Fiduciary and Trust Activities #3 Investment Responsibilities

Question 1

Prudent Man Rule

Answer 1

Before rule trustees were required to invest from “legal lists” of investments

Prudent man rule allows trustees to invest as a prudent man would keeping in mind

Needs of beneficiaries
Need for income
Need to preserve corpus for remainder beneficiaries

Trustee must make independent assessment of each asset

Does not include bedrock concerts of modern portfolio theory - diversification and total portfolio return

Question 2

Prudent investor rule

Answer 2

Mid 1990s replaced prudent man theory

Trustees required to follow modern portfolio theory

Diversity, consider total portfolio return, consider effects of inflation, consider tax effects

Adopted by restatement of trusts and UPIA (part of UTC)

Question 3

5 principles of Prudence

Answer 3

1. Analyze risk and return
2. Requires diversification
3. Duty of impartiality between current and remainder beneficiaries and current income and protecting purchasing power vs. Inflation
4. Duty to avoid excessive fees
   S. Duty to delegate investment decisions to 3rd party

Question 4

Power to invest

Answer 4

Must conform to any applicable trust provisions

Question 5

Power to delegate

Answer 5

T rust may, and in some cases has a duty, to delegate investment function activities of delegate must be monitored closely by trustee

Question 6

Duty to diversify

Answer 6

Except when otherwise provided for in trust document (Andersen stock)

Question 7

Duty to exercise skill and care

Answer 7

Review original trust and make reasonable investment decisions within reasonable amount of time

Question 8

Duty of impartiality

Answer 8

Balance competing interests of all beneficiary classes in fair and reasonable manner

Must consider inflation

Question 9

Duty to control investment costs

Answer 9

Must incur only costs that are reasonable

Question 10

Must review inception assets

Answer 10

Within reasonable time of trust’s creation

Question 11

Charitable trustee

Answer 11

Uniform prudent management of institutional funds act provides rules

Must consider purposes of charity and trust

Question 12

Directed trusteeship

Answer 12

Usually family member = trustee
investment advisor = authority to direct investments

Questions as to liability of each

Question 13

Trust protector

Answer 13

Named by trust and given certain discretion and power such as power to remove-replace trustee