Committing your assets into a trust managed by a fiduciary offers far more protection than investing with a non-fiduciary advisor. Fiduciaries are bound by rules to ensure they act only in your best interest. The prudent investor rule serves as fiduciaries guiding rule. At its core, it requires them to invest trust assets with the same care they would give to their personal investments.
The prudent man rule was the predecessor of the prudent investor rule. Its precedent was set in an 1830 estate law ruling in the case of Harvard College vs. Amory.
John McLean, a wealthy man of the time, left a sizable estate to his wife in his will. The will also left additional funds in a trust, naming Jonathan and Francis Amory as trustees. McLean’s wife would receive regular payments from the trusts proceeds. Once Mrs. McLean passed away, Harvard College would inherit a portion of the remaining trust.
By the time Harvard received these funds, the trust had diminished in value. They argued that the Amory made speculative investments and was therefore liable for the lost funds. Upon appeal, Judge Samuel Putnam ruled against the college, declaring,
All that can be required of a trustee is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of the capital to be invested.
Putnam understood that even prudent investments may result in a loss. His ruling protected trustees from being held liable for such losses, so long as they invested with discretion. The manufacturing and insurance companies in which Amory did invest were rightfully viewed as prudent investments. Thus, the prudent man rule was born and Amory was not liable for the funds losses.
In 1992, the American Law Institute’s Third Restatement of the Law of Trusts included the Uniform Prudent Investor Act (UPIA). This evolution of the prudent man rule reflected modern portfolio theory, allowing fiduciary investments to include a more diversified portfolio. It shifted focus away from individual investments and onto the overall portfolio and its total return.
Thus, the UPIA allows a trustee to invest in riskier assets, such as derivatives or commodities, so long as these assets are part of a balanced portfolio. In fact, the UPIA requires diversification as a means of mitigating the risk of any single asset.
At Life’s Plan, Inc. we take our fiduciary responsibility seriously, always managing our trusts with the best interests of their beneficiaries in mind. If you’ve thought of setting up a special needs trust in Chicago or the surrounding areas, we can help. Give us a call at 630-628-7189 to learn more about our services and how we can help care for your loved ones even after you’re gone.