          
          
          
          The "Prudent Investor" Rule:
          
          
               Keep in mind that the trustee must act in a
          fiduciary capacity on behalf of the interests of both
          parties to the CRT - the donor/beneficiary and the
          remainderman.  This means an impartial administration
          of trust assets to provide both favorable current
          income, and also preservation of the largest possible
          remaining corpus for the designated charity.
               The Third Restatement of the Law of Trusts,
          section 227, the authoritative treatise on such
          matters, imposes a duty on a trustee to manage a trust
          as a "prudent investor," balancing the rights of the
          beneficiary and the remainderman in light of the terms
          of the trust declaration, payout requirements and all
          other circumstances including inflationary
          considerations.
               The difficulty arises when market conditions make
          it impossible to satisfy both parties' best interests. 
          Then the trustee is expected to look for direction to
          the donor's intent as expressed in the trust
          declaration - yet another reason the drafting of that
          basic document is of such great importance.  The
          question then becomes, did the grantor intend to favor
          the remainderman over the current income beneficiary? 
          Under the codified Third Restatement rules, a trustee
          would rarely implement an investment policy that
          clearly favors one side over the other, unless the
          trust declaration unambiguously directed such a course.
          This is so because the Restatement suggests that a
          trustee can be held personally financially responsible
          for investing in a manner that favors the beneficiary
          at the expense of the remainderman, especially if the
          diminished principal loses purchasing power due to
          inflation.
               For example, a trust arrangement which allows the
          beneficiary to receive payment out of principal when
          current income is insufficient, clearly harms the
          interest of the remainderman - an inherent conflict of
          interest for the trustee.  This dilemma can be avoided
          so long as the overall rate of return (current income
          plus capital appreciation) meets the payout
          requirement, and thus keeps the corpus intact.  But
          when the trustee must figure in inflation, principal
          may have to be invaded to pay the beneficiary.  As we
          have already discussed, setting the payout rate at the
          minimum 5 percent will usually avoid this conflict, but
          higher payout rates might guarantee the problem.
               The practical solution is to set the payout rate
          as low as possible (5 percent), so that an experienced
          trustee's wisely diversified portfolio of investments
          can earn interest and dividends sufficient to meet all
          current income needs with inflation taken into account.
               Don't forget in this discussion of "competing
          interests" between CRT beneficiaries and the
          remainderman; the sole policy reason the law allows and
          encourages charitable remainder trusts (and the
          concomitant benefits to donors), is the ultimate
          objective of promoting charitable organizations and the
          achievement of their goals by tax-exempt private
          financing.  The IRS does not look favorably on
          operating a sham CRT providing bountiful lifetime
          rewards to its donor/beneficiary, while ultimately
          short changing the charitable organization it was
          created to help.  Follow that route and it leads to
          enormous retroactive tax liabilities, including
          interest and penalties stretching back over the years
          to the CRT's date of creation.
               In the midst of all these shifting variables, the
          "prudent investor" trustee can easily get caught "in
          the middle."  These problems should suggest how
          important it is to choose a qualified CRT trustee who,
          in fact, has your complete trust.
          
          
          
