The following post is updated from a prior post – this topic is always relevant, including in today’s environment.
A trustee needs a portfolio investment strategy in keeping with the terms of the trust and legal requirements.
In pertinent part California Probate Code section 16047(b) provides:
“A trustee’s investment and management decisions respecting individual assets and courses of action must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”
In discussing circumstances that are appropriate to consider in investing and managing trust liabilities section 16047(c)(4) also lists the role that each investment or course of action plays within the overall trust portfolio.
You should read section 16047 in its entirety, in addition to the terms of the trust and other applicable statutory and case law; however, the point is that a trustee needs to have a portfolio investment strategy.
And there is another very important reason to have a portfolio investment strategy. Investments will naturally increase and decrease in value over time, and even daily. Although facts and circumstances in each different situation will vary, assuming that there is a portfolio investment strategy and that the portfolio investment strategy and other relevant facts are appropriate for the trust and the beneficiaries, as a general rule gains and losses of different investments within that portfolio investment strategy should be netted such that the trustee gets the benefit of both gains and losses if there is an assertion or claim that the trustee breached his or her management and investment fiduciary duties. Whereas, if there is no overall portfolio investment strategy, there is more of a likelihood that the gains and losses will not be netted, and that a trustee might be chargeable with a loss in a particular investment without the benefit of gains in other investments.
And this also reinforces the need for trustees to regularly review the portfolio investment strategy and the individual investments to make sure that the investments and allocation of investments are appropriate – although gains and losses should be netted as part of an overall portfolio investment strategy, if a particular investment becomes unsuitable or unsuitable to that overall investment strategy and if time continues to pass without a reevaluation of that investment by the trustee, not immediately, but over time, and argument might arise that it might no longer be appropriate to consider that individual investment and losses or gains in that investment as part of the overall portfolio investment strategy. In that circumstance the trustee could find that a court might treat that investment as a standalone investment and also treat gains and losses in that investment in the same manner without the benefit of netting with other investments. Obviously although that situation for the trustee might turn out okay if there is a gain in that investment, it does create greater investment loss risk for the trustee. Additionally, whereas the investment might initially gain in value, is also possible that an argument might arise that a subsequent loss in that individual investment might not be netted with the prior gains in that investment.
The facts and circumstances in each situation will vary, and each situation must be evaluated based on the facts and circumstances of that trust and that situation. Additionally, different judges will have differing approaches to trustee investment duties and responsibilities. Nevertheless, having a portfolio investment strategy approach, and timely reviewing that strategy, the investments made, and the investment allocation within the context of the trust, the beneficiaries, statutory and case law, and the investment and economic environment will help manage and reduce trustee investment liability risk.
Dave Tate, Esq. (San Francisco / California)