Prudent administration and the Massachusetts Prudent Investor Act

The prudent person standard

G.L. c. 203E, § 804 provides that a trustee administers the trust as a prudent person would, considering the purposes, terms and other circumstances of the trust, and in doing so exercises reasonable care, skill and caution. A trustee incurs only costs that are appropriate and reasonable in relation to the trust property, the purposes of the trust and the skills of the trustee (§ 805), and a trustee who has special skills or expertise, or was named trustee in reliance on the trustee's representation of them, has a duty to use them (§ 806).

The prudent investor rule

The Massachusetts Prudent Investor Act (G.L. c. 203C, § 1) provides that a trustee who invests and manages trust assets owes the beneficiaries a duty to comply with the prudent investor rule (§ 2(a)): to invest and manage trust assets as a prudent investor would, considering the purposes, terms and other circumstances of the trust, with reasonable care, skill and caution (§ 3(a)). Decisions on individual assets are considered in the context of the trust portfolio as a part of an overall investment strategy reasonably suited to the trust (§ 3(b)), and the circumstances a trustee considers, where relevant, include general economic conditions, the possible effect of inflation or deflation, the expected tax consequences, the role each investment plays within the portfolio, the expected total return from income and the appreciation of capital, the beneficiaries' other resources, needs for liquidity, regularity of income and preservation or appreciation of capital, and an asset's special relationship or special value to the purposes of the trust or to a beneficiary (§ 3(c)); a trustee makes a reasonable effort to verify the relevant facts (§ 3(d)).

A trustee may invest in any kind of property or type of investment consistent with the act's standards (G.L. c. 203C, § 3(e)) and reasonably diversifies the investments of the trust unless, under the circumstances, it is prudent not to do so (§ 4). The provisions of a trust may expand, restrict, eliminate or otherwise alter the rule, and a trustee is not liable to a beneficiary to the extent the trustee acted in reasonable reliance on them (§ 2(b)); unless otherwise limited or modified, terms such as "legal investments" or "prudent investor rule" authorize any investment or strategy the act permits and are not read as a restriction of the rule (§ 11).

The review at the start, and judgment at the time of the decision

Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee reviews the trust assets and makes and implements decisions concerning their retention and disposition, in order to bring the trust portfolio into compliance with the purposes, terms and other circumstances of the trust and with the act (G.L. c. 203C, § 5); Massachusetts states no number of days. Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of the trustee's decision or action (§ 9). A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust (G.L. c. 203E, § 1001(a)), and a trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach to the extent the breach resulted from the reliance (§ 1006).

The statutes, verbatim

• Investment and management decisions

  G.L. c. 203C, § 3 ↗

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

• Diversification

  G.L. c. 203C, § 4 ↗

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

• Review of assets

  G.L. c. 203C, § 5 ↗

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

• Prudent administration

  G.L. c. 203E, § 804 ↗

  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

Must a Massachusetts trustee diversify?

A trustee reasonably diversifies the investments of the trust unless, under the circumstances, it is prudent not to do so (G.L. c. 203C, § 4); the provisions of a trust may expand, restrict, eliminate or otherwise alter the prudent investor rule (§ 2(b)).

Is a Massachusetts trustee liable for a market loss?

Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of the trustee's decision or action (G.L. c. 203C, § 9). A breach of trust is a violation of a duty the trustee owes a beneficiary, and the court's remedies for one include compelling the trustee to redress it (G.L. c. 203E, § 1001); whether a particular loss followed from a breach is a question for a licensed Massachusetts attorney of your choosing.

May a Massachusetts trustee hire an investment advisor?

A trustee may delegate investment and management functions if it is prudent to do so, exercising reasonable care, skill and caution in selecting the agent, establishing the scope and terms of the delegation and periodically reviewing the agent's actions, and is then not liable to the beneficiaries or the trust for the agent's decisions or actions (G.L. c. 203C, § 10; G.L. c. 203E, § 807).

General information about Massachusetts law, not legal advice.