Burn the Rembrandt? Trust Law's Limits on the Settlor's Power to Direct Investments
John H. Langbein
Yale University - Law School
January 25, 2010
Yale Law & Economics Research Paper No. 398
Boston University Law Review, Vol. 90, No. 1, 2010
Most but not all rules of trust law are default rules that the settlor (creator) of a trust is free to alter or abridge. There are, however, a few mandatory rules, which the settlor may not vary or defeat. Among them is the long-established rule against capricious purposes, an anti-dead-hand rule that has been applied in rare cases in which settlors attempted to impose trust terms that would have required trustees to destroy or waste trust assets. In recent years, the two most authoritative sources of American trust law - the Restatement (Third) of Trusts and the Uniform Trust Code - have reformulated the rule against capricious purposes, clarifying the principle that has always been its rationale. Section 27(2) of the Restatement provides that “a private trust, its terms, and its administration must be for the benefit of its beneficiaries.” Section 404 of the Code codifies this benefit-the-beneficiaries standard.
A few years ago I published an article explaining why the benefit-the-beneficiaries rule should be understood to place outer limits on a settlor's power to require a trustee to make or to retain trust investments that are manifestly harmful to the interests of the beneficiaries. A recent writer has challenged that view, asserting that trust law should “provide no aid in cases where a settlor intentionally and thoughtfully impaired beneficiaries’ economic rights.” The present article explains why such extreme deference to settler's intent would violate fundamental principles of fiduciary obligation.
The starting point is Gareth Jones’ arresting observation that although an owner “may destroy his own Rembrandt, …he cannot establish a trust and order his trustees to destroy it.” I discuss the reasons why the benefit-the-beneficiaries requirement prevents a settler from saddling a trust with value-impairing provisions harmful to the interests of the beneficiaries, and why that rule must apply to manifestly harmful investment provisions. Trust law grants the settler virtually unbounded freedom to select beneficiaries, apportion beneficial shares, and tailor administrative provisions, but it does not permit the settlor to destroy the core principles of fiduciary obligation that define a trust.
Number of Pages in PDF File: 24Accepted Paper Series
Date posted: January 26, 2010 ; Last revised: February 18, 2010
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