CSG Law Alert: Estate Planning with Sustainable ESG Investing

Between 2023 and 2045, an estimated $84 trillion in assets will pass to Millennials and members of Generation X from the Silent Generation and Baby Boomers through inheritance or gifting.1 Moreover, there is a growing trend, particularly among Millennials and the members of Generation Z, of incorporating environmental, social and governance (“ESG”) considerations into their personal investment portfolios. However, as the younger generations inherit wealth from their grandparents and parents in trust, there can be a disconnect between the trust investment strategies favored by the trust’s settlors, trustees, current beneficiaries, and future beneficiaries.

Trustees must adhere to the standards of fiduciary duty, which includes the duties of care, loyalty, and impartiality, when they make investment decisions for the trust.  The common law duty of care imposes the “prudent investor rule” under which a trustee must invest and manage an overall portfolio as a prudent investor by considering the trust’s purposes, terms, distribution requirements and other circumstances.2 The common law duty of loyalty obligates a trustee to act solely in the interests of the trust’s beneficiaries without interference from the trustee’s own interests or those of third parties, unless the trust terms provide otherwise.3 The common law duty of impartiality requires that a trustee act with due regard for the interests of all trust beneficiaries, including those with conflicting objectives or concerns.4

If a current beneficiary makes a request to the trustee to invest trust funds in sustainable ESG-related strategies, absent directive language in the trust document affirmatively allowing such investment strategies, the trustee may be concerned with being able to balance the ability to deliver financial and direct non-financial benefits to the beneficiary with the trustee’s fiduciary duties of care, loyalty, and impartiality. Further, trustees must balance the interests of current beneficiaries and future beneficiaries while adhering to the prudent investor rule.

If a settlor desires to give the trustees the ability to invest in sustainable ESG-related strategies without fear of breaching the trustee’s fiduciary duties and the prudent investor rule, it is best to include specific language in the trust document permitting these investments. The settlor may allow for the incorporation of ESG factors when choosing investments for the trust and may provide clear guidance to the trustee as to whether the trustee should be following the settlor’s ESG-related goals, those of the beneficiaries or a combination of both.

If a trust does not contain affirmative language permitting the trustee to invest in sustainable ESG-related strategies, there are tools that a trustee and the beneficiaries can use such as trust modification statutes, consents, indemnifications, court orders and non-judicial settlement agreements depending on the governing law of the trust.

Due to the potential implications of ESG investing for trustees, it is best to include clear language in trust documents that allow for ESG investing if the settlor desires such investments with clear parameters. This will allow trustees to invest the trust assets with consideration for the beneficiaries’ values and interests, even if this investing is at the expense of long-term investment returns, without fear of breaching the trustee’s fiduciary duties. If you have concerns with sustainable ESG investing in your trusts or wish to include affirmative language permitting such, please reach out to your CSG Law Trusts & Estates attorney to discuss.

1 https://www.nytimes.com/2023/05/14/business/economy/wealth-generations.html

2 Restatement (Third) of Trs. § 77 (Am. L. Inst. 2007)

3 Restatement (Third) of Trs. § 78 (Am. L. Inst. 2007)

4 Restatement (Third) of Trs. § 79 (Am. L. Inst. 2007)

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