Another view of American Century Giftrust
(Attorney Russ Willis)
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A few weeks ago, I posted an item to the FundAlarm bulletin board, taking issue with the suggestion that people who wanted out of the American Century Giftrust fund were somehow reneging on an obligation to stay with the fund for at least ten years. In that item, I identified myself as the lawyer who had been mentioned in the June 21 issue of Barron's as having successfully "broken" a "giftrust." In the intervening weeks, I have taken on several more of these. Roy Weitz has been kind enough to invite me to expand a little on the subject, in the form of this article.

Let me begin by mentioning that Jim Stowers at American Century has circulated a letter to some of the people I have been in contact with, and probably to a number of other "giftrust" investors. The letter is designed to persuade the investor to stay in the fund, on the grounds

(1) that the fund has performed within normal tolerances for a high-risk growth fund and may be expected to perform well in the future and

(2) that the legal difficulties attending a termination may be more burdensome than the investor is prepared to carry.

Stowers does not assert in this letter than an investor who wants out is reneging on anything.

There is nothing I can really say about the analysis of the performance history of the fund that is given in Stowers' letter. Apparently there have been some dramatic gains that have to some extent offset the losses. The fund is up about 15 percent since January 1. But between the lines of the Barrons' article ("changes to the management team and tinkering with industry weightings") and also in its own semi-annual report ("we've been working earnestly to improve our day-to-day effectiveness"), American Century as much as acknowledges that the fund has not been managed as well as it might have been.

In any event, I do have some comments with respect to that portion of Stowers' letter that gives what appears to be a legal analysis of the situation. The "giftrust" is styled as an irrevocable trust, vaguely similar to a transfers to minors act trust, in which (typically) a grandparent is the grantor and a grandchild is the beneficiary. Twentieth Century (now American Century) designates the trustee, and the trust document both limits the trustee to investing in the TWGTX fund and at the same time exonerates the trustee from any responsibility with respect to the quality of the investment.

Under the common law as it exists in most English-speaking jurisdictions, an irrevocable trust may be modified or terminated upon the consent of all of the beneficiaries if to do so will not frustrate a "material purpose" of the grantor in setting up the trust (the typical example is a trust that is supposed to protect a kid until age 40 or 50). If the grantor is available and also consents, then the problem of "material purpose" drops away. In Missouri, which is where the "giftrust" is administered, the "material purpose" problem has been superseded by legislation that requires the court to find only that minor, unborn, or unascertained beneficiaries will "benefit" by the modification or termination.

Twentieth Century chose to set up the fund as a collection of small trusts, probably because it did not want to rely on the investor's willingness to stay with the fund through down markets. If the trust agreement is a "contract" obligating the investor to stay in for at least ten years, then the common law and the Missouri statute, which allow for early termination of a trust, are a part of the terms of that contract.

Stowers' letter says that the trustee "needs" court approval to terminate a "giftrust." I think it would be more accurate to say that American Century and the trustee want the legal protection of a court order from possible future claims by the minor beneficiary or even the alternate beneficiary of the "giftrust" that the trustee should not have cooperated in a termination just before the market in small cap stocks went through the roof. This translates to a practical requirement that the investor secure a court order, because the fund and the trustee will not voluntarily recognize a nonjudicial termination by consent of the beneficiaries, though clearly this is valid under the common law and the Missouri statute.

Stowers' letter mentions the need for the court to appoint a "next friend" for a minor beneficiary. As a practical matter, the court will not make a formal appointment of a "next friend" unless it finds that the person who is named as giving consent on behalf of the minor has a conflict or otherwise is not representing the minor's best interests. Similarly, the court will not make a formal appointment of a "guardian ad litem" for unborn or unascertained (contingent alternate) beneficiaries unless it finds that there is a conflict between their interests and the interests of the active parties to the action. Neither of these problems should occur in the typical case.

Finally, Stowers' letter claims that paragraph 6(b) of the "giftrust" agreement requires that the trustee's expenses -- read, attorney's fees incurred in the termination proceeding -- are to be borne by the giftrust. I would argue that these fees were not incurred "in the administration of the trust."

In short, the design of the "giftrust" includes the possibility of early termination with the consent of the beneficiaries. There is a reasonably simple mechanism available to accomplish the termination, which does require a finding that the interests of minor, unborn, or unascertained beneficiaries have been protected. An investor who avails himself or herself of this mechanism is not reneging on an agreement, but rather adhering to its terms.

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