E. Elizabeth Sweetser

Keep an Eye on Your Trustee!

A trust is a frequently used estate-planning or asset protection instrument. Whether you plan to create a trust or are a trust beneficiary, you should be familiar with the law that governs how the trustee invests the money in the trust.

A person who creates a trust may state how s/he wants the trust invested right in the trust itself. Most trusts, however, do not contain specific investment direction because the kinds of and returns from investments change over time. If the trust is silent in that regard, there is a statute that governs the trustee known as The Prudent Investor Law.

Every trust is unique. A grandmother may create a trust to benefit her grandchildren when they reach the age of majority. A couple of retirement age may put all of their assets in a trust to provide income to them for the rest of their lives. The Prudent Investor Law requires the trustee to invest and manage trust assets as a prudent investor would by considering the purposes of the trust, the terms of the trust, the distribution requirements under the trust and other factors relevant to each particular trust. Thus, the trustee who manages the investments in the trust of the retired couple who have no income other than that produced by the trust, is required to invest very differently from the trustee who invests for the minor children in the grandmother’s trust who will get no distributions for many years.

Among other things, the trustee is required to diversify the assets in the trust, make conscious decisions about the asset allocation in light of the particular circumstances of each trust and to avoid unjustified fees and transaction costs. The trustee must also monitor the investments and reallocate the trust assets when investments are inconsistent with the investment strategy. Thus, if for example it has been determined that in view of the life expectancy and income needs of the retired couple the trust should be invested 40% in stocks and 60% in bonds, and a bull market results in the stock increasing in value to 80% of the portfolio, the trustee would be required to return the investments back to 40-60. This protects the beneficiaries. In the case of the retired couple, if the trustee failed to reduce the stock position from 80% back to 40% and there was a significant stock market correction, the couple might not have enough money left in the trust to support them for the remainder of their lives.

A trustee may delegate the investment function to someone with special investment skills and expertise. When doing so, the trustee is required to inform the investment manager of the unique circumstances of the trust and to periodically review and monitor the investment performance. The investment manager has the same investment responsibilities as the trustee and is held to the same standards as the trustee.

The amount of trust litigation in our courts against trustee Banks and individual trustees is a testament to the fact that it is not unusual for a trustee to act inconsistent with the dictates of the Prudent Investor Law. When creating your trust, select your trustee wisely. By asking the right questions you can find out if policies and procedures are in place to insure adherence to the law. Beneficiaries — meet with your trustee periodically to satisfy yourself that your trustee is acting consistently with the requirements of the Prudent Investor Law and make your trustee aware of any significant life changes so that if necessary, investment strategy can be altered. Do not assume that the trustee will do things automatically.

You will surely benefit from being informed and involved.

Learn more about:  Estates & Trusts Litigation

E. Elizabeth (Betsy) Sweetser

Commercial Law & Litigation, Appeals, Estates & Trusts Litigation, Employment & Labor

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