This article outlines key points new trustees should know about their duties relating to trust investments. When making investment decisions for the trust, taking any action that may affect how much the beneficiaries receive, invading trust principal, etc., a trustee must be aware of certain rules he or she must follow. If you are concerned about personal liability as a trustee, you should comply with standards set forth in state prudent investor statutes and related laws applicable to trustees.
If you are the trustee of a living trust or another type of estate planning trust, the following is a list of steps you should take with regard to trust investments:1. Find the relevant state law provisions that apply to your actions as a trustee regarding investments. First, determine if the state where the trust is being administered has adopted the Uniform Prudent Investor Act or UPIA. This model legislation has been adopted by approximately 43 states in the U.S. as of 2016.
However, several states have not adopted the Uniform Prudent Investor Act. If the trust you are administering is governed by the laws of one of these states, look for state statutes and case law that discuss how a trustee should make decisions regarding investments for the trust. Also, before taking any action to delegate investment and management decisions for the trust, find out if state law prohibits you from doing so or places any limitations on such delegation.2. Review the trust document. Examine any provisions that discuss how trust assets may be invested, actions that can be taken regarding trust principal and income, as well as any rules the trustee must follow. Under the UPIA, a grantor or trustor may set forth different standards of conduct for a trustee's management of trust assets. Therefore, understanding language in the trust document is critical.
You may also want to review any applicable Stock Powers.Also, review language in the trust document about which state laws apply to the trust. Sometimes the trust document provides that the laws of another state should apply to the trust.3. Consult an attorney with experience in
trust administration. Get advice on whether you are correctly interpreting the provisions of the trust and state law regarding investment decisions. If you plan to delegate any of your trustee duties to a professional investment manager, appoint a co-trustee or take any similar type of action, have the attorney advise on whether these actions comply with applicable law and the terms of the trust. For tips on how to find this type of attorney, see probate lawyer.
Trustees Need To Read Prudent Investor Act
There are several reasons a new trustee should review the applicable state Prudent Investor Act or similar laws that apply to trusts in the state where the trust is administered. For purposes of this article, I refer to the Uniform Prudent Investor Act, but trustees should refer to the state laws applicable to the trust. As the name suggests, the UPIA requires a trustee to invest and manage trust assets as a prudent investor would, taking into consideration certain circumstances listed in the Act. In addition, the Uniform Prudent Investor Act contains a list of factors the trustee should consider when making trust investments. Some of the factors a trustee is required to take into consideration under the Act include: a. economic conditions; b. inflation or deflation; c. tax consequences; d. the role an investment plays within the overall trust portfolio; e. expected total return from income and appreciation of capital; f. other resources the beneficiaries possess; g. need for liquidity, income, or preservation or appreciation of capital; and h. whether an asset has a special importance to the purposes of the trust or any of the beneficiaries.Before making decisions about trust investments, the trustee should become familiar with factors outlined in the relevant state statutes to ensure the trustee's conduct complies with the law. If you have questions about your trustee investment duties, consult an attorney.
Before Delegating Trustee Duties
If you need assistance managing trust investments and decide to delegate your trustee duties to a professional investment manager, there are a few points to keep in mind. First, state laws applicable to trusts generally require the trustee to exercise a certain level of care in selecting a co-trustee or delegating trust duties in this manner. In addition, the trustee must take costs into consideration when delegating trust duties. See
Fees Trustees Bill Charge.If you walk into the office of a financial adviser or brokerage firm and ask for help managing a trust, they will probably be more than happy to put the assets with their firm. However, unless you have thoroughly researched the party to whom you plan to delegate your duties, the trust may end up with huge losses, it may pay exorbitant fees, or both. A new trustee should seek professional investment help when necessary. But do not make the mistake of delegating this duty without doing your due diligence. Before placing trust assets with a professional or institution, ask detailed questions about performance, safety of principal, and fees. Find out how much experience they have managing trust investments. Review the state's Prudent Investor Act or related laws that apply to your conduct as trustee.
Trustee Must Understand Investment Risks
If you are a first-time trustee and are uncertain about what types of investments to choose for the trust, you should get the help of a professional rather than make decisions that could harm the beneficiaries. If you are unfamiliar with how quickly stocks, bonds or any other type of investment can drop in value, you may not have the expertise necessary to make investment decisions for the trust.For example, do you know the difference in risk between Treasury bills and growth stocks? What about the difference in risk between short-term bonds and emerging market stocks? Do you understand the tax consequences of different types of investments, such as municipal bonds and dividend stocks? If you are not comfortable answering these basic questions about investments, you should consult a professional before investing trust assets.Another investing concept trustees need to understand is asset diversification. A trustee generally has a duty to diversify trust assets, with some exceptions. State prudent investor statutes outline the circumstances in which a trustee is required to diversify trust assets. If you are not familiar with the principles of diversification, you may need to delegate management of trust investments to a financial planner or other investment professional.
State Laws on Trust Investments
Trustees should review state laws applicable to the trust because such laws may impact what type of investment approach the trustee can use. For example, if the state has adopted the Uniform Prudent Investor Act, the trustee's performance may be measured by the total return of all trust investments rather than the performance of individual assets in the trust portfolio.
However, if another standard applies based on state law or the trust document, the trustee needs to be aware of whether performance will be measured on an individual asset basis rather than total return. To ensure the trustee is not liable for failing to fulfill his or her fiduciary duties in managing trust investments, the trustee must understand how his or her investment performance will be measured. For more information, see
trust law sources.
Get Help With Trust Investments
Trustees often delegate investment decisions and management of trust assets to a financial professional or trust company. This happens for a variety of reasons. The trustee may have the financial expertise, but may not have adequate time to devote to managing the investments. The trustee may not be comfortable making investments that involve risk or may not be informed about the best options for earning income for the trust.
Concerns about the tax consequences of different types of investments may also cause the trustee to decide it is best to delegate investment decisions. Finally, the trustee may not know how to prepare a
trust accounting or financial paperwork that must be provided to beneficiaries. In these circumstances, a professional can provide the necessary services to ensure the trust is administered properly.
If the trust has substantial assets, it may be appropriate to have a trust company serve as co-trustee or assume the role of sole trustee of the trust. For an overview of how trust companies work and the trust administration services they provide, see
For trusts that may not have enough assets to be managed by a trust company, another option for obtaining professional investment management is a brokerage firm or bank. Most large brokerage firms and banks have trust services departments that provide a wide range of services, including portfolio management. These firms can be helpful to new trustees that are unsure how to invest trust assets or provide reports to beneficiaries.
Duties of a Trustee
If state law allows the trustee to delegate investment decisions or asset management, that does not mean the trustee can avoid responsibility entirely. The laws applicable to trustees typically provide some safeguards for beneficiaries when a trustee delegates these duties to a third party. For example, the trustee has some duties with regard to selection of the party to whom these duties will be delegated. The trustee may also be required to periodically monitor trust assets. Because the requirements for fiduciaries vary from state to state, it is not possible to list here the specific standards that apply to trustees in individual states.
Refer to our list of books for trustees for more details.
If you are a new trustee and plan to delegate trust investment duties, review the state's Prudent Investor Act and any other laws that apply to investments by fiduciaries to determine what standards of conduct you need to follow. Consult an attorney for guidance on how to perform your trust investment duties.
For an overview of the duties of trustees administering living trusts and related types of trusts, including a trustee's fiduciary duty, see
This article merely highlights some of the issues discussed in the Uniform Prudent Investor Act. To read a summary of the UPIA and its provisions regarding investment decisions by trustees, go to the
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