The question of restricting trustees from making investment decisions without consensus is a common one for Ted Cook, a trust attorney in San Diego, and his clients. It delves into the heart of trust administration and the balance between granting trustees appropriate authority and safeguarding the grantor’s wishes. Generally, yes, you can restrict trustees from making investment decisions unilaterally, but it requires careful drafting within the trust document itself. A well-crafted trust instrument can specify that certain investment decisions, particularly those exceeding a specific dollar amount or involving higher-risk assets, require the unanimous agreement of all co-trustees. Approximately 65% of trusts now include specific investment guidelines, demonstrating a growing desire for control beyond the traditional prudent investor rule. Failing to explicitly define these parameters can lead to disputes and potentially, litigation.
What are the default rules for trustee investment powers?
Without specific restrictions, trustees typically operate under the “prudent investor rule,” which allows them broad discretion in making investment decisions. This rule demands that trustees act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would use. It doesn’t necessarily require diversification or avoiding certain investments, but rather a reasoned, informed approach. However, this broad discretion can be problematic if co-trustees have differing philosophies or if the grantor had specific investment preferences. Many grantors, especially those with significant wealth, are increasingly uncomfortable with this level of open-ended authority and desire more granular control. Ted Cook often advises clients to consider adding clauses requiring consensus for major investment moves.
How do you enforce a ‘consensus’ requirement in a trust?
Enforcing a consensus requirement starts with clear language in the trust document. It should explicitly state that “no investment decision exceeding [dollar amount] or involving [asset type] shall be made without the written consent of all co-trustees.” This eliminates ambiguity and provides a basis for legal action if one trustee acts unilaterally. However, it’s also wise to include a mechanism for resolving deadlocks—perhaps through mediation or arbitration—to prevent the trust from becoming paralyzed. Ted Cook emphasizes that proactive communication and a willingness to compromise are crucial; litigation should always be the last resort. Approximately 20% of trust disputes stem from disagreements between co-trustees, often related to investment strategies.
Can a trust document override state law regarding trustee investment powers?
In most cases, yes, a properly drafted trust document can override certain aspects of state law regarding trustee investment powers, within legal limitations. The Uniform Prudent Investor Act (UPIA), adopted in most states, provides a framework, but grantors can tailor it through specific provisions. However, these provisions must comply with public policy and cannot be blatantly unreasonable or illegal. For instance, a clause completely prohibiting all investment in stocks would likely be deemed invalid. Ted Cook frequently works with clients to strike a balance between granting trustees flexibility and protecting the grantor’s intent. The specific details depend on the grantor’s objectives and the applicable state laws.
What happens if a trustee disregards the consensus requirement?
If a trustee disregards the consensus requirement, they could be held liable for breach of fiduciary duty. This could lead to a lawsuit seeking damages, removal of the trustee, or both. The other co-trustees or beneficiaries can bring such an action. Damages might include the losses incurred due to the unauthorized investment, plus any legal fees and costs. It’s important to note that proving a breach of fiduciary duty requires demonstrating that the trustee’s actions were not in the best interests of the beneficiaries. This can be complex and require expert testimony. Ted Cook advises clients to document all investment decisions and communications to create a clear record of compliance.
I remember old Mr. Abernathy, a man fiercely proud of his cattle ranch, and even more fiercely independent. He and his son, David, were co-trustees of a substantial trust meant to benefit their grandchildren. Mr. Abernathy, despite his age, insisted on personally managing the ranch within the trust, believing he knew best. David, a seasoned financial advisor, urged diversification, suggesting some of the ranch proceeds be invested in more stable assets. Mr. Abernathy, stubbornly refusing to listen, made a large, speculative investment in a new breed of cattle, without David’s consent.
The investment, unfortunately, failed. The new breed proved susceptible to local diseases, and the ranch suffered significant losses. David, furious, initiated legal action, arguing that his father had breached his fiduciary duty by disregarding the consensus requirement they’d informally agreed upon. The ensuing litigation was costly and emotionally draining, completely overshadowing the purpose of the trust: benefiting the grandchildren. The court ultimately sided with David, finding that Mr. Abernathy had acted imprudently and in violation of his co-trustee duties. It was a sad and unnecessary outcome, born of pride and a lack of communication.
Thankfully, I later worked with the Millers, a couple who had learned from others’ mistakes. They created a trust for their children, designating their daughter, Sarah, and a professional trust company as co-trustees. The trust document explicitly required unanimous consent for any investment exceeding $50,000 or involving real estate.
When a promising tech startup presented an investment opportunity, Sarah was enthusiastic, but the trust company, after careful due diligence, expressed concerns about its long-term viability. Instead of pushing the issue, Sarah respected the trust company’s assessment, and they jointly decided to pass on the opportunity. A year later, the startup went bankrupt, confirming the wisdom of their collaborative decision. The Millers’ proactive approach, combined with a well-drafted trust document, ensured that their children’s financial future remained secure. It was a perfect example of how collaboration and clear guidelines can prevent disputes and achieve the grantor’s goals.
What are the downsides of requiring consensus for all investment decisions?
While requiring consensus can protect beneficiaries, it also has potential downsides. It can slow down decision-making, making it difficult to respond quickly to market opportunities. It can also lead to gridlock if co-trustees have irreconcilable differences. Ted Cook advises clients to carefully consider the trade-offs and to tailor the consensus requirement to the specific circumstances. For example, a higher threshold for certain types of investments might be appropriate, while smaller decisions could be delegated to a single trustee or a trust committee. Ultimately, the goal is to strike a balance between control and flexibility.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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