The Modern Art of DelegationThe Modern Art of Delegation
Avoiding pitfalls in assigning investment management functions as a trustee.
Many practitioners don’t realize the Uniform Prudent Investor Act (UPIA) provides two standards for managing and investing trust property.1 The standard most referenced is the general standard. It lays out a litany of requirements:
A trustee must exercise reasonable care, skill and caution.2
A trustee must use their special skills or expertise.3
A trustee must understand the purposes, terms, distribution requirements and other circumstances of the trust.4
A trustee must develop an overall investment strategy with risk and return objectives reasonably suited to the trust.5
In developing and implementing their strategy, the trustee must consider:
General economic conditions
The possible effect of inflation or deflation
The expected tax consequences of investment decisions or strategies
The role that each investment or course of action plays within the overall trust portfolio
The expected total return from income and the appreciation of capital
Other resources of the beneficiaries
Needs for liquidity, regularity of income and preservation or appreciation of capital
An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.6
A trustee must diversify the trust investments, unless they reasonably determine that because of special circumstances, the purposes of the trust are better served without diversification.7
A trustee must make a reasonable effort to verify facts related to trust investments.8
A trustee must invest only in the interests of the trust beneficiaries—and not their own or those of third parties (including the settlor to the extent not articulated in the trust instrument).9
A trustee must invest with impartiality among beneficiaries.10
A trustee also may only incur reasonable and appropriate costs in investing and managing trust assets.11
Finally, a trustee must implement their investment decisions within a reasonable time after acceptance of the trust or receipt of the trust property.12
This list is daunting. But there’s an alternative standard for trust investing that applies when a trustee delegates their investment management functions. Before the UPIA, the prudent person rule didn’t allow a trustee to delegate. The trustee had to adhere to the prudent person standard.
In allowing delegation, the UPIA created a second, much shorter and simpler standard. A trustee delegating investment management functions must exercise reasonable care, skill and caution in only the following:
Selecting an agent
Establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust
Periodically reviewing the agent’s actions to monitor the agent’s performance and compliance with the terms of the delegation13
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