Duty to Invest Prudently Flashcards
Duty to Invest Prudently
governed by
Uniform Prudent Investor Act (UPIA) which is incorperated into the UTC
Duty to Invest Prudently
The investment functions requires that a trustee
asseses the trust assets and creates an investment stratagy to support the purposes of the rust and the needs of the beneficiaries, based on the kinds of property in the trust
Duty to Invest Prudently
3 centraal directives of the UPIA:
- duty to diversify
- the duty to tailor investments to the risk tolerance of the trust
- duty to delegate investing to the professionals
Duty to Invest Prudently
Modern Portfolio theory
certain risks can be minimized by diversification
- one performing poorly can be offset by good performance of others
modern portfolio theory
UPIA 1 Prudent investor rule
- execept as in b, a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set fourth in this act
- The prudent investor rule, a default rule, may be expanded, eliminated, or other wise be altered by the provisions of a trust
- A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provision of the trust
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
A trustee shall invest and manage trust assets as a prudent investor would, by considering
- the purposes, terms, distribution requirements, and other circumstances, of the trust
- In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
A trustee’s investment and management decisions respecting individual assets must be evaluated
- not in isolation, but as a whole
AND - as a part of an overall investment stratagy having risk and return objectives reasonably suited to the trust
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following
- As are relevent to the trust or its beneficiaries:
(8)
- general economic conditions
- the positive effect of inflation or deflation
- the expected tax consequences of investment decisons or stratagies;
- The role that each investment or course of action plays within the overall trust portfolio, which may include:
- financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property; - The expected total return from income and appriciation of capital;
- other resources of the beneficiaries;
- needs for liquidity, regularity of income, and presercaion or appriciation of capital, and
- an assets specal relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
A trustee shall make a reasonable effort to verify
facts relevent to the investment and management of trust assets
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
A trustee may invest in any kind of
property or type of investment consistant with the standards of this act
UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives
A trustee who has special skills or expertise, or named in
reliance upon the trusts representation that the trustee has special skills or expertise
- has a duty to use these special skills or expertise
Duty to Invest Prudently
A trustees failure to diversify an investment is breach of trust, if
under the circumstances, a prudent person would have diversified
Duty to Invest Prudently
The damages for a trustee’s improper retention of stocks are the
difference between the value upon eventual sale or accounting and the value when the stock should have been sold.
Duty to Invest Prudently
generally, the concentration of more then 5-10% in a single security requires
some kind of explaination or documentation
Duty to Invest Prudently
Exceptions to rule to diversify
- trustee not required to diversify if because or special circumstances, the purposes of the trust are better served without diversifying
- relatively limited, for the most part involves family property
- Not required to diversify, if the trust property is a family home, family land, or family heirlooms
Duty to Invest Prudently
Important difference between mandatory and permissive retention of undiversified asset
common trust forms include a provision that permits the retention of trust property
Duty to Invest Prudently
Permissive authoriation to hold certain assets does not neccessarily excuse the trustee from
liability for failure to diversify if diversification is in the best interest of the trust and the beneficiaries
- Therefore, the trustee may have the power to retain undiversified trust assets, but the trustee still has a fiduciary duty to invest prudently
Duty to Invest Prudently
Sometimes, a trustee may need to delegate parts or all of the investment function in order to adhere to the duty of prudence
UTC allows (and encourages) delegation when a trustee needs expert advice and skilled investment handling
- Although the rule still requires the trustee to act dilligently in overseeing the delegation
807 delegation by the trustee
A trustee may delegate duties and powers that a purdent trustee of comparable skills could properly delegate under the circumstances
- The trustee shall exercise reasonable care, skill, and caution in:
(3)
- selecting an agent
- establishing the scope and terms of the delegation, consistant with the purposes and terms fo the trust, and
- periodically reviewing the agents actions in order to monitor the agents performance and compliance with the terms of delegation
807 delegation by the trustee
In performing a delegated function, an agent owes a duty to the trust to exercise
reasonable care to comply witht the terms of the delegation
807 delegation by the trustee
A trustee who delegates who complies with (a) (appointing an agent) is not liable
to the beneficiaries or to the trust for an agent to whom the function was delegated
807 delegation by the trustee
if the trustee properly selects, monitors, and reviews the conduct of the agent
the trustee will not be liable for the agent errors
Duty to Invest Prudently
Sometimes, if the estate is a complex once, the settlor might choose to
have more then 1 trustee in order to have both an individual and an institutional trustee
Duty to Invest Prudently
When more then 1 trustee is serving, the cotrustees act by
majority (unless the trust provides otherwise)
Duty to Invest Prudently
each cotrustee has a duty to
active participation in all aspects of the trusts administration
Duty to Invest Prudently with cotrustees
liability arises when a trustee fails to take reasonable steps
to prevent a cotrustee’s breach of duty
Duty to Invest Prudently
An approach to balencing investment and other trustee functions is to name an
investment director or investment advisor in the trust
Duty to Invest Prudently
Allocating, generating, and distributing income and principle
duty to allocate trust income, and principal in accordance in accordance with the trusts distribution specifications
- also encompass allocating costs of the trust (like fiduciary fee) proportionately to income and principal
Duty to Invest Prudently
Today, a trust holds a diversified investment in account which produces:
- income in the form of dividends or interest, and
- prinicpal in the form of increased value
Duty to Invest Prudently
Often settlors give different beneficiaries rights to income and principal
- many trusts are structured with 1 or more lifetime beneficiaries with rights to income and possibly principal,
- followed by a remainder beneficariry who recieves the remaining principal of the trust at the death of the life estate of the holder
Duty to Invest Prudently
The trustee’s investment decisions must take into account both income and principal beneficiaries
generating sufficient lifetime income but also growing the trust corpus
Duty to Invest Prudently
The trustee’s investment decisions must take into account both income and principal beneficiaries generating sufficient lifetime income but also growing the trust corpus
This duty may hamper the trustees ability to
invest in accordance with modern portfolio theory
