The Uniform Prudent Investor Act

Not the most exciting of legal topics here but if you review the trust essays that have appeared on the UBE in the past, this pops up from time to time. The idea here is that in a "prudent investor" jurisdiction, only prudent investments are permissible regardless of the trust's terms.

There are similarities between the standards here and the standards learned when studying negligence. A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets. But a trustee with special skills or expertise who has represented him/her self as having such skills will have to use such skills or expertise when investing.

Further, a trustee must act exclusively for the beneficiary when investing and managing trust assets. If there are multiple beneficiaries, the trustee must act impartially never benefiting one or more than one at the expense of others.

Importantly, investment decisions must be evaluated in the context of the entire trust portfolio and as part of an overall investment strategy. In other words, risk is often inherent when investing and so the fact that certain investments might seem risky should not lead to a conclusion that the trustee has not acted with prudence, especially if those risky investments were balanced with safer investments. A trustee should always diversify investment unless it is reasonably determined that the purpose of the trust is better served absent diversification.

When analyzing this issue of compliance or non-compliance with the Prudent Investor Act, there are certain elements to address. Some of those elements are as follows: general economic conditions; the possible effect of inflation or deflation; the expected tax consequences of investment decisions or strategies; the role that any individual investment plays within the overall investment strategy; the expected total return from income and appreciation of capital; other resources for the beneficiaries; needs of the beneficiaries for liquidity and regularity of income, etc.

A trustee who acts in substantial compliance with the Prudent Investor Act will not be held liable for non-compliance. A trustee may also delegate investment decisions but in doing so the trustee must act prudently in selecting an agent, establishing the scope and terms of the delegation, and reviewing the agent's investment decisions.