Wednesday, March 22, 2017

Management of Trust Assets-Uniform Prudent Investor Act

Most individuals who establish a revocable trust during their lifetime also name themselves as the initial trustee of their trust.  In such a case, the trustee has complete discretion as to the investment and management of the trust assets.  For example, such a trustee can be very aggressive in his or her investment philosophy and invest in high risk, very speculative assets.   Also, the trustee can have an unbalanced trust investment portfolio such as investments consisting of only one stock or in one sector.  However, once the person who established the trust is no longer the acting trustee, the third party, successor trustee does not have such discretion.  Most states, including Nevada, have adopted the Uniform Prudent Investor Act.  Under this act, a third-party trustee must invest and manage the trust property as a prudent investor would, considering the terms, purposes, requirements for distribution, and other circumstances of the trust.  In satisfying this prudent investor standard, the trustee shall exercise reasonable care, skill and caution.  Also, a trustee who has special skills or expertise such as a stockbroker or hedge fund manager has a duty to utilize those special skills and expertise.  Within a reasonable time after accepting a trusteeship or receiving trust property, the trustee is required to review the trust property and make and carry out decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance with the purposes, terms, requirements for distribution and other circumstances of the trust and the Uniform Prudent Investor Act. Some of the circumstances the trustee shall consider in investing and managing trust property are:

      (a) General economic conditions;
(b) The possible effect of inflation or deflation;
(c) The expected tax consequences of decisions or strategies;
(d) The role that each investment or course of action plays within the overall trust portfolio;
(e) The expected total return from income and the appreciation of capital;
(f) Other resources of the beneficiaries;
(g) Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
(h) An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

    

A trustee is required to diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.  Also, a trustee is required to administer a trust in accordance with the terms of the trust even if such terms are in conflict with the Uniform Prudent Investor Act.  For example, a person may wish their trust assets to remain as stock in a publicly traded corporation that the individual or a family member founded or worked for.  In such a situation, it is important that the trust terms are properly drawn to allow the trustee such discretion.