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Fiduciary Standard: Prudent Investor Rule

Posted on: April 12th, 2017
rulesTrustees are held to fiduciary standards. These duties range from sensible asset management and proper accountings, to timely tax filings and managing the best interests of beneficiaries (and future beneficiaries). In all their actions, a trustee must act with loyalty and care and put the interests of the beneficiaries foremost in their decision-making.

Prudent Investor Rule

One of the fiduciary standards that trustees are held to is the Prudent Investor Rule. The Prudent Investor Rule obligates the trustee to make the most favorable trust asset investment decisions with the information available to them. Trustees must pay careful attention to factors such as:
  1. Risk. Some degree of risk is inherent in investing; however, blatantly risky investments should be avoided. Risk factors include the volatility of the investment, and also fees associated with investments. Fees should be reviewed in relation to investment income. The trustee, if they lack professional financial expertise, should consult a skilled party to guide investment decisions. 
  2. Asset preservation. While degrees of loss and return are considered when assessing investment risks, trustees should consider the overall safeguarding of trust assets. Careful review of the trust document when making investments helps to guide effective asset management. Depending on trust terms and the investments, a trustee may determine that updated trust provisions, an alternate tax situs, or other terms could help to ensure long-term preservation of trust assets.
  3. Beneficiaries. Investment decisions should be guided with respect to the best interests of trust beneficiaries. Among the many rights of trust beneficiaries, beneficiaries have the right to request removal of the trustee if a trustee carelessly invests trust assets or acts in another negligent way.

Legal Counsel for Trustees

Trustees concerned about maintaining their fiduciary duties can seek legal counsel. Trustee legal counsel assists the trustee with financial decisions, tax implications, asset valuations, outdated trust terms, and more. Since trustees can be held personally liable for losses associated with their actions, practical trust administration involves consulting with skilled parties. An attorney, financial adviser, accountant, or other experienced professional helps to ensure proper administration. 

Prudent Investment Practices

Once a trustee has counseled with an attorney and professionals and has made investment decisions, their duty is not fulfilled. Trustees must routinely monitor investments and continue to take actions that fulfill their fiduciary duties. This summer our trust attorneys will release a complimentary legal guide for trustees. Request access to our legal library to browse an archive of guides on trust administration, and you will receive an alert when the new trustee guide is available.
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