Over the last several weeks, financial markets have seen some of the largest swings in history, and as a result, fiduciaries have seen dramatic shifts in the value of trust investments.  Accordingly, fiduciaries should take a moment to revisit the Prudent Investor Rule as they look to manage risk and beneficiaries’ concerns. 

The Prudent Investor Rule 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 shall exercise reasonable care, skill, and caution.”  Colo. Rev. Stat. § 15-1.1-102.  The Prudent Investor Rule incorporates elements of Modern Portfolio Theory by requiring diversification of trust investments (absent special circumstances) and further emphasizing that “[a] trustee’s investment and management decisions respecting individual assets 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.”  Colo. Rev. Stat. § 15-1.1-102 & 103.

When investing and managing trust assets, the trustee shall consider the following circumstances and factors:

1. General economic conditions;
2. The possible effect of inflation or deflation;
3. The expected tax consequences of investment decisions or strategies;
4. The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;
5. The expected total return from income and the appreciation of capital;
6. Other resources of the beneficiaries;
7. Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
8. An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Colo. Rev. Stat. § 15-1.1-102.  The Prudent Investor Rule should guide all trustees’ investment decisions unless the trust expressly states otherwise. 

At this point in time, it is more important than ever that trustees act with reasoned and structured investment decisions.  As part of that process, trustees should contact beneficiaries and have conversations about any changes in the beneficiaries’ needs from the trust.  Prior investment decisions should have hopefully taken into consideration the possibility of a recession and can appropriately weather the future.  However, adjustments to investments may still be necessary at this time.  If so, a trustee is well-served to document and explain any investment decisions that it makes based upon the factors outlined above and the exercise of the trustee’s reasonable care and skill.  However, trustees cannot panic – the consequences could prove to be costly not only for the beneficiaries but also the trustees.