The Prudent Investor Rule
Nearly every state has adopted some version of the Uniform Prudent Investor Act (UPIA). The rule replaces the old habit of judging each investment in isolation with a modern, portfolio-wide standard: investments are evaluated as part of an overall strategy that fits the trust's purposes, risk tolerance, and time horizon.
Under UPIA, no asset class is automatically off-limits — even speculative investments can be appropriate as part of a balanced portfolio. What matters is the overall mix, the reasoning behind it, and whether it suits the trust's needs.
Key takeaway
Build an investment policy statement (IPS) early. A short document that names the trust's goals, time horizon, risk tolerance, target allocation, and review schedule is the single best protection against second-guessing later.
Diversification is mandatory unless excused
UPIA requires the trustee to diversify the trust's investments unless special circumstances make non-diversification clearly better for the beneficiaries. Common excused situations include closely-held family businesses, concentrated low-basis stock with major tax consequences, or specific instructions in the trust to retain a particular asset.
When holding a concentrated position is necessary or directed, document the reason in writing, monitor the position continuously, and review the rationale at least annually. A concentrated position that no one has revisited in five years is a lawsuit waiting to happen.
Knowledge check
A trust holds 80% of its value in a single tech stock the grantor founded. The trust document is silent on retention. What should the trustee do?
Delegation: when to hire help
UPIA explicitly allows trustees to delegate investment management to professionals when it is prudent to do so. Most non-professional trustees should delegate — investing trust assets is technical work, and 'I'll just buy index funds' is not a strategy a court will defend on its own.
Delegation does not eliminate trustee duties. The trustee must use care in selecting the manager, set clear terms in writing, and review the manager's performance and fees periodically. Hiring a manager and never looking again is itself a breach.
Recordkeeping that will survive a challenge
Records are the trustee's evidence. Keep account statements, transaction confirmations, invoices for trust expenses, written communications with beneficiaries, and notes on every significant decision. Digital is fine — many trustees use a single cloud folder organized by year.
- Monthly statements from every account.
- An asset inventory updated at least annually with valuations.
- Receipts for every expense paid from the trust.
- Dated notes on investment decisions, distributions denied or approved, and beneficiary communications.
- Copies of every accounting sent to beneficiaries with proof of delivery.