A trust can enrich and protect families for generations. However, after the death of the original grantor, a trust’s integrity could be compromised by unwise investment decisions. While trustees have a legal obligation to act in the best interests of the trust and its beneficiaries, trustees are only human—sometimes, they make mistakes, which can, under certain circumstances, strip heirs of their inheritances. The Prudent Investor Rule

California’s Prudent Investment Rule

Under California state law, trustees have a legal obligation, or fiduciary duty, to act in their client’s best interests. This fiduciary duty extends to investment decisions.

When a trust possesses investment assets, the trustee must make sensible decisions to ensure that such assets remain solvent and profitable. This obligation is detailed by the Golden State’s Uniform Prudent Investor Act.

Requirements of the Uniform Prudent Investor Act

  • Invest, manage, and allocate trust assets in a reasonable, prudent manner  
  • Consider the purposes, terms, and conditions of the trust when making any investment decisions
  • Exercise a reasonable standard of care when managing and investing trust assets

How the Uniform Prudent Investor Act Affects Individual Trusts

The Uniform Prudent Investor Act defines broad standards of conduct for trustees. However, this legislation also requires that trustees pay particular attention to the purposes and terms of an individual trust. For example:

  • Trustees have an additional legal duty to manage risk and pursue objectives suited to a  specific trust
  • Trustees must diversify investments to ensure that market volatility does not undermine or undercut trust assets
  • Trustees and associated investors cannot incur unreasonable or unwarranted costs

When trustees abrogate their duties under the California Uniform Prudent Investor Act, they expose themselves to significant personal risk—and can, under many circumstances, be held liable for any unreasonable losses.

Philip J. Kavesh
Nationally recognized attorney helping clients with customized estate planning guidance for over 40 years.
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