Insights: Article

The Importance of the Uniform Prudent Investor Act

What is it, and why does it matter to trustors, trustees, and beneficiaries?

February 12, 2018

In the 1990s, the Uniform Prudent Investor Act (UPIA) established primary legal and financial responsibilities for trustees, based on principles of judiciousness, trustworthiness, and objectivity. Any trustee should be prepared to be held to its standards.1

The roots of the UPIA go back to 1830. In that year, the Massachusetts Supreme Judicial Court handed down a decision in the case of Harvard College v. Amory. That decision inspired what came to be known as the “prudent investor” principle.1

In this case, beneficiaries took trustees to court because of the way they invested. These trustees (the brother and cousin of the late trustor) had directed trust assets into stocks instead of risk-averse investments that might have produced steadier income. The trustor’s will had instructed the trustees to invest this way, so the trustees were not judged disobedient – but the court noted that a trustee should “observe how men of prudence, discretion, and intelligence manage their own affairs,” with an eye toward “the probable safety of the capital” as well as the potential for trust income.1

The “prudent investor” principle urged trustees to manage trust assets as if the assets were their own. It guided trustees to ask themselves a question: given the information and financial knowledge available at the time of an investment decision, is the investment decision a prudent one?2

The UPIA gave legal structure to the prudent investor principle. The UPIA is not a federal law; rather, it is a legal doctrine that was developed in 1994 by the National Conference of Commissioners on Uniform State Laws. Forty-three states and the District of Columbia have so far enacted the UPIA, sometimes with modifications.1,3

A trustee “shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust,” the UPIA states. “In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”1

The UPIA weds the “prudent investor” principle to Modern Portfolio Theory. What does that mean? It means that the standard of prudence now applies to the entirety of a trust’s assets. Investment risks and investment decisions need to be seen in the context of their impact on the whole portfolio.1,4 

In the view of the UPIA, prudence requires thorough diversification of invested assets. Should a trustee want to strongly overweight or concentrate assets in one investment class, he or she must show compelling reason for that portfolio management decision and be prepared to legally defend that choice, if challenged. He or she must also recognize the duty to manage assets on behalf of assorted parties linked to the trust: not just the trustor and beneficiaries, but also charities or non-profit organizations that may eventually receive some of the assets.1 

In applying the standard of prudence in a broader context, the UPIA also states other expectations for trustees. It notes their duty to avoid unreasonably high investment and account fees; they should seek to minimize them. It guides them to invest with twin goals of income production and capital appreciation in mind. It directs trustees to act with loyalty and impartiality in keeping with their role as fiduciaries. Lastly, it allows them to delegate authority prudently.3

Prudent trust management is a legal duty in almost all U.S. states. Irresponsible trust management may lead to legal trouble for a trustee. Fortunately, capable financial professionals are ready to provide guidance and insight to families, charities, and colleges, to help prevent the mismanagement of trust assets and abide by the principles codified in the UPIA.      

 

Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - wealthmanagement.com/estate-planning/diversifying-charitable-remainder-trust-investments [9/26/17]

2 - investopedia.com/terms/p/prudent-investor-rule.asp [1/18/18]

3 - altruistfa.com/prudentinvestorrule.htm [1/18/18]

4 - investopedia.com/terms/u/uniform-prudent-investor-act.asp [1/18/18]

Latest Insights

September 20, 2018
Firm News
Eide Bailly LLP announced the winners of its 2018 Nonprofit Resourcefullness Awards, recognizing creative and sustainable revenue ideas from nonprofits in Arizona, Colorado, Minnesota, North Dakota and Utah.
September 19, 2018
Article
The IRS has started sending out Letter 5699 asking businesses to verify if they should have filed Forms 1094/1095-C. These forms are required for all ALEs.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Pennsylvania? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into Pennsylvania tax filings.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Nevada? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into North Dakota tax filings. This webinar will cover registration,…
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in North Dakota? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into North Dakota tax filings. This webinar will cover registration,…
September 18, 2018
Article
As the largest tax reform legislation in the past 30 years becomes reality, it is important to stay up-to-date on planning opportunities and how reform may impact you and your business. Our Tax Reform: Practical Insights examples aim to break down…
September 18, 2018
Tool
Get ahead of tax season with the Eide Bailly Tax Planning Guide. A supplemental strategy guide to help guide year-end and make the tax laws work for you.
September 18, 2018
Article
The SCOTUS Wayfair decision has prompted a new focus on state and local tax compliance. The decision to register, report, and comply is important.
September 17, 2018
Article
When an IRS Letter 226J is received, it is important to respond timely and with accurate information to eliminate, abate or reduce IRS calculated penalties