In May of 2004, the Uniform Prudent Investor Act (UPIA) was adopted in 44 states and the District of Columbia. The UPIA reflects a modern portfolio theory and a total return approach to the exercise of fiduciary investment discretion. This approach was designed to allow fiduciaries to utilize the modern portfolio theory in order to guide their investment decisions and thereby requires the risk versus return analysis. This means that the fiduciary's performance is not measured by individual investments, but instead on the entire portfolio.
The 1995 enactment of the California version of the UPIA (Prob C §§16002(a), 16003, 16045-16054) has caused California trust litigation attorneys to give increased attention to the obligations of trustees responsible for investing in publicly traded securities. The statute applies to investment decisions and actions taken after January 1, 1996, and also applies to preexisting trusts. In light of the UPIA, many trustees tend to favor index mutual funds when selecting investments for long-term trusts. History has shown that the case for such investments is strong and trustees who instead choose "active" investment strategies may find it difficult to justify their choices.
Requirements of a Prudent Investor
We must point out that the cornerstone of the UPIA is the prudent investor rule, which states that a trustee shall invest and manage trust assets as a prudent investor would. In satisfying this standard, the trustee must exercise reasonable care, skill and caution when making investment decisions.
The trustee's duties include:
- Duty to diversify
- Duty to evaluate investments as a portfolio and as a whole
- Duty to avoid unreasonable or inappropriate costs
- Duty to consider tax consequences
If the trustee lacks the knowledge or experience necessary to execute his or her duties, then prudent investing may require that the trustee delegate their investment decisions to an investment expert.
One of the Biggest Mistakes a Trustee Can Make
One of the biggest mistakes that a trustee can make is not diversifying the trust's investments. Trustees have to remember that just because they handle their own personal portfolio in a certain manner; it doesn't mean that the same method will work well for the trust. Trustees have the legal obligation to diversify investments under the UPIA. Unfortunately, improper investments or poor investment management commonly leads to litigation against trustees. If you're a trustee and you aren't sufficiently diversified, it's time to tell the investment manager to get working.
On the other hand, if you are a beneficiary or a trustee who is facing litigation because of the investment strategies employed, we urge you to contact a Los Angeles trust litigation lawyer from the Law Offices of David A. Shapiro, P.C. for trusted legal guidance into the matter.
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