accidents. Controversies about workplace discrimination will not only mean a low “S” rating, but probably also low workplace morale, more employee turnover, and hence lower productivity for those companies. In most cases, the higher the ESG rating, the stronger the business and profits. It’s common sense.

As more and more investors insist on investments with high ESG ratings in their individual portfolios, grantors and beneficiaries of trusts are insisting on investments with high ESG ratings in their trust portfolios.  Many mutual funds and ETFs with a focus on ESG ratings now exist.  These are the low-hanging fruits for fiduciaries when considering values are expanded options.

Grantors of trusts may want to consider establishing their trusts in Delaware, not just for the recent expansion of its prudent person standard to include the beneficiaries’ personal values when investing, but because of the primacy of grantor intent under Delaware law.  If the grantor directs that the trustee make socially minded or impact investments, the trustee must do so.  Better yet, the grantor can name an investment advisor well-versed and experienced with investing in high ESG rated companies to direct the trustee to make these types of investments.  This is where the real prospects for trust investments lie:  in direct investing in privately held companies and non-profits.

Time will tell whether Delaware fiduciaries take advantage of their new investment choices.  There remains much fear by fiduciaries and trustees to invest outside of the traditional choices. We are creatures of habit and training. Millennials, however, seem to be creatures of holistic choices. They are leading the way in values investing. Their demand for more holistic investments in trusts is now embodied in Delaware trust law – hopefully other states follow!

 

This post was co-authored by Elizabeth Killough, Director of the Untours Foundation.  Click here to learn more about the Untours Foundation.