## Facts

- Ruth Lilly’s estate plan created two charitable remainder annuity trusts (CRATs) to simplify administration of a very large estate.
- CRAT #1 paid an annuity to Ruth Lilly for life; CRAT #2 paid annuities to six nieces and nephews for five years.
- The remainder beneficiaries of both CRATs were The Poetry Foundation (35%), Lilly Endowment, Inc. (35%), and Americans for the Arts (30%).
- National City Bank of Indiana served as trustee for both CRATs.
- The trust instruments included a retention clause authorizing the trustee to retain indefinitely any property received, permitting concentration in a single asset.
- The instruments also included an exculpatory clause stating that investments made in good faith were valid even if not compliant with statutory diversification requirements.
- In January 2002, the CRATs were funded almost entirely with Eli Lilly and Company stock; the stock declined significantly thereafter.
- By October 2002, the trustee had sold most of the Eli Lilly stock and diversified the portfolios.
- In November 2002, the trustee petitioned the probate court for approval of its investment decisions and administration.
- Americans for the Arts and The Poetry Foundation objected and asserted claims that the trustee’s delay in diversifying was negligent, breached fiduciary duties, and violated the Indiana Uniform Prudent Investor Act (PIA).

## Issues

1. Whether the PIA’s default duty to diversify applied where the trust instruments expressly permitted indefinite retention of assets and validated good-faith investments notwithstanding noncompliance with diversification requirements.
2. Whether the exculpatory clause was unenforceable due to overreaching, abuse of a confidential relationship, or other limits on trustee exculpation.
3. Whether the trustee’s timing in diversifying the Eli Lilly stock created liability for negligence or breach of fiduciary duty despite the trust’s retention and exculpatory provisions.

## Decision

- The Court of Appeals of Indiana affirmed summary judgment for the trustee.
- The court held the retention clause reflected settlor intent sufficient to modify or eliminate the PIA’s default diversification duty for these trusts.
- The court held the exculpatory clause was enforceable because the record did not show bad faith, self-dealing, or abuse of a fiduciary or confidential relationship in adopting or applying the clause.
- Because the beneficiaries’ claims alleged, at most, imprudent delay rather than bad faith, the clause barred liability for the trustee’s good-faith investment judgments, including the diversification timing.

## Legal Principles

- The duty to diversify under the Indiana Uniform Prudent Investor Act is a default rule that may be altered by the express terms of a trust instrument.
- A retention clause authorizing indefinite retention of received property can evidence settlor intent to permit concentrated holdings and to displace default diversification expectations.
- Exculpatory clauses limiting trustee liability for negligence may be enforced when they do not protect bad faith or intentional misconduct and are not the product of overreaching or abuse of a confidential relationship.
- Beneficiaries seeking to avoid an exculpatory clause must show facts supporting bad faith, self-dealing, or improper procurement; disagreement with investment timing or hindsight loss is insufficient.

## Conclusion

The court enforced trust provisions allowing indefinite retention and shielding good-faith investment decisions, concluding that the trustee’s delay in diversifying a concentrated stock position did not create liability absent evidence of bad faith, self-dealing, or abusive procurement of the exculpatory language.


Americans for the Arts v. Ruth Lilly Charitable Remainder Annuity Trust, 855 N.E.2d 592 (Ind. Ct. App. 2006)