The increasing desire for socially responsible investing extends to all areas of financial planning, including the management of assets held within a Community Property Trust (CRT). While traditionally focused on financial returns, modern estate planning increasingly incorporates client values, and sustainability is a growing concern for many. It’s absolutely possible to include clauses within a CRT that prioritize, or at least consider, sustainability factors when managing trust assets, but it requires careful drafting and a clear understanding of fiduciary duties.
What are ESG factors and how do they apply to my trust?
ESG stands for Environmental, Social, and Governance. These factors are increasingly used by investors to evaluate companies beyond traditional financial metrics. Environmental criteria consider a company’s impact on the planet—things like carbon emissions, resource depletion, and pollution. Social criteria evaluate a company’s relationships with employees, suppliers, customers, and the community. Governance looks at a company’s leadership, executive pay, audits, and shareholder rights. According to a 2023 study by Morgan Stanley, approximately 84% of investors expressed interest in sustainable investing, highlighting a significant shift in investor preferences. Including clauses that require consideration of ESG factors doesn’t necessarily mean excluding all investments in companies with less-than-perfect records; it means incorporating these considerations into the overall investment strategy.
What does ‘fiduciary duty’ mean when considering sustainability?
As a trustee, your primary duty is to act in the best interests of the beneficiaries. This is known as fiduciary duty. Historically, this meant maximizing financial returns. However, courts are increasingly recognizing that beneficiaries’ values can be considered *alongside* financial returns, especially if those values are explicitly stated in the trust document. In fact, the Uniform Prudent Investor Act, adopted by most states, allows trustees to consider “the beneficiaries’ investment objectives, risk tolerance, and other relevant circumstances.” A recent case in California involved a beneficiary who strongly opposed investments in fossil fuels; the court sided with the trustee who incorporated those preferences into the investment strategy. It’s crucial that any sustainability clauses are clearly worded and don’t unduly jeopardize the trust’s financial stability.
I heard a story about a trust that went wrong – can you share?
Old Man Hemlock, a local orchard owner, had a trust established decades ago. He wanted his estate to support environmental conservation, but the language in his original trust was vague—simply stating a preference for “environmentally friendly” investments. After his passing, the trustee, unfamiliar with ESG investing, invested heavily in a timber company that, while profitable, engaged in unsustainable logging practices. The beneficiary, Hemlock’s granddaughter, a passionate environmental activist, was horrified. She sued the trustee, arguing a breach of fiduciary duty. The case dragged on for years, costing a fortune in legal fees. The vagueness of the original trust language made it difficult to prove the trustee had violated any specific instructions, but the emotional distress and financial burden were significant. It was a mess, and could have been avoided with clear, precise language in the original trust document.
How can I ensure my CRT’s sustainability clauses are effective?
The Johnson family, aware of the pitfalls, approached our firm with a clear vision: they wanted their trust to prioritize sustainable and ethical investments. We drafted specific clauses outlining their preferences – excluding investments in fossil fuels, prioritizing companies with strong environmental records, and directing a portion of the trust’s income to environmental charities. We also included language allowing the trustee to seek expert advice on ESG investing and to regularly report on the sustainability performance of the trust’s portfolio. Years later, the trust is thriving, generating both financial returns and positive environmental impact. The beneficiaries feel confident that their family’s values are being upheld, and the trust is a source of pride for everyone involved. This highlights the importance of clear, precise language, expert guidance, and ongoing monitoring.
“A trust is not simply a vehicle for wealth transfer; it’s a reflection of your values and a legacy you leave for future generations.”
Ultimately, including sustainability clauses in a CRT is possible and increasingly common. By working with an experienced estate planning attorney, you can ensure those clauses are drafted clearly, legally sound, and aligned with your values and financial goals. Approximately 60% of millennials and Gen Z investors prioritize sustainability when making investment decisions, signaling a long-term trend that estate planners must address.
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About Steve Bliss at Escondido Probate Law:
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