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California Uniform Prudent Investor Act

A trustee may delegate investment and management functions as prudent

By Chris Micheli, July 23, 2022 7:57 am

California has numerous formals acts in statute. Probate Code Division 9, Part 4, Chapter 1, Article 2.5 provides the Uniform Prudent Investor Act, which is contained in Section 16045 to 16054. Article 2.5 was added in 1995 by Chapter 63. Section 16045 names the act.

Section 16046 requires a trustee who invests and manages trust assets to owe a duty to the beneficiaries of the trust to comply with the prudent investor rule. In addition, the settlor may expand or restrict the prudent investor rule by express provisions in the trust instrument. A trustee is not liable to a beneficiary for the trustee’s good faith reliance on these express provisions.

Section 16047 requires a trustee to invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee must exercise reasonable care, skill, and caution.

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. There are specified circumstances that are appropriate to consider in investing and managing trust assets, to the extent relevant to the trust or its beneficiaries.

In addition, a trustee must make a reasonable effort to ascertain facts relevant to the investment and management of trust assets. A trustee may invest in any kind of property or type of investment or engage in any course of action or investment strategy consistent with the standards of this chapter.

Section 16048 requires that, in making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so. Section 16049 requires a trustee, within a reasonable time after accepting a trusteeship or receiving trust assets, review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this chapter.

Section 16050 provides that, in investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, overall investment strategy, purposes, and other circumstances of the trust. Section 16051 provides that compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.

Section 16052 specifies that a trustee may delegate investment and management functions as prudent under the circumstances. The trustee is required to exercise prudence in specified activities. In performing a delegated function, an agent has a duty to exercise reasonable care to comply with the terms of the delegation.

Section 16053 provides that the following terms or comparable language in the provisions of a trust, unless otherwise limited or modified, authorizes any investment or strategy permitted under this chapter: “investments permissible by law for investment of trust funds,” “legal investments,” “authorized investments,” “using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital,” “prudent man rule,” “prudent trustee rule,” “prudent person rule,” and “prudent investor rule.”

Section 16054 provides that this article applies to trusts existing on and created after its effective date. As applied to trusts existing on its effective date, this article governs only decisions or actions occurring after that date.

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