In 1995, California enacted its own version of the Uniform Prudent Investor Act (UPIA) (Probate Code §§16002(a), 16003, 16045-16054), and has caused estate planning attorneys to give increased attention to the obligations of trustees investing in publicly traded securities. The statute, applicable to investment decisions and actions taken after January 1, 1996, even for preexisting trusts, is based on the Restatement (Third) of Trusts (Prudent Investor Rule) §227 (1992).

The cornerstone of UPIA is its prudent investor rule, which states:

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(a).

The statute then prescribes more specific duties, including:

• A duty to select risk and return objectives reasonably suited to the particular trust (Probate Code § 16047(b).)
• A duty to diversify (Probate Code § 16048).
• A duty to evaluate investments in the context of the portfolio as a whole (Probate Code §16047(b).)
• A duty to avoid unreasonable or inappropriate costs (Probate Code §16050).
• A duty to consider tax consequences (Probate Code §16047(c)(3).)
  

Whether a trustee satisfies the requirements of the statute is determined in light of the facts and circumstances existing when a trustee made his or her investment decisions. Probate Code § 16051. These decisions are specifically protected from being judged in hindsight, even if trust investment returns prove to be inferior. (“Inferior” usually means underperforming some market benchmark such as the Standard and Poor’s 500 Index (S&P 500).)  If a trustee lacks the knowledge or experience to carry out his or her duties, prudent investing may require the trustee to delegate investment decisions to (or at least receive advice from) an investment expert. Probate Code § 16052(a); see Introduction to Restatement §227. Assuming delegation is done prudently with respect to costs, the selection of the expert, the terms of the delegation, and periodic review, the trustee will not be liable for the expert’s actions. Probate Code § 16052(c). See also Probate Code §16401.

If you have questions about the Prudent Investor Rule, please feel free to give us a call at 1-800-306-6010 or contact us online.