California trustees must take care to follow the prudent investing laws when choosing how to manage the assets in trusts. Since trustees invest assets solely for the benefit of the trust beneficiaries, any unreasonable investment choices could be breaches of duty.
What Are the Prudent Investor Laws in California?
The Probate Code explains the prudent investor standard this way:
“A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” (Probate Code § 16047.)
In other words, a trustee making investments needs to take into account the trust language. He or she must make careful and reasoned investments, not impulsive decisions. For example, a trust document could state that the trust was to be for the benefit of grandchildren but the trustee could not make distributions until all grandchildren turned age 21. It would not be reasonable for this trustee to make high-risk, short-term investments when the trust is intended to benefit the grandchildren in several years.
Similarly, it would not be very prudent for a trustee to spend most of the trust’s funds on an apartment building in the middle of a bad real estate market. The law says that the trustee should make decisions “not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy”. Buying an apartment building would leave little money left to appropriately diversify the trust’s investments.
How Should a Trustee Pick Investments?
There is no one investment strategy that is appropriate for any trust. The trustee must take many factors into account, including the trust language and purpose, the economic situation, the role of each investment in the overall portfolio, and more. He or she can even consider the beneficiaries’ other resources in considering how to invest, as it could affect how soon beneficiaries need or want distributions from the trust.
The task of prudently investing a large trust is above some trustees’ heads because they lack a background in investing. Fortunately, the law allows trustees to delegate some investment decisions to others. Just like for other trust decisions, the trustee must make the choice of investment advisor prudently. The trustee should monitor and limit the investment advisor’s duties as needed. In this way, even an inexperienced trustee can follow the prudent investor laws in California.
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