December 2, 1999 | Read Time: 2 minutes
Investing and Managing Trusts Under the New Prudent Investor Rule
By John Train and Thomas A. Melfe
As America prepares for the multitrillion-dollar transfer of wealth over the next decades, much of it in the form of trusts, many people could find themselves swamped by the rules that govern trust administration and investment, say the authors.
“The office of trustee cannot be learned on the job,” write Mr. Train and Mr. Melfe, both lawyers who specialize in trusts. “Investing has become so complicated that one can no longer be a trustee in name only.”
In 1992, the National Conference of Commissioners of Uniform State Laws published the “Uniform Prudent Investor Rule,” effectively wiping out more than 100 years of court-imposed restrictions on the “Prudent Man Rule.”
The prudent-man model came from an 1830 Massachusetts decision that absolved a trustee who had made unlucky investment decisions. The essence of that 1830 ruling — “Do what you will, the capital is at hazard” — became the beacon for the modern-era trustee.
Mr. Train and Mr. Melfe begin by defining different types of trusts available today. They summarize the tenets of the Prudent Investor Rule: diversify the portfolio, exercise caution when weighing risk versus return, avoid unjustified fees imposed by an investment program, balance current income with growth potential, and be impartial when honoring the requests of the trust’s beneficiaries.
Thirty states and the District of Columbia have enacted laws that can remove a trustee if he or she flouts those principles. Most other states use the rule as a guide in court cases.
The authors explore the idea of “prudence” in sections on managing trusts and investing under the new rule. They cover the types of funds available, investment strategies, and tax treatments. Using charts and graphs, they show how to set up a hypothetical portfolio and monitor its performance.
The authors provide a chapter for lawyers as well, citing sections of the new rule that apply to power of attorney and trustee liability.
Appendixes provide a digest of a typical trust agreement, a glossary of terms, and the “Uniform Application for Investment Adviser Registration” form, which is administered by the White House’s Office of Management and Budget to screen potential trustees.
Publisher: The Harvard Business School Press, Operations Department, Boston 02163; (617) 495-6117 or (888) 500-1016; fax (617) 496-1029; corpcustserv@hbsp.harvard.edu; http://www.hbsp.harvard.edu; 282 pages; $49.95; I.S.B.N. 0-87584-861-3.
