Prudent administration: the standard behind every trustee decision

The prudent person

§16040 provides the standard of care: the trustee administers the trust with reasonable care, skill and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims, to accomplish the purposes of the trust as determined from the instrument. Investment and management functions are governed instead by the Uniform Prudent Investor Act (§16040(c)). It is a standard of conduct, measured by the process the trustee followed, not by hindsight about results.

The standard applies to the whole administration — collecting and securing the property (§16006), keeping it separate and designated as the trust's (§16009), and the decisions about what to do with it.

The prudent investor

For investments, §16047 adds the prudent investor rule: the trustee invests and manages trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust, and each decision is judged not in isolation but in the context of the portfolio as a whole. §16045 names this article, with the duties of loyalty and impartiality, the Uniform Prudent Investor Act.

The rule begins with a review. Within a reasonable time after accepting the trusteeship or receiving trust assets, §16049 has the trustee review the assets and make and implement decisions concerning their retention and disposition, to bring the portfolio into line with the trust's purposes and terms.

Loyalty and impartiality

Prudence travels with loyalty. §16002 has the trustee administer the trust solely in the interest of the beneficiaries, and §16004 forbids using or dealing with trust property for the trustee's own profit or taking part in a transaction adverse to a beneficiary; a transaction in which the trustee obtains an advantage from a beneficiary is presumed to be a breach.

Where the trust has more than one beneficiary, §16003 has the trustee deal with them impartially and act impartially in investing and managing the property, taking into account any differing interests — the income beneficiary who wants yield and the remainder beneficiary who wants growth among them.

Help, and its limits

A trustee is not expected to be an investment professional. §16052 allows the delegation of investment and management functions as prudent under the circumstances, exercising prudence in selecting the agent, establishing the scope and terms of the delegation and periodically reviewing the agent's overall performance; §16247 allows hiring advisers and agents.

What cannot be delegated is the trustee's own judgment about acts the trustee can reasonably be required to perform personally (§16012). Questions about a particular investment, a concentrated holding or a family business are the kind many trustees bring to a licensed California attorney of their choosing and to qualified advisers.

The statutes, verbatim

• Duty of loyalty

  Prob. Code §16002 ↗

  Clear, simple explanation; the verbatim statute text is not yet attested in our library. See the official statute via the link above.

• Duty to deal impartially with beneficiaries

  Prob. Code §16003 ↗

  Clear, simple explanation; the verbatim statute text is not yet attested in our library. See the official statute via the link above.

• Standard of care

  Prob. Code §16040 ↗

  Clear, simple explanation; the verbatim statute text is not yet attested in our library. See the official statute via the link above.

• Prudent investment: the standard

  Prob. Code §16047 ↗

  Clear, simple explanation; the verbatim statute text is not yet attested in our library. See the official statute via the link above.

• Review of the trust assets after acceptance

  Prob. Code §16049 ↗

  Clear, simple explanation; the verbatim statute text is not yet attested in our library. See the official statute via the link above.

Common questions

Frequently asked questions

What is the prudent investor rule in California?

§16047: invest and manage trust assets as a prudent investor would, considering the trust's purposes, terms, distribution requirements and other circumstances, with each decision judged in the context of the portfolio as a whole.

Does a California trustee have to sell the assets?

No. §16049 has the trustee review the assets within a reasonable time after accepting and decide what to keep and what to dispose of, to bring the portfolio into line with the trust's purposes and terms — a decision, not a requirement to sell.

Can a California trustee hire an investment adviser?

Yes. §16052 allows delegating investment and management functions as prudent, exercising prudence in selecting the agent, setting the scope and terms of the delegation and reviewing the agent's performance, and §16247 allows hiring advisers; acts the trustee can reasonably be required to perform personally may not be delegated (§16012).

General information about California law, not legal advice.