Mar 1, 2007 12:00 PM

By Maureen S. Bateman, partner, and Faith Carter, associate, Holland & Knight LLP, New York

Though more than a dozen years have passed since the National Conference of Commissioners on Uniform State Laws approved and recommended that states adopt the Uniform Prudent Investor Act (UPIA), there still is relatively little case law interpreting the statute and its various state-by-state adaptations.¹ Further, the law that does exist is far from clear. Adding to the confusion is the fact that the so-called Prudent Person Rule, the somewhat less stringent common law standard that guided trustee investments prior to the UPIA, still applies to acts performed by a trustee before a state's enactment of the UPIA. As a result, the investment behavior expected of both corporate and individual fiduciaries is uncertain, and it seems that trustees are unlikely to receive much guidance from the courts anytime soon.

One particularly thorny issue raised by a recent landmark case in New York, Dumont,² is the scope of a trustee's duty to diversify. We know that a trustee is required to diversify trust assets in the absence of “special circumstances” that demand otherwise.³ But may the trustee limit its attention to the assets within the trust, or is it expected to consider all the assets held by the beneficiary, both in trust and otherwise? Naturally, a fiduciary cannot be responsible for assets over which it has no legal control and even, perhaps, no knowledge. At the same time, it's clearly a bad idea to take a formulaic approach to diversification without regard to the uniqueness of the trust and its beneficiaries. So can a trustee get away with “underdiversifying” a trust because the beneficiary happens to already hold a wide assortment of assets? Or, less commonly, can a trustee get into trouble for “overdiversifying” a trust, for the same reason?

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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