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Wills & Trusts > Duty to Invest Prudently > Flashcards

Duty to Invest Prudently Flashcards

1
Q

Duty to Invest Prudently

governed by

A

Uniform Prudent Investor Act (UPIA) which is incorperated into the UTC

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2
Q

Duty to Invest Prudently

The investment functions requires that a trustee

A

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

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3
Q

Duty to Invest Prudently

3 centraal directives of the UPIA:

A
  1. duty to diversify
  2. the duty to tailor investments to the risk tolerance of the trust
  3. duty to delegate investing to the professionals
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4
Q

Duty to Invest Prudently

Modern Portfolio theory

A

certain risks can be minimized by diversification
- one performing poorly can be offset by good performance of others

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5
Q

modern portfolio theory

UPIA 1 Prudent investor rule

A
  1. 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
  2. The prudent investor rule, a default rule, may be expanded, eliminated, or other wise be altered by the provisions of a trust
  3. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provision of the trust
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6
Q

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

A
  • the purposes, terms, distribution requirements, and other circumstances, of the trust
  • In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution
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7
Q

UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives

A trustee’s investment and management decisions respecting individual assets must be evaluated

A
  • 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
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8
Q

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)

A
  1. general economic conditions
  2. the positive effect of inflation or deflation
  3. the expected tax consequences of investment decisons or stratagies;
  4. 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;
  5. The expected total return from income and appriciation of capital;
  6. other resources of the beneficiaries;
  7. needs for liquidity, regularity of income, and presercaion or appriciation of capital, and
  8. an assets specal relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries
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9
Q

UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives

A trustee shall make a reasonable effort to verify

A

facts relevent to the investment and management of trust assets

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10
Q

UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives

A trustee may invest in any kind of

A

property or type of investment consistant with the standards of this act

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11
Q

UPIA 2 Standad of Care Portfolio Stratagy, risk and return objectives

A trustee who has special skills or expertise, or named in

A

reliance upon the trusts representation that the trustee has special skills or expertise
- has a duty to use these special skills or expertise

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12
Q

Duty to Invest Prudently

A trustees failure to diversify an investment is breach of trust, if

A

under the circumstances, a prudent person would have diversified

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13
Q

Duty to Invest Prudently

The damages for a trustee’s improper retention of stocks are the

A

difference between the value upon eventual sale or accounting and the value when the stock should have been sold.

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14
Q

Duty to Invest Prudently

generally, the concentration of more then 5-10% in a single security requires

A

some kind of explaination or documentation

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15
Q

Duty to Invest Prudently

Exceptions to rule to diversify

A
  • 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
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16
Q

Duty to Invest Prudently

Important difference between mandatory and permissive retention of undiversified asset

A

common trust forms include a provision that permits the retention of trust property

17
Q

Duty to Invest Prudently

Permissive authoriation to hold certain assets does not neccessarily excuse the trustee from

A

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

18
Q

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

A

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

19
Q

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)

A
  1. selecting an agent
  2. establishing the scope and terms of the delegation, consistant with the purposes and terms fo the trust, and
  3. periodically reviewing the agents actions in order to monitor the agents performance and compliance with the terms of delegation
20
Q

807 delegation by the trustee

In performing a delegated function, an agent owes a duty to the trust to exercise

A

reasonable care to comply witht the terms of the delegation

21
Q

807 delegation by the trustee

A trustee who delegates who complies with (a) (appointing an agent) is not liable

A

to the beneficiaries or to the trust for an agent to whom the function was delegated

22
Q

807 delegation by the trustee

if the trustee properly selects, monitors, and reviews the conduct of the agent

A

the trustee will not be liable for the agent errors

23
Q

Duty to Invest Prudently

Sometimes, if the estate is a complex once, the settlor might choose to

A

have more then 1 trustee in order to have both an individual and an institutional trustee

24
Q

Duty to Invest Prudently

When more then 1 trustee is serving, the cotrustees act by

A

majority (unless the trust provides otherwise)

25
Q

Duty to Invest Prudently

each cotrustee has a duty to

A

active participation in all aspects of the trusts administration

26
Q

Duty to Invest Prudently with cotrustees

liability arises when a trustee fails to take reasonable steps

A

to prevent a cotrustee’s breach of duty

27
Q

Duty to Invest Prudently

An approach to balencing investment and other trustee functions is to name an

A

investment director or investment advisor in the trust

28
Q

Duty to Invest Prudently

Allocating, generating, and distributing income and principle

A

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

29
Q

Duty to Invest Prudently

Today, a trust holds a diversified investment in account which produces:

A
  • income in the form of dividends or interest, and
  • prinicpal in the form of increased value
30
Q

Duty to Invest Prudently

Often settlors give different beneficiaries rights to income and principal

A
  • 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
31
Q

Duty to Invest Prudently

The trustee’s investment decisions must take into account both income and principal beneficiaries

A

generating sufficient lifetime income but also growing the trust corpus

32
Q

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

A

invest in accordance with modern portfolio theory

Wills & Trusts (26 decks)

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