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Understanding the prudent investor rule

On Behalf of | Nov 3, 2017 | Estate Planning And Administration

Greensburg residents spend much of their lifetimes accumulating assets for the benefit of their beneficiaries. Placing such assets into a trust can generate income for said beneficiaries on top of already established trust assets. One of the main ways to build such income is through investments. While this can pay off in a big way, it opens the door for uncertainty based off a trustee’s investment acumen.

Those who are party to trusts may find it difficult to accept that the health of their interests lies in the hands of a trustee. The state understands such concerns and holds trustees accountable for their investment decisions. Section 7203 of Pennsylvania’s statutes shows that all trustees are to follow the state’s prudent investor rule. Simply put, this places an obligation on a trustee to manage and invest trust assets with the same care a prudent investor would. It also stipulates that all investments must be made with the goal of accomplishing the purposes of the trust.

When evaluating investment opportunities, a trustee is required to consider factors such as:

  • The size of a trust
  • The nature of his or her role in executing a trust
  • A trust’s distribution and liquidity requirements
  • The distribution and tax consequences of investment decisions
  • The role of investments in achieving a trust’s purposes
  • The inherent or intrinsic value of certain trust assets

Are trustee should also consider the needs of trust’s beneficiaries when making investments.

Often, a settlor’s family or friends will not have the investment know-how to understand how to generate income through investments. This is why the American Bar Association recommends naming a third party (such as a bank or investment firm) as a trustee (or co-trustee) if a trust is to rely on investments to create income for beneficiaries.