One of the key aspects of setting up a California trust for the sake of your beneficiaries is to select a trustee. The trustee will be in charge of managing the property that the “settlor” (in other words, the creator of the trust) places in the trust for the benefit of the beneficiaries. Aside from avoiding any wrongdoing with respect to the trust assets (e.g. self-dealing) and taking the steps to properly distribute assets to your beneficiaries per your wishes, one of the trustee’s most significant responsibilities will be to properly manage the trust assets through prudent investment choices.

The Prudent Investor Rule in California

The law regarding the management of trust assets by a trustee is primarily sourced in state law. In recent decades, most states – including California – have adopted some version of the “Uniform Prudent Investor Act” also referred to generally as the “Prudent Investor Rule.” At its heart, the Prudent Investor Rule requires trustees to incorporate diversification into investment strategies and encourage overall portfolio growth while downplaying the importance of individual stock selections or the need to obtain specific rates or levels of return.

The general thinking behind the Prudent Investor Rule is to prevent trustees, especially inexperienced, unsophisticated, or reckless trustees from depleting trust assets through foolhardy and/or unnecessarily risky investment choices.

How the Prudent Investor Rule Plays Out in California

It should be noted that the settlor of a trust has the right to provide any type of investment instructions or guidelines to a trustee which might expand or restrict the confines of the Prudent Investor Rule so long as those are included in the express terms of the trust instrument.

California law requires that a trustee “shall exercise reasonable care, skill, and caution” in invest and manage trust assets “by considering the purposes, terms, distribution requirements, and other circumstances of the trust.” The law does not dictate any specific type of investment strategy that must be followed in doing so and indeed says that a trustee may invest in any kind of property and incorporate any kind of investment strategy so long as the trustee’s investment choices properly consider issues such as:

  • General economic conditions
  • The possible effect of inflation or deflation
  • The expected tax consequences of investment decisions or strategies
  • The role that each investment or course of action plays within the overall trust portfolio
  • The expected total return from income and the appreciation of capital
  • Other resources of the beneficiaries known to the trustee as determined from information provided by the beneficiaries
  • Needs for liquidity, regularity of income, and preservation or appreciation of capital
  • An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries

Again, however, California does place a specific requirement that a trustee diversify the investments of the trust unless it is not prudent to do so under the circumstances. Furthermore, it is certainly the case that even the most prudent investment choices can go south due to unexpected market conditions, and so a trustee’s choices will be evaluated based on the information available at the time the investment was made and not based on how the investment did in hindsight.

A trustee must comply with the requirements of the Prudent Investor Rule within a reasonable time of receiving the trust assets or accepting the trusteeship or delegate investment authority in a prudent manner.

Create a California Trust With an Experienced Estate Planning Attorney Today

The Ledbetter Law Firm, APC is dedicated to individuals and families plan for their futures through all aspects of estate planning. Contact The Ledbetter Law Firm, APC to see how you can begin creating or updating an estate plan that incorporates the needs and goals of you and your loved ones.