A trustee must follow the prudent investor rule in managing the assets of a trust. Keep in mind: this is a process-based standard—not a performance-based one.
Investing Trust Assets
Volatile markets present unique challenges to trustees—those responsible for investing and managing the assets of trusts on behalf of beneficiaries. Although there are exceptions in some jurisdictions, generally, trustees must follow the standards of the prudent investor rule in carrying out their duties.
Essentially, the prudent investment rule dictates that a fiduciary, such as a trustee, should invest trust assets as if they were their own. As Investopedia explains:
Consider the needs of the trust’s beneficiaries — such as a family or employees that do not have a background in investing, the provision of regular income, and the preservation of trust assets — and should avoid investments that are excessively risky. The prudent investor rule states that the decision-making process must follow certain guidelines.
Although beneficiaries may complain about the performance of investments in a trust, the trustee must remember that the care exercised—and documented—while making decisions is ultimately most critical in the eyes of the law. Legal experts at McDermott explain:
Compliance with the Prudent Investor Rule is a test of the trustee’s conduct, not the resulting performance of the trust. The rule imposes a specific duty upon the fiduciary to review trust assets and make decisions concerning the retention and disposition of those assets. It requires the trustee to adopt an investment strategy that considers both income and principal enhancement consistent with the duty of impartiality. In addition, it creates a duty to diversify the assets of the trust.
Protecting Beneficiaries: Understanding Trustee Bonds
When a trust is created, the person originating it (the trustor) appoints a trustee to manage it and details how the assets are ultimately to be distributed to beneficiaries. The trust document can require the trustee to obtain a bond Courts can also require trustees to be bonded.
A trustee bond is a type of fiduciary bond that protect the interests of the trust and its beneficiaries in accordance with applicable state law. Essentially, trustee bonds guarantee the faithful performance of the trustee.
As a leading national provider of many types of fiduciary bonds, Colonial Surety Company helps trustees obtain trustee bonds easily and efficiently. Uniquely, Colonial offers direct, digital, trustee bonds. Sometimes these bonds are referred to as administrator, estate, fiduciary or personal representative bonds. Colonial provides all of them.
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Action Items for Trustees
To exercise reasonable care and skill in managing the assets of a trust, experts advise:
- Periodically assess the policies, procedures and guidelines being used by investment managers.
- Maintain and document regular communication with beneficiaries.
- Keep a written record of decision-making rationale.
While these action items are standard aspects of a trustee’s duties, diligence in carrying them out is ever more important when stewarding investments during volatile times.
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Founded in 1930, Colonial Surety Company is a direct seller and writer of surety bonds and insurance products. Colonial is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed, and licensed for business everywhere in the USA.