Ethics in Accounting: A Decision-Making Approach

Chapter 15Duties of Fiduciaries: Financial Planners, Trustees, and Executors

AM I ETHICAL?

In 1963, a successful entrepreneur created a trust for her 14 grandchildren. Trust documents did not provide instructions on how trust assets should be invested. However, a scrapbook created by this business owner contained several handwritten letters in which she proclaimed her “hatred for the tax devil's visit every April 15.” The scrapbook also contained a 1963 newspaper article that correctly reported that the United States had a 91% top income tax rate and 77% top estate tax rate.

As the trustee in charge of this trust, you now have to decide between two courses of action. Choice Number 1 is to invest trust assets in a very conservative manner. This is the choice preferred by eleven of the grandchildren. Choice Number 2 is to invest trust funds in riskier, growth-oriented assets. This choice will greatly minimize the beneficiaries' income and estate taxes, but only three of the grandchildren favor this choice. Which course of action should you select?

1. You should select Choice 1 because a majority of the beneficiaries favor this approach
2. You should select Choice 1 because a trustee has a duty to conservatively protect trust assets
3. You should select Choice 2 because a trustee has a duty to maximize after-tax returns
4. You should select Choice 2 because a trustee has a duty to carry out the wishes of the party who creates a trust

The SOLUTION is revealed at end of the chapter.