As an estate planning attorney in San Diego, I frequently encounter clients concerned about balancing control and delegation when establishing trusts. The question of limiting a trustee’s access to investment decisions is a common, and critically important one, requiring careful consideration of the trust’s terms and the grantor’s intentions. While a trustee generally has a fiduciary duty to invest prudently, grantors *can* and often *should* define the scope of those investment powers within the trust document itself. This allows for a customized approach, ensuring alignment with the beneficiary’s needs and the grantor’s risk tolerance, while also potentially mitigating potential mismanagement or conflicts of interest.
What investment powers should I grant my trustee?
Defining investment powers isn’t an all-or-nothing proposition. You can grant broad discretionary powers allowing the trustee to invest in virtually any asset class, or you can meticulously specify permissible investments – like stocks, bonds, mutual funds, and real estate – and prohibit others. According to a recent study by Cerulli Associates, approximately 65% of high-net-worth individuals express concerns about trustee investment discretion, highlighting a strong desire for some level of control. Consider specifying limits on concentrated positions (e.g., no more than 10% in a single stock) or requiring consultation with a financial advisor for investments exceeding a certain dollar amount. Grantors can also outline specific investment philosophies or restrictions – such as socially responsible investing or avoiding certain industries.
What happens if I don’t specify investment powers?
If the trust document remains silent on investment powers, the trustee will default to the “prudent investor rule,” as outlined in the Uniform Prudent Investor Act (UPIA), adopted by most states, including California. While seemingly straightforward, the UPIA can be open to interpretation, potentially leading to disputes. The UPIA emphasizes a total return approach, considering risk and return objectives, but leaves significant discretion to the trustee. This can create ambiguity and make it difficult for beneficiaries to challenge investment decisions. It’s important to remember that over 70% of trust disputes involve investment decisions, underscoring the importance of clear and specific instructions.
I once represented a client, Eleanor, who established a trust for her young grandchildren.
She appointed her brother, David, as trustee, assuming their shared family values would guide his investment decisions. Unfortunately, David, a novice investor, succumbed to a “hot stock” tip and invested a substantial portion of the trust funds in a highly speculative venture. The investment quickly plummeted, causing significant losses and creating a rift within the family. Had Eleanor included specific investment guidelines – like prohibiting speculative investments or requiring professional financial advice – this situation could have been avoided. It was a painful lesson in the importance of proactively defining investment powers within the trust document.
How can I regain control if my trustee is making poor investment choices?
Even with carefully crafted investment powers, issues can arise. If a trustee breaches their fiduciary duty – by making imprudent investments or prioritizing their own interests – beneficiaries have legal recourse. This might involve petitioning the court for an accounting, seeking the removal of the trustee, or pursuing damages for losses incurred. However, litigation is costly and time-consuming. Thankfully, another client, Robert, found himself in a similar situation. He had granted his sister, Susan, broad investment powers, but she began making increasingly risky decisions. Robert, anticipating this potential outcome, had included a clause in the trust allowing for a co-trustee – a professional financial advisor – to provide oversight and veto power over investment decisions. This co-trustee was able to intervene, preventing significant losses and preserving the trust’s assets. This preemptive measure proved invaluable, demonstrating the power of proactive planning and the importance of incorporating safeguards within the trust document to ensure alignment with the grantor’s intentions and protect the beneficiaries’ financial future.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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