As an estate planning attorney in San Diego, I often encounter clients concerned about how their assets will be managed after they’re gone, and the question of trustee investment control is a frequent one; it’s a critical consideration when establishing a trust, as it directly impacts the preservation and growth of the trust’s assets.
What are the typical trustee investment powers?
Traditionally, trustees in California have broad investment powers, mirroring those of a prudent investor; however, these powers aren’t absolute and can be significantly restricted within the trust document itself. The Uniform Prudent Investor Act (UPIA), which governs trustee investments in most states (including California), emphasizes a portfolio approach and allows for diversification across various asset classes. A trustee’s duty is to act with reasonable care, skill, and caution – but this doesn’t mean unchecked authority. Roughly 68% of Americans don’t have an updated will or trust, meaning their assets will be distributed according to state law, which offers no such personalized investment controls. Restricting investment decisions to require consensus among co-trustees is a common and effective strategy to ensure collaborative and cautious management of trust assets.
How can I limit a trustee’s investment discretion?
The key is precise language within the trust document. You can specifically state that certain investment decisions – or all investment decisions – require the unanimous consent of all co-trustees. For example, the trust might stipulate: “No investment shall be made, nor any existing investment sold, without the written consent of all trustees.” This creates a clear mandate for collaboration and prevents a single trustee from making potentially risky or inappropriate decisions. Additionally, you could establish an investment committee composed of all trustees, or designated experts, to review and approve investment strategies. It’s important to remember that overly restrictive clauses can also be problematic; it could paralyze the trustee’s ability to react to market changes or seize opportunities. A balance is needed between providing sufficient control and allowing for prudent investment management.
What happened when a client didn’t restrict investment power?
I recall a case involving the Miller family. Old Man Miller, a successful local builder, created a trust naming his two sons, David and Robert, as co-trustees. He assumed they would work together harmoniously, but David, more impulsive, believed he had a “sure thing” in a new tech startup. Despite Robert’s cautious objections, David invested a substantial portion of the trust funds in this venture. Within months, the startup collapsed, and the trust lost nearly 40% of its value. Robert was understandably furious, but legally, David had acted within his broad trustee powers. The family was left with significant legal bills and a fractured relationship, all stemming from a lack of clear restrictions on investment authority. This situation is surprisingly common, demonstrating the importance of proactive planning and clearly defined roles.
How did proactive planning save another family?
Fortunately, I was able to help the Hanson family avoid a similar fate. Mrs. Hanson, a retired teacher, wanted to ensure her grandchildren’s college education was fully funded. She established a trust with her two daughters as co-trustees, but she included a clause requiring unanimous consent for any investment exceeding $25,000 or involving high-risk ventures. Years later, one daughter proposed investing in a speculative real estate project. The other, more conservative, daughter raised concerns, and they sought my advice. We reviewed the trust document, and the unanimous consent requirement was clear. They ultimately decided against the investment, preserving the funds for the grandchildren’s education. Mrs. Hanson’s foresight and proactive planning, combined with clear trust language, prevented a potentially costly mistake and ensured her wishes were honored. It’s a testament to the power of careful estate planning and the importance of limiting trustee discretion when necessary.
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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