Important Questions Answered

First and foremost, you have a fiduciary duty to the beneficiaries. This duty as a Trustee was eloquently described by Chief Justice Benjamin Cardozo in 1928:

“Many forms of conduct are permissible in the workday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of honor, the most sensitive, is the standard of behavior.”  § 10:200. Guidelines for trustees, 14 Fla. Prac., Elder Law § 10:200 (2020-2021 ed.)

The Uniform Prudent Investor Act list duties a trustee has regarding the investment process.

There is a duty of loyalty. This is the foundation and most basic rule of trust law, “A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.” UPIA § 5 Solely means exclusively, the trustee can’t act in their own self interest or the interest of a third party. This concept of prudence and loyalty is so intertwined, ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B), extracted in the Comment to Section 1 of this Act, effectively merges the requirements of prudence and loyalty. A fiduciary cannot be prudent in the conduct of investment functions if the fiduciary is sacrificing the interests of the beneficiaries. UPIA § 5 Comments

Duty upon accepting of trusteeship. Within a reasonable time after accepting a trusteeship or upon receiving trust assets, a trustee shall review all the trust assets and implement any changes necessary to bring the trust assets into compliance with the investment policy statement and the purposes, terms, distribution requirements, any other terms of the trust and with the requirements of the Uniform Prudent Investor Act. UPIA § 4

There is a duty to monitor the investing and managing of trust assets. This continuing responsibility for oversight extents from the suitability of assets initially placed in the trust, the investments already made to any new investment decisions. UPIA § 2 Comments

There is a duty to investigate. There is a traditional responsibility of a fiduciary investor to examine information likely to bear importantly on the value or security of an investment. E.g., Estate of Collins, 72 Cal. App. 3d 663, 139 Cal. Rptr. 644 (1977) (trustees lent on a junior mortgage on unimproved real estate, failed to have land appraised, and accepted an unaudited financial statement; held liable for losses). UPIA § 2 Comments

There is a duty to diversify.  A trustee shall diversify the trust assets unless it is reasonably determined that because of special circumstances or the trust terms, the purposes of the trust would be better served without diversifying. A Trustee of a pension plan is guided by a comparable rule, mandated by ERISA.  ERISA § 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C). Case law overwhelmingly supports the duty to diversify. See Annot., Duty of Trustee to Diversify Investments, and Liability for Failure to Do So, 24 A.L.R. 3d 730 (1969) & 1992 Supp. at 78-79  UPIA § 3

There is a duty to be impartial. This duty is derived from the duty of loyalty.  When there are multiple beneficiaries, loyalty requires the trust to act in the best interests of each beneficiary, not favoring the interest of one beneficiary over another but considering the differing interests of the beneficiaries.  This balancing of interests is critical, especially conflicts that can arise between beneficiaries that are interested in income vs those interested in principal. UPIA § 6

And lastly, the UPIA imposes a duty to manage investment costs.  In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee. UPIA § 7  Managing costs does not necessarily mean you have to attain the cheapest cost, only that the costs are appropriate and reasonable in relation to the assets.  The Restatement of Trusts 3d says: “Concerns over compensation and other charges are not an obstacle to a reasonable course of action using mutual funds and other pooling arrangements, but they do require special attention by a trustee. . . . [I]t is important for trustees to make careful cost comparisons, particularly among similar products of a specific type being considered for a trust portfolio.” Restatement of Trusts 3d: Prudent Investor Rule § 227, comment m, at 58 (1992). UPIA § 7 Comments  The critical point to be made is [I]t is important for trustees to make careful cost comparisons, particularly among similar products of a specific type being considered, not the cheapest, but it probably would not be considered to be prudent to incur costs when reasonable alternatives were available that were less expensive.

The Uniform Trust Code list additional duties a trustee has regarding the administration of a trust.

There is a duty to administer the trust.   Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with the UTC. UTC § 801  This section highlights that the main duty of a trustee is to administer the trust according to its terms in order to fulfill the purposes of the trust, and do so in good faith. That being said, a trustee is not required to perform in any way prescribed by the terms of the trust if that performance would be impossible, illegal or contrary to public policy. UTC § 404

There is a duty for the prudent administration of the trust. This means a prudent trustee would consider the trust purposes, terms, distribution requirements, and other circumstances of the trust and shall exercise reasonable care, skill, and caution while doing so. UTC § 804  While a trust maker may modify this standard of care in the trust document, Section 1008 prohibits them from exonerating a trustee from liability for a breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or to the interests of the beneficiaries.

There is a duty to control and protect the trust property. The trustee shall take reasonable steps to take control of and protect the trust property.  UTC § 809  Taking control would include taking physical possession of the tangible property and any securities owned by the trust. Protecting the trust property could include purchasing homeowners’ insurance on any homes the trust owns, purchasing fire and liability insurance on any commercial properties.

It could also mean not having the trust purchase high risk assets. An example of this could be a beneficiary needs an automobile to go back and forth to work. The trust provides for the health, education, maintenance, and support, so it would be within the terms of the trust for the trustee to fulfill that need. The trustee could do one of two things. First, the trustee could have the trust buy the car, purchase the insurance, and let the beneficiary have use of the car. But what if the beneficiary then had an accident with it, that beneficiary would have created a potential liability putting all the other trust assets at risk in that ensuing lawsuit, endangering the interest of ALL the beneficiaries.  Second, distribute the money for that beneficiary to purchase the car, then they would retain any potential liability exposure for themselves. This would be especially true if the beneficiary was a new inexperienced driver.  Which choice would you as a prudent trustee choose?

There is a duty to inform and report. “A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of the trust.” UTC § 813(a)  At a minimum, the trustee shall send to the beneficiaries of trust income or principal, and to other remote remainder beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values. UTC § 813(c)

There is a duty to keep adequate records and maintain the segregated identification of trust property.  UTC § 810  The first part of this duty is to keep detailed enough and adequate records so you as the trustee can fulfill your duty to inform and report to the beneficiaries as discussed above. UTC § 810 (a)  The second part of this duty is to keep trust property separate from the trustee’s own property, never comingle your assets with the trust’s. UTC § 810 (b)

The duty to keep adequate records will allow the trustee to fulfill two other duties previously discussed. First, the duty to inform and report to the beneficiaries requires a certain amount of detailed record keeping to accomplish that duty.  Secondly, it will also be required to fulfill the duty to administer the trust. Part of administration is the filing of all the required fiduciary income tax returns needed, state and federal. Making sure these are filed timely and the beneficiaries are given the necessary income tax information to file their individual income tax returns on a timely basis.

As you can see, while being named a trustee is an honor and shows the amount of respect someone has for your character, there are many ethical concerns and tasks associated with that position that need to be addressed. Remember to delegate to professionals and then monitor their performance those tasks you are not proficient at so the purposes of the trust can be fulfilled for the benefit of the beneficiaries. That would be a prudent trustee.

And if the Trust limits investment strategy, can a trustee deviate from those limits?

The Uniform Prudent Investor Act of 1994 (UPIA) states in § 1 (a) “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 forth in this [Act]” except (b) “the prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise 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 provisions of the trust.”

§2 is the heart of the UPIA.  A prudent investor would manage trust assets by considering the purposes, terms, distribution requirements, and other circumstances of the trust while exercising reasonable care, skill, and caution. UPIA § 2(a). This section is modified to the extent that the trustee has special skills or expertise, then that trustee has a duty to utilize those special skills or expertise in managing the trust. UPIA 2(f)  That means the standard of prudence is relational, it follows that the standard for professional trustees is the standard of prudent professionals; for amateurs, it is the standard of prudent amateurs.  The investment decisions and considerations outlined should not be made based on individual assets, but on the overall investment strategy of the portfolio having risk and return objectives reasonable suited to the trust.  UPIA 2(b) The other circumstances a trustee should consider as are relevant to the trust or its beneficiaries are the general economic conditions; inflation or deflation; tax consequences; the role each investment plays within the overall portfolio; expected return from income or appreciation; other resources of the beneficiary; needs for liquidity, income, and the preservation or appreciation of capital; and if an asset has a special value to the purposes of the trust or to one or more of the beneficiaries. UPIA 2(c)So how would a prudent investor invest? They would diversify to reduce risk. The current standard in diversification is an investment process called the theory of efficient markets, or Modern Portfolio Theory (MPT). 4 Nobel prizes in economics have been awarded for the academic research that identified and verified the theory of efficient markets. Franco Modigliani of MIT (1985), Harry Markowitz of CUNY (1990), Merton Miller of Chicago (1990), and William Sharpe of Stanford (1990) Basically, MPT divides risk into 2 categories, compensated and uncompensated risk. The more diversification you have, the less uncompensated risk your portfolio would contain, and therefore be more prudent. By accepting only risk that you would be compensated for, your portfolio would be more efficient by maximizing the projected return for a given level of risk accepted.  The main investment vehicles utilized to achieve this diversification in MPT are usually either index funds or mutual funds for the vast majority of trust. Those pooled investment funds would offer greater diversification and lower cost than one could achieve purchasing individual stocks and bonds in the trust.

But what if the trust terms specify a specific type of investment only, the trustee shall only invest in investment grade corporate and U.S. bonds.  What can the trustee do to allow him to invest in a broadly diversified portfolio in accordance with the UPIA and MPT.  To deviate from administrative and investment provisions of the trust instrument or from the administrative provisions of the Trust Code, the trustee must obtain judicial authority. Read v. U.S. ex rel. Dep’t of Treasury, 169 F.3d 243, 251 (5th Cir. 1999)  Courts have been reluctant to second guess the trust makers wishes regarding directing the type of investments allowed written into the trust document, only in exceptional circumstances or in cases of emergency, urgency or necessity will deviation from a donor’s intention as to scope of investment of trust funds, as evidenced by the trust instrument, be authorized, and even if the donor could not have foreseen the changed circumstances, deviation will not be authorized unless it is reasonably certain that the purposes of the trust would otherwise be defeated or impaired in carrying out the donor’s dominant intention. In re Trusteeship under Agreement with Mayo, 259 Minn. 91, 105 N.W.2d 900 (1960)  Courts have placed significant emphasis on fulfilling the purposes of the trust, The Missouri Supreme Court, Hyde, J., held that authorization for deviation from investment restrictions in trust agreements which required trustees to invest its funds, accumulated from deposit of portion of cemetery lot sales, in government bonds and notes secured by first mortgage on real estate was not justified, even though trust was perpetual, return did not exceed 3.10% in last six years and investment in real estate mortgages of kind specified when trust was established was virtually impossible, in absence of showing that income was not sufficient to accomplish the purpose of trust which was to maintain and beautify the cemetery. Troost Ave. Cemetery Co. v. First Nat. Bank of Kansas City, 409 S.W.2d 632 (Mo. 1966)

Because it is difficult to deviate from any investment restrictions contained in the trust document, maybe the best cause of action when reviewing trust that can be changed by the trust maker would be to allow the trustee flexibility to change investment strategies or mandate adherence to MPT for a broadly diversified long term investment portfolio.

Insurance purchased from PTC will cover the Trust and Trustee for litigation costs, including attorney fees, in legal actions brought by beneficiaries or other third parties against the Trust/Trustee for negligence and the alleged failure of the Trustee to fulfill his/her fiduciary duty to the Trust.  Such insurance coverage is available immediately upon receipt and acceptance of a claim and Chubb Insurance will provide and pay for the defense of the Trust/Trustee in the legal action.