Question of the Day on ElderCareMatters.com: "I’m the trustee on my parent’s trust. Parts of the trust’s assets are held in the stock market. With the recent market fluctuations, can I be held responsible for any losses the trust’s stock may have sustained?"

Answer:  Generally, a fiduciary is a person who manages property for the benefit of another, exercises discretionary authority or control over an asset(s), and/or renders comprehensive and continuous investment advice.  When you accept the role to trustee, you are a fiduciary and accordingly you become personally liable to all trust beneficiaries.  Liability is not determined by the performance of investments but by whether you followed “prudent investment practices”.   

The Prudent Investor Act sets forth 7 Uniform Standards of Care to avoid being found liable for investments losing value:

  1. Know standards, laws, and trust provisions.
  2. Diversify assets to the specific risk/return profile of the trust.  Each trust and beneficiary will have specific cash flow requirements and risk return objectives.  The interests of all need to be weighed.
  3. Prepare an Investment Policy Statement (IPS).  The IPS is basically a business plan for the trust’s investments.  It lays out goals and policies regarding trust investments.
  4. Use “prudent experts” (lawyers, money managers, CPAs) and document due diligence.  Unless you are an experienced professional this can be a daunting task.  Any slip up and you could be paying out of your pocket.  Hiring an expert, so long as you use due diligence in determining their qualifications, and your liability is eliminated.
  5. Control and account for investment expenses.  It is your role to make sure that the trust is paying a fair fee for the professional services.
  6. Monitor the activity of “prudent experts”.  Monitoring the investment professional is part of using due diligence.  You, as trustee, want to be sure the money manager is not taking funds and is working toward accomplishing the goals stated in the IPS.
  7. Avoid conflicts of interest and prohibited transactions.  Although this seems silly, trustees often violate this principal.  A trustee cannot use entrusted assets for personal or business gain.   

This is one of the most common areas of litigation we see today.  Especially with the market falling and stocks losing value, people are afraid to make changes and are standing still, thinking that if they do nothing they will not be liable for losses.  NOT TRUE.  Trustees do not need to personally guarantee every investment decision is successful.  What a trustee should do is follow a system that ensures you are following the Prudent Investor Act standards.  There is a 5 Step Investment Management Process you can use to be sure you are within the prudent investor standard:

  1. Analyze Current Position.  This is where you review current investment activates, disbursements, investing strategies and policies, and legal constraints.  You examine what the trust’s investment picture currently looks like.
  2. Design the Optimal Portfolio.  This is where you propose optimal asset allocation strategies and suggest any changes, keeping in mind the current market.
  3. Formalize Investment Policy.  The policy should include investment objectives, guidelines, as well as guidelines for selecting and monitoring money managers, if you have them.
  4. Implement Policy.  Here you would propose a number of alternative money manager structures, negotiate favorable fees and coordinate brokerage services.
  5. Monitor & Supervise.  In monitoring the investments you would prepare detailed monthly appraisal and transaction report as well as quarterly reports that compare performance of the trust’s investments against the performance of the market and the state objectives.  

To answer your question, as long as you followed the 7 Uniform Standards of Care and the 5 step process for managing investments you will not be found liable for any investment losses. 

To find  competent, caring elder care professionals across America who are located near You and can help you with your elder care matters, go to: www.ElderCareMatters.com – A FREE online resource to find elder care experts plus elder care information & answers to your elder care questions.

Dennis B. Sullivan, Esq., LLM, CPA
Estate Planning & Asset Protection Law Center of Dennis Sullivan & Assoc.
Wellesley, Massachusetts  02482
781-237-2815
Member of the national ElderCare Matters Alliance, Massachusetts chapter 

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