Anti-Diversification Clause Effective

Ruth Lilly is the sole surviving great-grandchild of Eli Lilly & Company founder Eli Lilly (the company responsible for such notable pharmaceuticals as Prozac and Cialis). National City was appointed conservator of her estate. The probate court directed the bank in 2001 to draft a new estate plan for Ruth. The bank petitioned the probate court on November 27, 2001 to implement certain changes in the estate plan pursuant to an Indiana statute. National City “hoped to simplify, streamline, and improve the financial efficiency of the estate plan.”  Notice was sent to all interested parties, and all the interested parties played a role in the plan.  The probate court approved the estate plan, which included the creation of two charitable remainder trusts. At issue in this case was section 10(b), which provided that National City, as trustee,

shall have the following powers and rights and all others granted by law * * * (b) To retain indefinitely any property received by the trustee * * * and any investment made or retained by the trustee in good faith shall be proper despite any resulting risk or lack of diversification or marketability and although not of a kind considered by law suitable for trust investments.

Both trusts were funded on January 18, 2002 with Lilly stock. National City formulated an investment plan in March of that year, and by October 2002, the trusts were fully diversified. “In November 2002, National City petitioned the probate court to approve of its formulation and implementation of the diversification of the investment in Eli Lilly and Company stock held by the [trusts]”(internal quotations omitted). Two of the charities objected and counter claimed, “alleging that [National City’s] delay in diversifying was negligent, a breach of fiduciary duty, and a violation of the Indiana Uniform Prudent Investor Act.”

The probate court granted National City’s motion for summary judgment on the grounds that “that the exculpatory clause is ‘valid and binding upon the parties’ and that ‘[t]he investments made or retained by the trustee during the accounting period’ were ‘made or retained in good faith’ and were ‘proper.’”

The Court of Appeals of Indiana affirmed the probate court’s decision in Americans for the Arts v. Ruth Lilly Charitable Remainder Annuity, 855 N.E.2d 592 (Ind. App. 2006), summarizing its opinion as follows:

The primary question presented by this appeal is whether National City Bank of Indiana (National City), as trustee of two charitable trusts created by Ruth Lilly’s (Ruth) estate plan, was required to diversify the trust assets. Although as a general rule, trustees have a duty to diversify, the trust instrument may modify that duty by permitting the trustee to retain certain—or all—trust assets. Concluding that the relevant documents at issue herein sufficiently relieved National City of the duty to diversify the trust assets, we affirm the judgment of the trial court.

Special thanks to Patrick S. Sylvester of Lincolnshire, Illinois for bringing this case to my attention.