Does the Trustee Have a Duty to Diversify Assets?

Originally published by Paul Romano.

One of the most important non-familial relationships in our broad and complex commercial world is that of trustee. As the title implies, the person or entity so designated has been “entrusted” to carry out the stated desires of the trustor, to abide by the provisions of the Texas Trust Code (“the Code”), and always to act in the best interests of the trust’s beneficiaries. As a “fiduciary,” a trustee named in a Texas trust instrument assumes a number of duties, including (but not limited to) the following:

• Duty of loyalty
• Duty to keep and render accounts
• Duty to furnish appropriate information
• Duty to take and retain control of the trust property, and the
• Duty to exercise reasonable care and skill in the investment and management of the trust property.

Does a trustee also have a duty to diversify the trust’s assets? The answer depends upon a number of factors.

Trustee is Bound by Terms of the Trust Agreement

Initially, it should be stated that the trustee is ordinarily bound by the terms of the trust agreement itself, assuming the agreement does not require any nefarious activity. It is possible, therefore, that a trust could be crafted in such a fashion that the trustee was directed not to diversify the trust’s assets. Such a situation would be quite rare, however.

Trustee Has Duty to Invest “Prudently”

The trustee generally has a duty to act in the best interests of the trust and its beneficiaries, to preserve and protect trust assets and, ordinarily, to make those assets productive. In doing so, the trustee ordinarily must abide by “the prudent investor rule,” under which the trustee must carefully consider a broad range of issues, including the following:

• Current overall economic climate
• Existence of (or lack of) inflation
• Liquidity versus capital preservation
• Availability of alternative investments
• Nature and risk involved with closely held corporations and partnerships
• Production of income for beneficiaries

To Be Prudent May Require Diversification

While diversification of assets is not typically listed as a duty owed by the trustee to the trust and its beneficiaries, in most situations (unless there are specific directions otherwise within the trust instrument itself), the duty to act as a prudent investor will mean that the trustee essentially must diversity the trust’s portfolio. Just as it generally isn’t considered prudent for an investor to put all his or her eggs in one basket, the same follows for the trustee.

Poor Performance is Not Enough to Constitute Breach of Fiduciary Responsibility

Some beneficiaries confuse poor performance with a lack of diversification. They, of course, are not the same thing. Poor performance can be caused by a host of factors, many of which can be beyond the control of the trustee. If the market generally is down, one cannot expect the trustee to always win in his or her investment choices. Poor performance alone is insufficient to subject the trustee to a claim for breaching his or her duties to prudently invest. As long as the trustee was reasonable in his or her decision-making, there should be no liability for the fact that the trust did not grow or provide beneficiaries with a level of income that they desired.

Sometimes, However, Trustees Fail to Live Up to Fiduciary Duty

In spite of the fact that poor performance alone is generally not a breach of duty, there are still instances in which a trustee fails to live up to his or her obligations and, in those instances, the trustee can be liable in damages to the beneficiaries. Generally speaking, the beneficiary needs to discuss the matter with a skilled, experienced attorney, who can advise the beneficiary of his or her rights.

The attorneys at Romano & Sumner, PLLC have more than 20 years of combined experience providing expert legal assistance to clients in meeting their fiduciary duties as a trustee or holding trustees accountable for breaching their fiduciary duties.  Our firm also provides a wide array of estate planning services. We have extensive litigation experience in these areas as well and, if the circumstances require, we can represent your interests all the way to trial.

At Romano & Sumner, we always listen to you. We present you with options and we can advise you of the risks and rewards in virtually any action you may choose to take. We pride ourselves upon our professionalism and client service. We keep our clients informed, returning your calls within 24 hours. We’re ready to assist you as you make the important decisions that affect your family. Call us at 281-242-0995 or complete our online contact form.

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