Appendix B: Uniform Prudent Investor Act (UPIA) Summary
The Uniform Prudent Investor Act (Prob. Code Section 16045 et. seq.) governs the trustee’s actions and sets the standard by which trustee’s management of trusts will be reviewed and evaluated. The Uniform Prudent Investor Act (UPIA), effective January 1, 1996, applies to trusts existing on and created after that date. (Prob. Code §16054).
A. Sources of Trustee Duties & Powers:
1. FEDERAL LAW. Selected portions of the Internal Revenue Code and Regulations relate to Trustees.
2. CALIFORNIA LAW. The Probate Code sets forth trustee’s powers and statutory duties for trustees. (Probate Code Sec. 16000 et.seq.)
3. TRUST DOCUMENT. Most trust instruments include a list of powers of the trustee, which the trustee must follow. Some of these powers may be unique to each trust.
B. Major Changes in Criteria for Prudent Investing - California’s Uniform Prudent Investor Act (“UPIA”).
The UPIA attempts to reflect current investment practices and realities by adopting the MODERN PORTFOLIO THEORY (MPT) of investments. MPT seeks to minimize risk by encouraging diversification of investments and evaluating investment performance on the basis of the performance of the entire portfolio. The focus on overall portfolio performance, diversification, and risk balancing requires a high level of expertise by the investor.
1. RISK: All investments have risk. The Trustee’s main responsibility in investing is balancing the risk and return aspects of the investments. (P.C. §16047(b)).
2. INVESTMENTS. Trustees may invest in any kind of property or type of investment consistent with the standards of the UPIA. Thus, restrictions on types of investments have been removed. (PC §16047(e)).
3. DIVERSIFICATION. Trustees have a duty to diversify the investments of the trust. (PC §16048).
4. PORTFOLIO THEORY. Trustee’s investment and management decisions evaluated in context of the trust as a whole, not in isolation, and as part of an overall investment strategy. (P.C. §16047(b)).
5. DELEGATION. Trustees may delegate investment and management functions subject to safeguards. (P.C. §16052).
C. Duty to Review Trust Assets and Implement Investment Strategy.
1. Upon accepting a Trusteeship, trustees have a duty to review trust assets, make and implement an investment strategy and retain or dispose of assets to bring the trust portfolio in compliance with the investment strategy. (P.C. §16049).
2. Investment strategies and decisions should be memorialized at the time made.
D. Criteria for Investment and Management of Trust Assets
1. Trustee must make a reasonable effort to ascertain facts relevant to the investment and management of trust assets. Prudent investing requires more than merely purchasing “risk-free” investments. The UPIA appears to require a fairly structured process of gathering information, assessing beneficiaries’ needs, and developing an appropriate plan or investment strategy.
2. “Prudence” under the UPIA is not based on risk alone, but whether the level of risk is appropriate under all of the circumstances.
3. Risk is viewed as unavoidable. Investment decisions are not viewed in isolation, but rather evaluated in the context of the entire trust portfolio and as part of an overall investment strategy with risk and return objectives suitable to the trust circumstances.
4. The UPIA sets forth various factors that are appropriate in considering in investing and managing trust assets. These factors include: general economic conditions; effects of inflation/deflation; tax consequences of investment decisions; the role each investment plays in the overall trust portfolio; the beneficiaries’ other resources; and needs for liquidity, income, preservation/appreciation of capital. (P.O. §16047)
5. Trustees are authorized to invest in any type of property or investment strategy consistent with the UPIA. (P.C. §16047(e)).
6. Compliance with the UPIA is determined in light of the facts existing at the time of a trustee’s decisions, not in hindsight. Thus if Trustees can prove they properly complied with UPIA’s requirements they are protected from liability for negative investment results. (P.C. §16046).
E. Duty to Diversify Investments.
1. Under the UPIA, Trustees have a duty to diversify the investments of the trust, unless, under the circumstances, it is prudent not to do so. (P.C. §16048).
2. In order to reduce risks inherent in investments, a Trustee has a duty to diversify the types of investments. Failure to diversify an investment portfolio will be a breach of trust in most cases.
3. The trust document may expand or restrict the prudent investor rule. Therefore, the Trustee may not be required to follow certain provisions of the UPIA, if they are following the trust terms in good faith. (P.C. §16046(b)).
F. Duty to Treat Beneficiaries Impartially.
Trustees have a duty to deal impartially with the beneficiaries, and shall act impartially in investing and managing trust property, taking into account any differing interests of the beneficiaries, including income and remainder beneficiaries.
G. Delegation of Trustee’s Investment and Management Functions.
1. Trustees may delegate investment and management functions as prudent under the circumstances. (P.C. §16049).
2. In delegating investment and management functions, the trustee must exercise prudence (i.e. care, skill and caution) in selecting the agent, establishing the scope and terms of the delegation, and reviewing the agent’s performance.
3. Trustees can limit their liability for acts of agents if they delegate investment or management functions in the manner specified by the UPIA. (P.C. §16052(c)).
4. An agent has a duty to exercise reasonable care to comply with the terms of the delegation. The UPIA creates duties and liabilities for investment agents.
5. Trustees should document all delegations and the scope and terms of any delegation.
H. Trustee’s Duty to Account to Beneficiaries.
1. The Trustee is required to account at least annually, at the termination of a trust, and upon a change of Trustee, to each beneficiary to whom income or principal is required or authorized to be currently distributed to. (P.C. §16062).
2. Exception: The Trustee is not required to report information or account to a beneficiary where the beneficiary and the trustee are the same person. (P.C. §16064(d).
The foregoing synopsis of the Uniform Prudent Investor Act was provided by Attorney Ronald R. Webb of the Law Offices of Ronald R. Webb. This is a summary only.
