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Investing Trust Assets

Investing well has never been easy. All the more so if you are a trustee. The requirements for investing trust assets, and the standards by which you will be judged, have become much more complex over the past several decades.

The law governing the investment of trust assets in the United States has evolved over the years. In 1830, the case of Harvard College v. Amory established the “Prudent Man Rule”–that a trustee must conduct himself faithfully and with sound discretion, must observe how others with prudence, discretion and intelligence manage their own affairs, and must consider income as well as the safety of principal. The Prudent Man Rule requires that each investment be judged on its own merits and that speculative or risky investments must be avoided. That rule guided trustees well into the latter half of the twentieth century. Guidelines and lists of supposedly prudent assets were added by courts and others over time in an effort to help trustees comply, causing the Prudent Man Rule to lose much of the flexibility inherent in its original formulation. Fresh thinking was needed.

The Uniform Prudent Investor Act (UPIA), was adopted in 1992 by the American Law Institute’s Third Restatement of the Law of Trusts. It reflects “modern portfolio theory” and a “total return” approach to fiduciary investments. No longer is each investment regarded solely on its own merits. Many states, including Massachusetts in 1998, adopted the UPIA. The many considerations that a trustee must take into account when constructing an investment portfolio under the UPIA include:

  • general economic conditions
  • the particular circumstances for which the portfolio must be designed
  • the role of each investment within the total portfolio
  • the need to diversify investments
  • the ability to delegate responsibility to third party advisors
  • the tax consequences of investments
  • the impact of inflation and deflation on investment strategies;
  • the special role of particular assets
  • the expenses of investing

While the law describes a thought process that is helpful for trustees, many find that they want or need professional advice to manage trust portfolios. Portfolios appropriate for individuals are often inappropriate for trustees, and trustees must construct portfolios that work for the specific circumstances of each trust. Not all investment advisors are experienced in constructing investment portfolios for fiduciaries. Trustees often need help in identifying advisors with the right experience.

If you are serving as fiduciary, and you need help to navigate through the many choices and complex requirements for trust investments, call a member of our Trusts and Estates Department to learn about Trustee Support Services, our proprietary program that provides guidance and help on topics that every trustee must understand to be successful. We can help you identify advisors with the right experience to guide you.