The bane of many a trustee’s existence is the responsibility and potential liability associated with holding, and perhaps having to dispose of, trust property that doesn’t readily lend itself to routine trust administration. Such property includes various types of tangible personal property, for example, valuable jewelry, furs, china, crystal, stemware, silver hollowware and flatware, furniture, furnishings, paintings, drawings, sculptures, graphics, rare books, coin collections, stamp collections, classic motor vehicles, firearms, equipment used on a farm or ranch and even livestock. Although such assets are sometimes a necessary component of a trust, they can give rise to substantial challenges. These assets are inherently illiquid, often difficult to value and frequently require specialized expertise to assess and manage. In some cases, they can give rise to liability that may result in losses beyond their value. In addition to the practical administrative challenges the trustee faces in handling such trust property, the trustee may also be confronted with conflicting demands from beneficiaries relating to the property.
The UPIA
One may reasonably question under what circumstances a prudent trustee would ever agree to accept, much less invest in, tangible personal property. In beginning to address the question, consideration of the Uniform Prudent Investor Act (UPIA) is in order. The UPIA, promulgated by the National Conference of Commissioners on Uniform State Laws in 1994, has been adopted in 44 states1 and the District of Columbia. Section 2(c) of the UPIA states:
Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:…an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
This provision clearly implies that maximization of total investment return isn’t the sole criterion for judging the suitability of a trust asset.
Trust Instrument Language
A trustee considering holding tangibles of any kind should verify that the trust instrument contains clear language sufficient explicitly to empower the trustee to take the following actions with respect to tangible personal property (and to expend trust funds in so doing): assume ownership, retain, protect, insure, take physical possession, maintain, repair, improve, store, pack, ship, sell and permit use by and distribute to beneficiaries. Equally important governing instrument language from the trustee’s perspective are provisions that absolve and indemnify the trustee from liability for any tort committed while using, and damage to, or waste, loss or destruction of, tangibles whether ostensibly in the possession or control of the trustee or a beneficiary.
Delegation
Proper administration of valuable or unique tangible personal property often requires specialized knowledge of the item or items in question, and, depending on the trustee’s background, the trustee may not possess that knowledge. While a trustee is often legally justified in delegating certain investment and management functions, the trustee must “exercise reasonable care” in selecting an agent, establishing scope and terms of the delegation and periodically reviewing the agent’s actions.2
Tangible Personal Property Issues
Most types of tangible personal property are innately movable (vulnerable to disappearance) and so present unique trust administration challenges that can keep even the most experienced and sophisticated trustee awake at night. Among the numerous issues a trustee responsible for tangible personal property faces are the following:
If it’s ordinary, non-unique tangible personal property without material value, for example, personal effects and non-museum quality household furniture and furnishings, the trustee should look for legitimate ways promptly to distribute or sell the items in question. If, before accepting appointment as trustee, the trustee determines the trustee would have to retain long-term ownership of and responsibility for such items, the trustee should consider whether the trustee can accept appointment without taking ownership and responsibility or, failing that, whether to accept appointment at all.
If the tangible personal property has significant value, for example, super-high quality, museum quality and/or antique (not junk) jewelry, china, crystal, glassware, silver hollowware and flatware, furniture, furnishings, rugs, paintings, drawings, sculptures, graphics and other works of art, coin collections, stamp collections or other collections of tangibles and exotic or classic automobiles, and the trustee chooses to accept ownership and responsibility, the trustee should determine its location and who controls it and should promptly arrange to inspect it. If possible, practical and not inconsistent with the settlor’s intentions as set out in the trust instrument, the trustee should consider taking possession of and securing the items in a safe deposit box, safe, vault or other secure storage facility. Otherwise, the trustee (or the trustee’s agent) should be prepared to conduct periodic inspections going forward.
A trustee who owns or contemplates owning valuable tangible personal property in trust should be acutely aware of the dangers and risks inherent in having responsibility for such assets. As compared to most other types of trust assets, items of tangible personal property are easily moved, misplaced, hidden, stolen, sold, given away, damaged, subject to deterioration and destroyed.
In cases in which the trustee doesn’t take possession of tangible personal property held in trust, possession is almost always entrusted to one or more beneficiaries. The trustee should consider entering into an agreement with such beneficiaries providing, essentially, that, in exchange for the trustee’s allowing such beneficiaries to have possession, use and enjoyment of the items, the beneficiaries agree not to subject such items to hazardous conditions, to secure such items and to provide proper maintenance and upkeep of such items. In addition, in all cases involving the holding of tangible personal property in trust, the property should be insured against casualty and theft losses (and, in some cases, losses resulting from torts). Whether the cost of insurance is borne by the trust or by the beneficiaries may be negotiated. Security should involve holding the items in a locked and, perhaps, guarded facility fitted with burglar and fire alarms. What constitutes proper maintenance and upkeep depends on the type of property involved but could include such things as cleaning, restoration, ensuring appropriate lighting and climate control.
Lastly, a trustee holding valuable tangibles should have a solid understanding, and should make sure the beneficiaries have a solid understanding, of what’s the fundamental purpose of having the tangibles as trust property. Are the tangibles simply another form of trust investment—included in the portfolio to increase diversification with an expectation they’ll increase substantially in value over a period of years? Alternatively, were the tangibles included among the trust assets because the settlor wanted the beneficiaries to be able to use and enjoy them but not have outright ownership of them?
Endnotes
1. Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
2. Uniform Prudent Investor Act Section 9(a).