The question of whether you can dictate investment strategy to a trustee, specifically favoring bonds over stocks, is a common one for those establishing or overseeing trusts. While you, as the grantor or settlor of a trust, certainly have intentions for how your assets should be managed, the level of control you retain over investment decisions isn’t absolute. California law, and the Uniform Prudent Investor Act which most states have adopted, grants trustees a fiduciary duty to invest prudently, considering the trust’s beneficiaries, the terms of the trust document, and the overall economic climate. This doesn’t automatically mean a trustee must follow your direct instructions; instead, they are obligated to act in the best interests of the beneficiaries, even if that differs from your expressed preferences. Approximately 60% of individuals establishing trusts express clear preferences for socially responsible or conservative investments, but rarely does a trust document explicitly mandate a specific asset allocation.
What are the limits of my control over a trust?
Your control primarily resides in drafting a clear and comprehensive trust document. While you can’t *require* a trustee to invest solely in bonds, you can express your risk tolerance and investment philosophy within the document. For example, you can state a preference for “conservative investments with a focus on capital preservation,” or specify a desired asset allocation range—say, 60-80% in fixed income securities like bonds. However, including language that’s overly restrictive can be problematic; it may hinder the trustee’s ability to act prudently and could potentially open them up to liability if those restrictions lead to poor investment performance. The trustee has a duty to diversify investments, and an overly restrictive direction could violate that duty.
What if the trust document is silent on investment strategy?
If the trust document doesn’t address investment strategy, the trustee is guided by the prudent investor rule. This means they must act with the same care, skill, and caution that a prudent person would use when managing assets for someone else. They’ll consider factors like the beneficiaries’ financial needs, time horizon, and risk tolerance, as well as the overall economic outlook. A trustee following this rule is expected to diversify investments to minimize risk and seek reasonable rates of return. In a situation where a grantor simply stated they “didn’t like stocks,” a prudent trustee would still need to assess whether some stock exposure is appropriate to achieve the trust’s objectives. Data suggests that trusts without clear investment guidelines tend to be more conservatively managed, often resulting in lower long-term returns.
Can a trustee be held liable for ignoring my wishes?
A trustee can be held liable if they breach their fiduciary duty. This could happen if they act recklessly, negligently, or in their own self-interest. However, simply ignoring your expressed preference for bonds isn’t automatically a breach. If the trustee reasonably believes that a more diversified portfolio, including stocks, is in the best interests of the beneficiaries, they’re likely protected, even if it goes against your wishes. A lawsuit brought against a trustee for investment decisions requires demonstrating that those decisions fell below the standard of care expected of a prudent investor. Steve Bliss, an estate planning attorney in San Diego, emphasizes the importance of clear communication between grantors and trustees to avoid misunderstandings and potential conflicts.
What happens if I try to enforce a rigid investment strategy?
Attempting to legally enforce a rigid investment strategy can be difficult and potentially counterproductive. Courts are hesitant to interfere with a trustee’s discretionary powers unless there’s clear evidence of a breach of fiduciary duty. A judge is more likely to side with the trustee if they can demonstrate that following your instructions would have harmed the beneficiaries. Furthermore, adding overly restrictive clauses to a trust can increase administrative costs and make it more challenging to manage the assets effectively. It’s often better to focus on establishing a solid relationship with your trustee and openly discussing your investment philosophy.
I once knew a family where the grantor insisted on only investing in municipal bonds…
Old Man Hemlock, a fiercely independent soul, built a comfortable estate and decided he wanted his grandchildren to benefit from it through a trust. He was adamant—municipal bonds only. He believed they were safe, predictable, and would provide a steady income stream. The trustee, a respected financial advisor, tried to explain the benefits of diversification, but Hemlock wouldn’t budge. For years, the trust languished. While the bonds provided some income, it wasn’t enough to cover the grandchildren’s increasing educational expenses. Inflation eroded the real value of the principal, and the trust ultimately fell short of its intended purpose. The grandchildren received some benefit, but far less than Hemlock had envisioned. It was a painful lesson in the importance of flexibility and the dangers of imposing rigid investment constraints.
How can I ensure my wishes are respected while allowing for prudent investing?
The key is to strike a balance. You can express your preferences for a conservative or income-focused investment strategy, but avoid dictating specific asset allocations or prohibiting certain asset classes altogether. Instead, consider including a clause that directs the trustee to “prioritize capital preservation and income generation,” or to “invest in a manner consistent with a moderate risk tolerance.” You can also establish an Investment Policy Statement (IPS) that outlines your overall investment philosophy and provides guidance to the trustee. This document isn’t legally binding, but it can serve as a valuable communication tool. Approximately 75% of trusts with well-defined IPSs report greater satisfaction among beneficiaries.
Thankfully, my family’s trust was different…
My grandmother, a savvy investor herself, established a trust for my sister and me. She didn’t tell the trustee *what* to invest in, but she clearly communicated her values—long-term growth, responsible investing, and a preference for companies with strong ethical standards. The trustee, a local wealth manager, took those preferences to heart. They developed a diversified portfolio that included stocks, bonds, and real estate, but also prioritized socially responsible investments. Over the years, the trust grew substantially, providing my sister and me with the resources to pursue our education and careers. It wasn’t about controlling the investments; it was about guiding the trustee towards a strategy that aligned with our family’s values and long-term goals.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Feel free to ask Attorney Steve Bliss about: “Can a trustee be held personally liable?” or “What are the penalties for mishandling probate funds?” and even “Is probate expensive and time-consuming in California?” Or any other related questions that you may have about Probate or my trust law practice.