The Duty of Care

The Reasonable Care Standard

The duty of loyalty tells you who you serve. The duty of care tells you how well you must serve them.

A trustee is required to administer the trust with the care, skill, and caution that a reasonably prudent person would use in managing their own affairs. Notice the standard is not perfection. It is not "the best decision possible." It is what a reasonable person, exercising sound judgment, would do under the same circumstances.

That said, this standard is not as forgiving as it sounds. If you have professional expertise in a relevant area, you are held to a higher standard. A trustee who is a CPA will be judged more strictly on tax decisions than a trustee who is a schoolteacher. A trustee who is a licensed financial advisor will face greater scrutiny on investment choices. The law assumes that if you have specialized knowledge, you will use it.

The Prudent Investor Rule

The Uniform Prudent Investor Act, adopted in some form by all 50 states, replaced the old "prudent man" rule that had governed trust investing for over a century. The old rule evaluated each investment in isolation. If one stock lost money, the trustee could be liable, even if the overall portfolio gained value.

The modern prudent investor rule takes a portfolio approach. It evaluates the trustee's investment performance based on the entire portfolio, not any single investment. This means you can hold some higher-risk investments (like growth stocks or real estate) as part of a diversified strategy without automatically breaching your duty, as long as the overall portfolio is reasonable for the trust's goals and the beneficiaries' needs.

Core Requirements of the Prudent Investor Rule

• Diversification. A trustee must diversify trust investments unless there is a specific reason not to. Holding all trust assets in a single stock, a single property, or a single asset class is presumptively imprudent. The grantor can override this requirement in the trust document (for example, directing the trustee to hold a family business), but absent such direction, diversification is mandatory.
• Risk and return balance. Investment decisions must consider the trust's purpose, the distribution requirements, the beneficiaries' needs, the trust's time horizon, and general economic conditions. A trust designed to support a 90-year-old beneficiary has different risk tolerances than a dynasty trust intended to last for centuries.
• Costs matter. A trustee must consider the costs of investments, including management fees, trading costs, and tax consequences. Paying 2% annually in fund management fees when a comparable index fund charges 0.05% requires justification.
• Total return. The prudent investor rule focuses on total return, combining income (dividends, interest, rent) and capital appreciation. This replaces the old approach of investing solely for income, which often produced suboptimal results.

When and How to Delegate

No trustee is expected to be an expert in every discipline. The Uniform Trust Code and most state laws explicitly allow trustees to delegate investment management, tax preparation, legal matters, and other specialized functions to qualified professionals.

But delegation is not abdication. You remain responsible for selecting competent agents, establishing the scope and terms of the delegation, and monitoring the agent's performance over time. You cannot hand the trust portfolio to a financial advisor, walk away for three years, and claim you delegated properly when the portfolio loses half its value to excessive risk.

The Three Steps of Proper Delegation

1. Select carefully. Choose professionals with appropriate credentials, experience, and track records. Document why you selected them. A trustee who hires their college roommate to manage $2 million in trust assets, without verifying credentials, will have a hard time defending that choice.
2. Define the scope. Put the delegation in writing. Specify what the agent is authorized to do, what limits apply, and what reporting you expect. An investment policy statement is essential for delegated investment management.
3. Monitor regularly. Review the agent's performance at least annually. Compare results to relevant benchmarks. Document your reviews. If the agent is underperforming or acting outside the scope of delegation, take corrective action.

Common Mistakes That Breach the Duty of Care

Most breaches of the duty of care are not dramatic acts of fraud. They are quiet failures of attention. Here are the patterns that get trustees into trouble most often.

• Failing to invest trust assets. Leaving large sums in a non-interest-bearing checking account for months or years is a breach. Trust assets should be invested according to the trust's needs and goals from the beginning.
• Ignoring the trust document. The trust document may contain specific investment instructions, restrictions, or authorizations. A trustee who has never read the document thoroughly cannot possibly comply with it.
• Not reviewing investments. Markets change. Beneficiaries' needs change. A trustee who sets an investment strategy and never revisits it fails the standard of care, even if the original strategy was sound.
• Missing tax deadlines. Filing trust tax returns late, failing to make estimated payments, or missing elections that could save the trust money are all preventable failures that courts consider breaches of the duty of care.
• Failing to obtain insurance. If the trust holds real property, a trustee who fails to maintain adequate insurance coverage is not exercising reasonable care.

The common thread in all of these is inaction. The duty of care requires active, ongoing engagement with the trust and its assets. Passivity is not a defense. It is the problem.