As an estate planning attorney in San Diego, I often get asked about the level of control a grantor can exert over a trust’s investments, and it’s a valid concern – you want to ensure your assets are managed responsibly and in line with your risk tolerance. While you can certainly express your preferences to the trustee, outright *requiring* investment in only low-risk portfolios can be problematic and may not be fully enforceable. The legal standard generally dictates that trustees have a duty of prudence, meaning they must act as a reasonably prudent person would in managing the trust assets, considering the purposes of the trust and the beneficiaries’ needs. This doesn’t necessarily equate to *only* low-risk investments, as some growth may be necessary to outpace inflation and maintain the trust’s value over time. A complete restriction to low-risk options may even be considered a breach of fiduciary duty if it harms the beneficiaries in the long run.
What are the downsides of overly restrictive investment clauses?
Often grantors believe limiting investments to only low-risk options is the safest route, but this approach can backfire. Consider the current economic landscape: consistently low interest rates mean that solely investing in low-yield bonds or CDs may not even keep pace with inflation, eroding the real value of the trust over time. According to a recent study by Fidelity, a portfolio entirely comprised of low-risk assets over a 20-year period yielded an average annual return of just 2.5%, while a diversified portfolio with a moderate risk level yielded around 7-8%. This means a $1 million trust invested solely in low-risk options would be worth significantly less after two decades than a trust with a more balanced approach. Furthermore, overly restrictive clauses can discourage qualified individuals from serving as trustee, as they may not want to be held to an inflexible standard that hinders their ability to manage the trust effectively.
What happened when a client insisted on complete control?
I recall a case involving Mr. Henderson, a retired engineer who was adamant about controlling every aspect of his trust’s investments. He drafted a trust document that explicitly forbade his trustee – his daughter, Sarah – from investing in anything other than FDIC-insured accounts and U.S. Treasury bonds. Initially, Sarah complied, but after several years, the trust’s value began to stagnate, and it was clear the income generated wasn’t sufficient to cover the beneficiaries’ growing needs—primarily educational expenses for his grandchildren. Sarah approached me, deeply frustrated. She explained that she had repeatedly tried to discuss more diversified options with her father, but he was unyielding, fearing any potential loss of principal. The situation became untenable; the trust was losing purchasing power, and Mr. Henderson’s rigid instructions were actively harming those he intended to benefit. Ultimately, we had to petition the court for a modification of the trust terms to allow for some level of reasonable investment risk, which was a costly and emotionally draining process.
How can I express my preferences without being overly restrictive?
Instead of *requiring* low-risk investments, a more effective approach is to clearly articulate your general investment philosophy and risk tolerance to the trustee, and incorporate language into the trust document that provides *guidelines* rather than rigid rules. For example, you could state that the trustee should prioritize capital preservation and income generation, with a preference for conservative investments, but also allow for a reasonable level of diversification to achieve long-term growth. You can also establish an investment committee or consult with a financial advisor to provide ongoing guidance to the trustee. Approximately 65% of high-net-worth individuals now utilize investment committees to oversee their trusts and endowments, demonstrating a growing trend towards collaborative decision-making. A well-drafted trust document will allow the trustee to exercise their judgment while remaining aligned with your overall objectives.
What was the outcome when a client focused on guidelines?
Mrs. Davison came to me with a similar concern, wanting to ensure her trust was managed conservatively, but she understood the pitfalls of absolute restrictions. We crafted a trust document that stated her preference for low-risk investments, emphasizing capital preservation and income generation for her grandchildren’s education. However, we also included a clause allowing the trustee – a professional trust company – to make reasonable investment decisions based on market conditions and the beneficiaries’ evolving needs, as long as they acted in accordance with the “prudent investor rule.” Years later, I received a letter from the trust company praising the clarity of the trust document. They explained that they had been able to successfully navigate various market fluctuations, achieving consistent returns while remaining within the parameters of Mrs. Davison’s preferences. The grandchildren were thriving, and the trust was well-positioned to continue providing for their future. This success stemmed from a collaborative approach that balanced control with flexibility, ensuring the trust’s long-term viability.
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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