Home > Uncategorized > >Reasons for a Trustee to Consider an Investment Advisor (California)

>Reasons for a Trustee to Consider an Investment Advisor (California)

>Although a trustee is not required to retain an investment advisor and retaining an investment advisor may or may not be beneficial depending on the trust and the pertinent factual and investment situation, a trustee might very well find retaining an investment advisor beneficial for the reasons discussed below.

A trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule. However, the language of the trust may expand or restrict the prudent investor rule by express provisions in the trust instrument.

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. A trustee’s investment and management decisions respecting individual assets and courses of action must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

Among circumstances that are appropriate to consider in investing and managing trust assets are the following, to the extent relevant to the trust or its beneficiaries:

(1) General economic conditions.

(2) The possible effect of inflation or deflation.

(3) The expected tax consequences of investment decisions or strategies.

(4) The role that each investment or course of action plays within the overall trust portfolio.

(5) The expected total return from income and the appreciation of capital.

(6) Other resources of the beneficiaries known to the trustee as determined from information provided by the beneficiaries.

(7) Needs for liquidity, regularity of income, and preservation or appreciation of capital.

(8) An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

A trustee shall make a reasonable effort to ascertain facts relevant to the investment and management of trust assets.

In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.

Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this chapter.

In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, overall investment strategy, purposes, and other circumstances of the trust.

However, and with the above rules in mind, a trustee may delegate investment and management functions as prudent under the circumstances. The trustee must exercise prudence in (1) selecting the agent, (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust, and (3) periodically reviewing the agent’s overall performance and compliance with the terms of the delegation.

In performing the delegated function, the agent has a duty to exercise reasonable care to comply with the terms of the delegation.

Importantly, except as indicated in the circumstances listed below, a trustee who complies with the requirements that he or she prudently select and oversee the investment advisor agent should not be liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated. Note, that the trustee still remains liable for an act or omission of the investment advisor agent where the trustee (1) directs the act of the agent, (2) delegates to the agent an act that the trustee is under a duty not to delegate, (3) does not use prudence in the selection or retention of the agent, (4) does not review the agent’s overall performance and compliance with the terms of the delegation, (5) conceals the act of the agent, or (6) neglects to take steps to compel the agent to redress a wrong where the trustee knows of the agent’s acts or omissions.

Nevertheless, the retention of a qualified trust investment advisor can help to transfer risk/liability for investment decisions if done properly. Of course the trustee must prudently select the advisor and continue to oversee the investment advisor and investment situation.

Dave Tate, Esq. (San Francisco and Beyond)

Categories: Uncategorized
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