A trust is inherently an investment vehicle and the trustee has a duty to invest all trust funds as soon as possible. In making such investments, the trustee is potentially subject to the broad prudent investor standard pertaining to trustees under Prudent Investor Act as adopted by each particular state. The extent to which the Trustee of a particular trust is subject to the Prudent Investor Act of any particular state will be a function of the terms of the agreement. Grantors may address the applicability of this Act in the governing documents. Some documents will waive some or all requirements of the Act. As stated earlier, the governing document controls. Prudent investor standards have changed over time. The most recent changes were as a result of the 1994 revision to the Uniform Prudent Investor Act (“1994 Actâ€). Various states have revised the Prudent Investor Standards as a result of the 1994 Act. The emphasis of the 1994 Uniform Prudent Investor Act is to allow the Trustees to follow the investment principles of modern portfolio theory. It allows the trustee to invest for total return. The total return on an asset is not strictly limited to the yield (interest, dividends, rents, etc.) but also includes the gain or loss that the asset realizes as its value appreciates or depreciates. Total return encourages investors to seek the highest overall return (given a certain risk tolerance and within the bounds of prudent investing) without needlessly being hampered by how that return is specifically created. This concept has been codified in the 1994 Uniform Prudent Investor Act. Prior to this, a prudent person rule, the measurement of investment performance centered on the amount of trust income earned by the assets and the conservation of the assets for eventual distribution to the remainderman. There was no mention of, or interest in, growth of the assets. Under the 1994 Uniform Prudent Investor Act, the fiduciary is required to create an investment strategy for the trust. What is the appropriate investment strategy for the trust? The Uniform Prudent Investor Act codifies a number of principles and standards for prudent investing that reflects the American Law Institutes Restatement (Third) of Trusts (1992). This model code has been adopted in one form or another by individual states throughout the country. This could be by statute or case law or other type of legislation. It embodies the general standard that trustees should use care, skill, prudence and diligence in making investment decisions and that trust assets should be appropriately diversified. Further, the investment strategy should have proper risk and return allocations that are reasonable in light of the investment objectives. While asset allocation plays a pivotal role, how each beneficiary shares in the risk and return is also largely driven by the distribution policy adopted by the fiduciary. Following is a summary of the Standards in the Uniform Prudent Investment Act:

1. The standard of prudence is applied to the portfolio as a whole rather than each individual asset.
2. The primary consideration of fiduciaries in finding the appropriate balance between risk and return for the trust. Because there are two equitable owners, this is more complex in the trust situation.
3. There are no prohibitions in the selection of assets as long as the selected asset plays an appropriate role in achieving the risk and return objectives and meets the other requirements of prudent investing.
4. The trustee has an obligation to diversify unless the trustee determines that there are special circumstances where the purposes of the trust are better served without diversifying.
5. The trustee may delegate investment and management functions to a third party.

While the concepts are straight forward, they can often leave the trustee in a dilemma. For example, sometimes the purchasing power of the annual income stream will not be protected unless the purchasing power of the trust corpus is likewise protected and to do this, the trustee must invest heavily in growth stocks such as common stocks. However, these growth stocks will not produce an adequate level of traditional fiduciary accounting income for the income beneficiary. If the trustee invests for the purpose of producing an adequate income for the income beneficiary, it will do so at the expense of the long-term growth prospects of the portfolio. At TLD Law, our trust and estates attorney assist Trustees in administration to avoid liability. The author, Monica Goel, is a certified specialist in Trusts, Estates, and Probate.