Some people are afraid of serving as a trustee to a trust because they fear that they may not always make the “best” decisions. Well, have no fear – the law does not require a trustee to always make the “best” decision. Trustees are only required to make a decision that is reasonable at the time it was made. Remember, it is often said that “hindsight is 20/20”. Unfortunately, beneficiaries of a trust, who often have the benefit of hindsight, sometimes try to evaluate the performance of a trustee by arguing that there were other options that, if selected, would have resulted in a better outcome for the trust (i.e., some beneficiaries expect the trustee to always make the “best” decision). Such arguments by beneficiaries, however, should not prevail.
Generally speaking, and above all else, a trustee must act in the best interests of the trust’s beneficiaries. New York’s Estates, Powers, and Trust Law Sections 11-2.3 (a) and (b) state that a trustee must exercise reasonable care, skill, and caution when making investment and management decisions. This is otherwise known as the “Prudent Investor Rule”. The test for judging a trustee’s conduct is their prudence, not the outcome of their performance.
In determining whether a trustee has complied with the Prudent Investor Rule when investing trust assets, one must view the trustee’s conduct at the time the decision was made. “Whether the trustee is prudent in the doing of an act depends upon the circumstances as they reasonably appear to him at the time when he does the act, and not at some subsequent time when his conduct is called in question.”
A trustee has a general duty to invest funds and diversify the assets of the trust. The trustee is under a duty to make such investments as an intelligent, prudent person would make with his own property or assets. As such, a trustee must weigh multiple factors in determining whether an investment decision is in the best interest of the trust. How much money is involved in the decision? What are the general economic conditions currently? What type of investment is it compared to other assets owned by the trust? What kind of income will be derived by the investment, if any? Does the asset at issue cost the trust any money to maintain? What are the risks associated with the investment? Has the trustee considered other available options?
There are many different investment options from which a trustee can choose, and there will always be some choices that appear prudent and others that are seemingly less prudent, but still viable. Just because the trustee may have chosen an option that ultimately did not perform as well as another option available to the trustee, does not support a finding that the trustee acted imprudently. “A fiduciary is neither insurer nor guarantor of the value of a trust’s assets.”
Given the above, if you are ever chosen to act as trustee of a trust, never fear a beneficiary’s hindsight when it comes to evaluating investment choices. As trustee, you will not be required to be able to predict the future. Your decisions, as trustee, might not ultimately be deemed to be the “best” decision, which is okay. The Courts are looking to see if you, as trustee, made a reasonable decision at the time it was made.
If you are ever in the position where you have been nominated or appointed as a trustee of a trust or if you are a beneficiary of a trust and questioning whether a trustee has adhered to his or her fiduciary duties, do not hesitate to contact an attorney at Pullano & Farrow.
If you have any questions related to this Legal Briefing, please contact any member of our Firm at 585-730-4773.
This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. ©2021 Law Offices of Pullano & Farrow PLLC