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Trusts • Trustee Powers & Duties
TRUSTS#034
Legal Definition
A trustee must manage investments as a prudent investor would, and thus must exercise reasonable care, skill, and caution. Care relates to the trustee's diligence and efforts, skill to his capabilities and caution to conservatism in managing the trust. The duty of care includes the duty to investigate (i.e., to make a reasonable effort to research and verify information likely to affect the value of investment assets).
Plain English Explanation
The law expects a trustee to be as careful with the trust's property as they would be with their own property. This means taking the time to research decisions before making them, knowing their limitations, and knowing when to seek outside assistance or advice.
Hypothetical
Hypo 1: Bob is trustee for Sam's $1M inheritance. Bob invests the money into his friend's new company without researching it. The company goes bankrupt. Result: Bob breached his duty of care by failing to skillfully and cautiously investigate the investment.
Hypo 2: Bob is trustee of Sam's trust. Bob is a sophisticated investor. He uses advanced techniques to choose risky startup stocks for Sam's trust. The stocks lose 50% of their value. Result: Bob met the standard of care expected of his investing skill level. Just because the investment lost money doesn't mean Bob breached his duty.
Hypo 3: Bob is trustee of Sam's modest $50K trust. Bob puts 30% in risky derivatives, violating prudent investing rules for that trust size. He loses money. Result: Bob breached his duty of care through overly speculative investing beyond Sam's risk appetite.
Hypo 4: Bob invests Sam's trust after thorough research. The company CEO is later convicted of fraud that Bob couldn't have known about. Result: Bob upheld his duty of care through prudent research efforts, even though the investment soured.
Hypo 5: Bob fully divests Sam's gun company stocks simply because he personally dislikes guns, losing money. Result: Duty of care focuses on financial prudence, not personal beliefs. Sam can argue breach.
Hypo 2: Bob is trustee of Sam's trust. Bob is a sophisticated investor. He uses advanced techniques to choose risky startup stocks for Sam's trust. The stocks lose 50% of their value. Result: Bob met the standard of care expected of his investing skill level. Just because the investment lost money doesn't mean Bob breached his duty.
Hypo 3: Bob is trustee of Sam's modest $50K trust. Bob puts 30% in risky derivatives, violating prudent investing rules for that trust size. He loses money. Result: Bob breached his duty of care through overly speculative investing beyond Sam's risk appetite.
Hypo 4: Bob invests Sam's trust after thorough research. The company CEO is later convicted of fraud that Bob couldn't have known about. Result: Bob upheld his duty of care through prudent research efforts, even though the investment soured.
Hypo 5: Bob fully divests Sam's gun company stocks simply because he personally dislikes guns, losing money. Result: Duty of care focuses on financial prudence, not personal beliefs. Sam can argue breach.
Visual Aids
Related Concepts
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What is the Uniform Prudent Investor Act?
