The Prudent Investor Act (the Act) mandates that a fiduciary, such as a trustee, guardian, executor, or fiduciary to a living trust, handle assets entrusted to them as a prudent investor would regarding investing and managing assets considering the trust. While the trust terms dictate what happens with trust assets, blanket provisions that authorize a trustee to manage or invest the trust require the trustee to act prudently given the trust’s purpose, beneficiaries, distribution terms, and trust circumstances. N.J.S.A. 3B:20-11.1-11.12 (the Act) imposes a standard of reasonable “care, skill, and caution” in administering a trust.
Historically, fiduciaries entrusted to manage and distribute assets to beneficiaries had the duty, first and foremost, to preserve asset principal, meaning making sure the assets did not diminish in value. However, in modern times, a fiduciary must diversify investments to maintain principal against inflation, minimize risk, and maximize investment returns. Thus, a review of a fiduciary’s investments in modern interpretations of the Prudent Investor Act looks at the overall picture to determine whether a fiduciary’s acts are prudent.
The Act specifies that the fiduciary of a trust owes a duty to the beneficiaries to comply with the Act as applied to the trust terms. When the fiduciary follows the trust terms, they cannot be liable to the beneficiaries unless the superior court orders them to deviate from them. So, when a trust expressly provides that the trustee shall not invest in high-risk stocks, the fiduciary may not do so, even when such stocks yield the maximum profits. The second provision under the Act governs the fiduciary’s investment duties. It says that a fiduciary must make financial decisions respecting trust property considering the purpose, terms, distribution provisions, and circumstances of the trust, beneficiaries, and grantors. In addition, the fiduciary should base financial decisions on the overall trust purpose and strategize any investment schemes appropriate to the trust. An investment is prudent when considering the economy, inflation, tax ramifications, trust purpose, investment returns, capital appreciation, beneficiary resources, income requirements, and any ties an asset has to a beneficiary, such as real estate. The fiduciary must be reasonably informed about investments and trust assets, verifying the facts or information they rely on to invest, such as statistics, a Securities and Exchange prospectus, or financial rating. They must also use any special skills to do their job as fiduciaries. However, the beneficiary’s or beneficiaries’ interests shall govern all decisions, considering the separate interests of all beneficiaries.
As part of their management duties, a fiduciary must diversify investments when doing so is in alignment with the trust’s purposes and control the costs of managing or delegating responsibilities to others, even deducting expenses from their allowable fees when necessary. When they delegate investment and management duties, they must reasonably select, manage, and monitor those who will stand in for the fiduciary, including spelling out the scope and terms of their duties and verifying their skills and abilities to do the tasks assigned. So long as the fiduciary manages and monitors the delegates and notifies the beneficiaries of the delegation and the delegate names, the fiduciary is not responsible for the delegates’ decisions.
Finally, the Act requires that within six months of becoming trustee to a living trust, the fiduciary is responsible to review the trust assets and determine which assets should stay in the trust, which should be invested, and which should be discarded relative to the trust terms and the reasonable, prudent investor standard. Exercising the requisite skill and caution, the trustee must consider making the trust assets profitable for the beneficiary or beneficiaries.
To invest wisely, the fiduciary must consider the grantor’s or grantors’ intent, the beneficiaries’ age, the family (nuclear, blended, divorced, etc.), the economy, the assets, and tax consequences. So, a trust that contains a variety of assets, such as real estate holding, bonds, stocks, businesses, and other assets, requires a different approach than a trust with an investment in real property or a residence only. Likewise, minor beneficiaries require different considerations for long-term investment income than older adult beneficiaries with financial holdings, income, and careers. A fiduciary must invest to make more money for minors than those who earn money. And it matters less that the investment makes money than the fiduciary makes prudent choices based on the information available and the various factors that influence a prudent investor’s decisions. In addition, a trustee must personally manage assets entrusted to them and not delegate their duties to others unless a prudent investor would do so under the circumstances. So, for example, a trustee with little knowledge about investments and various assets in a trust would be wise to hire professionals to help them, such as an investment broker, financial advisor, accountant, or attorney. A trustee may require the services of several professionals to manage entrusted assets wisely.
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The primary responsibility of the trustee of a revocable trust is to make Article VIII distributions according to the trust’s terms regarding net income distributions, principal distributions, unproductive assets, and Qualified Terminable Interest Property (QTIPS), and terminating a marital trust at the death of a spouse. Revocable trusts with spouses and children often have marital trusts that kick in when one spouse dies. In some trusts, the surviving spouse maintains the trust assets in trust, including the deceased spouse’s portion of the assets. Article VIII requires the fiduciary to follow the wishes of the grantor or grantors, respecting how the trust assets are divided between surviving spouses and then children, grandchildren, or other beneficiaries once the surviving spouse dies. So, a fiduciary satisfies Article VIII duties by diversifying investments on assets that yield income, such as rental real property or liquid assets that support a beneficiary that may be held in interest-producing accounts. They may sell assets to fulfill terms of the trust, such as supporting an heir, but they may have to sell assets that are costs against the estate. Depending on the estate, the puzzle can be complicated regarding what should be retained, lost, invested, or sold. It takes sound financial and investment knowledge and skill.
Our estate planning attorneys at Bronzino Law Firm can help a fiduciary perform their duties or advise them about professionals they should seek to perform tasks the fiduciary is underqualified to perform. Having experience creating and administering estate documents, our lawyers can ensure that the fiduciary follows the trust terms and laws governing fiduciaries, such as the Prudent Investor Act. Most importantly, we can put a fiduciary and the beneficiaries involved at ease, knowing they are performing their duties legally. If you have concerns about estate planning and administration in New Jersey, we can help. Contact (732) 812-3102 or complete the online form. With local offices in Brick and Sea Girt, we serve the entire Ocean and Monmouth areas in towns such as Lavallette, Toms River, Holmdel, Sea Bright, Manchester, Neptune, Lakewood, and neighboring towns.
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