Case 2 of 2 on a trustee's duty to diversify.

small hotel.jpgMrs. Cooper died in 1978, providing in her Will that a trust was to be established to provide Mr. Cooper with income for his lifetime, and then go to her two children Richard and Joyce. Her estate was about $800,000. As executor Mr. Cooper diddled around with the estate for eight years but finally funded the trust with $1.8 million.

Despite the growth in value, daughter Joyce still sued Mr. Cooper for slanting the investments toward fixed-income securities that would provide income for him, but no growth for the children's future benefit. Mr. Cooper countered with hey, I made the trust grow; in particular we made $500,000 on what had seemed a small investment in a hotel in Idaho.

The trial court found for Joyce and assessed damages of $450,000 against Mr. Cooper, for the loss of growth caused by his fixed-income approach.

The Washington Court of Appeals upheld Joyce's win. Noting that, other than the hotel the investments had been 87% fixed income instruments and only 13% equities, the Court found his approach faulty: "We hold the prudent investor rule [the governing law via RCW 11.100.020] focuses on the performance of the trustee, not the results of the trust." It's the behavior, not the numbers that counts.

It wasn't sufficient that Mr. Cooper got lucky on the hotel that seemed like a small investment of the trust. And it couldn't have helped in the Court's eyes, that his slanting of the portfolio was to his personal benefit. A failure to diversify is not good; if such a failure is self-serving it's doubly hard to defend.