What do you do if you are appointed trustee of a trust?

The Prudent Investor Act and how it applies to you

A trust may be used in estate planning for many different reasons.   A trust may manage funds for small children whose parents have passed away. Trusts may also be used to manage money for a spouse, who has lost their husband or wife. A trust may also be used to provide funds for individuals with special needs, while preserving their access to governmental benefits.

Regardless of the purpose of the trust, the appointed trustee must invest the trust funds pursuant to the Prudent Investor Act, which is found in section 11-2.3 of the New York State Estates Powers and Trusts Law.

Individuals planning their estates will often choose a valued family member or friend to serve as a trustee of a trust for the benefit of their spouse or child. They may also choose a bank or other financial institution. While banks and financial institutions have policies and procedures in place to ensure compliance with the Prudent Investor Act, individuals are often not familiar with its requirements.

The Prudent Investor Act generally requires the trustee to “invest and manage property . . . in accordance with the prudent investor standard.” Some of the factors that the trustee must consider when complying with the prudent investor standard include:

• Pursuing an investment strategy for the portfolio which will allow the trustee to make appropriate distributions to the beneficiary given the risk and return goals of the trust.

• Considering the impact of a variety of outside economic factors on the trust, such as inflation, tax consequences, and the general economic environment.

• Determining if diversification of the portfolio is in the best interests of the beneficiaries.

Unless you are a financial professional yourself, most trustees will seek out the services of an investment advisor to ensure they are properly investing the trust funds and complying with the prudent investor standard. Although the Prudent Investor Act allows such delegation of the trustee’s investment responsibilities, that does not mean the trustee is thereafter free of any potential liability.

The Prudent Investor Act requires the trustee to select a suitable investment advisor. The scope and terms of the advisor’s responsibilities must be consistent with the trust. The trustee must also periodically review the advisor’s performance, as well as reasonably control the advisor’s costs.

Before you take on the responsibility as a trustee for a family member or friend, be sure you understand your obligations under the Prudent Investor Act. If you fail to meet those obligations, you may be liable to the beneficiaries for violating your fiduciary duty. If you would like more information on strategies to meet those obligations, please contact the experienced estate planning attorneys at O’Connell and Aronowitz.