Tips to Avoid Liability in Trust Management

The Uniform Prudent Investor Act requires trust managers to diversify an estate’s instruments. To avoid liability, trustees should avoid trusts with a heavy concentration in one asset. Barron’s provides some tips to conform with the Uniform Prudent Investor Act: 

• When writing a will, a testator should create a directed trust which allows him/her to appoint a third party to direct the trustee’s investments.
• The settlor of the trust should write out his/her thinking about each asset, specifically declaring the need to hold on to a concentrated position. 
• Even with specific retention instructions, trust managers still have a duty to be sure that the position remains prudent. 
• “Collars” can help hedge against a decline in value of assets.
• Create a charitable trust — trust managers still have to sell the holdings that appreciate heavily, but they aren’t subject to a big tax hit in charitable trusts. 

See Lauren Foster, Warning: Too Many Eggs in One Basket, Barron’s, Sept. 19, 2011. 

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.