Fiduciary Responsibility, accounting assignment help

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Your client is the
founder of Epsilonia, a highly successful, closely held business. Your client
never married or had children, but he did have three sisters, all of whom were
active in the company’s management and served on the company’s Board of
Directors. Epsilonia was started over 70 years ago. Prior to 1960, your client
was the sole stockholder of Epsilonia. As the company’s value grew rapidly,
your client became concerned about income taxes and estate taxes. This concern
was common in 1960 because the top income tax rate was 91%, and the top estate
and gift tax was likewise extremely high. Long-term capital gains tax rates
were 25%.

In 1960, your client retained 40% of Epsilonia
stock for himself and placed the remaining 60% of the stock into trust for the
benefit of his sisters and their children. The trust said, in relevant part:
“The split-interest trust annually shall distribute trust income to each sister
during her life. Upon each sister’s death, the principal attributable to her
share of the trust shall be distributed in kind to her then-living children.”
Your client remained the sole trustee of the trust during his lifetime. Upon
the recent death of your client, his sisters became cotrustees. Due to the
generosity of your client to his sisters during his lifetime, each sister is
independently wealthy and self-sufficient financially.

Epsilonia stock
historically has paid a dividend distribution rate equal to only .007% on
market value. Two of the three sisters do not mind that Epsilonia stock pays
such a low dividend because the stock has generated substantial capital
appreciation, making each sister’s children “ridiculously rich.” In fact, the
Epsilonia stock has appreciated at more than twice the rate of the overall
stock market from 1960 to present. However, one of the sisters would like to
receive more income for herself and has pleaded with her sisters, as
cotrustees, to shift the trust’s assets into a High-Income Stock Index Fund
that will generate significant dividend income. The other sisters have refused,
however. As a result, the aggrieved sister has filed a lawsuit, claiming that,
as the income beneficiary of the trust, she is receiving an inadequate amount
of money. She contends that:

  • The
    cotrustees have breached their fiduciary duty of reasonable care by
    failing to adequately diversify the trust.
  • The
    cotrustees have breached their fiduciary duty of impartiality. This duty
    requires trustees to establish investment policies that give “due regard”
    to the interests of both the income beneficiary and the principal
    beneficiary in a split interest trust.
  1. Did
    the three sisters, as cotrustees, unethically gamble with the trust’s wealth
    by maintaining a concentrated investment ownership position only in
    Epsilonia stock?
  2. In
    this situation, was it unethical for the cotrustees to keep all the
    trust’s assets invested in a stock that generated such a low dividend that
    the trust’s income beneficiaries barely received any income?

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