In California, a trustee has a fiduciary (legal) duty to invest and manage trust assets impartially for the benefit of all the beneficiaries. The trustee must make all assets economically productive, unless the trust provides otherwise.
The trust instrument may provide specific rules regarding the trustee’s asset management and investment duties, authorities and powers. Otherwise, the trustee must follow California’s Prudent Investor Rule (“PIR”), Probate Code sections 16047-16052, and Uniform Prudent Investor Act (“UPIA”), Probate Code sections 16045 – 16054.
The Prudent Investor Rule requires a trustee to consider the trust’s purposes, terms, distribution requirement and other relevant circumstances when establishing an overall investment strategy. Investment decisions – including the balancing of investment risk with investment return goals — must be made in the context of an overall investment strategy. No one asset is considered in isolation and investment diversity is the general rule.
For example, consider a trust that provides the settlor’s surviving spouse with the trust income as necessary for her health, education, maintenance and support and the use of a residence in which to live, during the spouse’s life, and at her death gifts the remainder of the estate to the settlor’s children. An inherent tension exists between the surviving spouse who wants more income and the settlor’s children who wants appreciation in value. This can result in lawsuits over the investments, especially if the parties are not on good terms.
Here, the trustee must balance income for the surviving spouse and appreciation in asset value for the children. Investing to produce near term income, however, decreases long term asset appreciation in value. Depending on how the trust is drafted, the trustee may or may not also be required to consider the spouse’s own (external) resources. The trustee needs to reach a reasonable balance with respect to investing for income versus growth and investing in risky high return investments versus investing for preservation of assets.
Acting impartially is much more difficult when the trustee herself is either the surviving spouse or a child due to self-interest.
Under the Prudent Investor Rule a trustee can delegate investment decisions to a professional investment advisor. If the trustee follows the following three rules the trustee will not be liable to beneficiaries for following the investment advice: (1) The trustee must select the advisor prudently; (2) trustee must establish the scope and terms of the delegation consistent with the purposes and terms of the trust; and (3) the trustee must periodically monitor the advisor’s performance and compliance with the delegation.
Selecting an advisor prudently usually means interviewing several different advisors. Simply accepting the deceased settlor’s investment advisor is not acceptable unless the trust instrument states that the trustee can or must follow the advice of the deceased settlor’s advisor. The trustee should consider each advisor’s credentials, experience investing trust assets in similar situations, and any possible conflicts of interest.
Once an investment advisor is selected, the trustee (through his or her attorney) should prepare an Investment Policy Statement to establish the scope of the delegated investment powers, consistent with the terms of the trust, and the investment strategy to be employed.
The foregoing is most relevant to ongoing trust administrations where assets are being held long term (over years) and less relevant to trust administrations where assets are being liquidated to pay a decedent’s debts, trust administration expenses, and to distribute inheritances outright. A trustee confronting investment issues should seek qualified professional legal and investment advice before proceeding.