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Review of the prudent investor rule

This blog has previously discussed a trustee’s duty to the beneficiaries of a trust. Among other things, a trustee must refrain from self-dealing or conflicts of interest, must manage the trust according to the legal requirements and must act in the best interests of the trust.

In general, a trustee subject to Texas law can fulfill these obligations by being careful and remembering that the needs of the trust must come first. However, trustees are required by law to have some knowledge and skill regarding investments. Like other states, Texas requires trustees to follow the prudent investor rule.

While this rule can be complicated to apply, the general idea is that a trustee must invest the assets of the trust in a way that is reasonably calculated to earn an appropriate return on the investment. The rule does not require a trustee to be a financial expert, but it does compel a trustee to consider certain common questions that a reasonable investor would think about before actually investing.

Moreover, a trustee also has an obligation to diversify the trust portfolio appropriately. For instance, a trustee who puts $1 million in several common savings accounts would be at risk of running afoul of the prudent investor rule, even though their actions are unlikely to cause the trust to lose money.

Those who create trusts have discretion to modify or even waive the prudent investor rule by clearly stating so in their trust documents. Trustees and others who have questions about the prudent investor rule should speak with an experienced attorney.

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