Merger Doctrine, the Common Trust Fund, the Trusteed Mutual Fund, Common-Fund Doctrine, Combining Trusts, Common Fund of Related Sub-trusts: Which is not about trust investing?

Charles E. Rounds, Jr. - Suffolk University Law School
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The answer is the common-fund doctrine, which relates not to asset management but to whether a trust beneficiary who brings an action involving the trust may be reimbursed from the trust estate for his or her attorneys’ fees. See §8.15.13 of Loring and Rounds: A Trustee’s Handbook (2022). As to merger doctrine the question is ambiguous. In the trust context merger occurs when one person possesses the entire legal and the entire equitable interest. In such a case, there is no trust; the person simply owns the property outright and free of trust, all interests being still merged or now having merged in that person. See § 8.7 of the Handbook. If merger occurs in mid-course of the trust, the person, going forward, no longer is bound by the fiduciary principle in the management of the once-entrusted assets, so in that sense merger can touch on investing.

In the case of a common trust fund or a trusteed mutual fund, the entire equitable interest in the entrusted asset pool is sliced into vested pieces (shares or participations), which themselves can end up being assets of other trusts. See §9.7.5 of the Handbook. The combining for investment purposes of the portfolios of related sub-trusts is very different in concept. Title to the common fund is in the trustees of the sub-trusts. There are no vested shares of beneficial interest, no intermediary trustees. Thus, unequal distributions out of the asset block can be a record-keeping nightmare. See §3.5.3.2(d) of the Handbook and UTC §810(d). Finally, there is the combining of similar trusts into a single trust, provided “the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust.” See UTC § 417.

Un-trained and un-mentored newly-minted lawyers are finding it ever more challenging navigating trust law and its unhelpful nomenclature, and it is only going to get worse. The traditional, discrete Trusts course has no longer been required for decades in American law schools. See §8.25 of the Handbook. Now, the National Conference of Bar Examiners is on track to remove Trusts as a tested subject on the Multistate Bar Exam. Equity, as well as the other foundational fiduciary relationship besides the trust, namely Agency, have been on the Conference’s cutting-room floor for some time now. It has concluded that “the Foundational Concepts & Principles assessed on the NextGen exam should be limited to those that are common to numerous practice areas, consistent with assessing competence for a general license to practice law.” See https://nextgenbarexam.ncbex.org/faqs/#ftoc-heading-7.

In the appendix below is a fictional narrative of events that take place sometime in the not-to- distant future. It recounts the trials and tribulations of James, a newly-minted lawyer during his first few days on the job. It turns out they also were his only days on the job. He has neither taken Trusts nor been bar-tested on the subject. It is drawn from my experiences over the decades mentoring newly-minted lawyers and fielding their frantic phone calls.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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