A bank trust department was sued by the beneficiaries of a trust. The plaintiffs claimed that the trustee improperly allocated assets over a decade earlier by owning too many bonds and not enough stocks.
Although several other factors were involved, a key to the case centered on the “riskiness” of certain real estate held as a trust asset. Greater risk associated with the real estate required the safety of a greater allocation to bonds and less to stocks. The beneficiaries claimed the real estate was not “risky” while the trustee felt otherwise.
We looked at the trust’s real estate in the context of market conditions at the time of the original asset allocation, assuming that we did not have knowledge of subsequent events. Using market data published at that time, we estimated the duration of a likely vacancy and projected the costs of carrying the property in that event. Our goal was to replicate the projection process that the trustee might have made at the time in question.
In hindsight, we could demonstrate that actual carrying costs were higher than might have been projected, and the actual vacancy was longer than would have been estimated. But it was important to use contemporary market statistics and estimates rather than actual results because the trustee made asset allocations without the benefit of knowledge of those future events and conditions.
Projections showed that the costs of carrying a vacancy would have enormous impact on the income to the trust beneficiaries, justifying a more conservative allocation to bonds. As noted above, the subsequent reality was even worse than we projected when we assumed that we did not know the actual course of events.
Mr. Rutledge issued an expert opinion and subsequently was deposed by the plaintiffs’ attorney. Soon after that deposition, the case was settled.
Litigation is always a risk, and this case presented some complicated challenges. However, the question of risk associated with the real estate seemed rather clear-cut once the financial data were analyzed. The effect of Mr. Rutledge’s testimony was a result of careful preparation and the use of documented objective historical market information.
Rutledge Company LLC
License No. 481.000176
John K Rutledge, Managing Broker
License No. 471.004599