As a San Diego estate planning attorney, I frequently encounter questions regarding the powers and limitations of trustees, and whether a settlor (the person creating the trust) can dictate specific investment strategies, such as favoring bonds over stocks. The short answer is, it’s complicated, and depends heavily on the trust document’s language and applicable state law—specifically, the Uniform Prudent Investor Act (UPIA). While settlors have significant control when *creating* a trust, dictating *how* a trustee invests those assets isn’t always straightforward. A trustee has a fiduciary duty to act in the best interests of the beneficiaries, and that often involves balancing risk and reward, which isn’t always achieved by exclusively investing in lower-yield, but safer, instruments like bonds.
What are the limits of my control over a trust once it’s created?
Many people assume that because they established the trust, they can continue to control investment decisions. However, once assets are transferred into the trust, the trustee generally assumes control, subject to the terms of the trust document. The UPIA, adopted in many states including California, emphasizes that trustees must invest and manage trust assets as a prudent investor would, considering the purposes of the trust, the terms of the trust, and the beneficiaries’ needs. For example, a trust established for a young child might prioritize safety and income, while a trust designed to grow wealth for a future generation might lean towards growth stocks. According to a recent study by Cerulli Associates, approximately 65% of trusts are established with a focus on long-term growth, suggesting a general preference for diversified portfolios, rather than strictly conservative investments.
Could a trustee be held liable for following my instructions?
Yes, absolutely. If a settlor attempts to *force* a trustee to make imprudent investment choices, the trustee could face liability. Imagine a scenario where the trust is intended to provide income for a beneficiary over 20 years, but the settlor insists on 100% bonds, yielding a minimal return. If inflation erodes the value of the trust assets, and the beneficiary suffers a loss of purchasing power, the trustee could be sued for failing to act prudently. According to a report by the American College of Trust and Estate Counsel (ACTEC), cases of trustee liability related to investment decisions have been steadily increasing, underscoring the importance of carefully drafted trust documents and prudent investment strategies.
I remember old Mr. Abernathy, and how things went wrong…
I once worked with a family where the patriarch, Mr. Abernathy, a retired naval officer, insisted his trust document stipulate *only* US Treasury bonds. He was deeply risk-averse, believing bonds were the only “safe” investment. His estate planning attorney, unfortunately, simply wrote his wishes into the trust without explaining the potential consequences. When Mr. Abernathy passed, the trustee followed his instructions. Years later, with inflation steadily climbing, the trust’s assets barely maintained their purchasing power, and his grandchildren couldn’t afford the college education he’d envisioned. His family lamented the loss of potential growth, realizing his rigid instruction had ultimately undermined the trust’s purpose. It was a painful lesson about the importance of balancing safety with growth.
How did we fix things for the Henderson family?
Fortunately, we recently helped the Henderson family avoid a similar fate. Mrs. Henderson, a successful entrepreneur, wanted a conservative approach but also wanted her trust to grow. Instead of dictating specific investments, we drafted a trust document that outlined her general investment philosophy – prioritizing capital preservation but allowing for *reasonable* growth potential. We included language allowing the trustee to allocate a portion of the portfolio to stocks, while ensuring the overall portfolio remained within her risk tolerance. The trustee, a professional investment advisor, created a diversified portfolio with a mix of bonds, stocks, and real estate. This allowed the trust to generate a healthy return while still providing a degree of safety, and her beneficiaries were very grateful. It’s a perfect example of how clear, thoughtful drafting can achieve the settlor’s goals without unduly restricting the trustee’s ability to act prudently.
“The key is to express your preferences without creating an inflexible mandate. A well-drafted trust document allows for both guidance and discretion.”
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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