Prudent investor rule

Also called: Minnesota Prudent Investor Act.

Where the statute uses it: Minn. Stat. § 501C.0901

What it means

The standard is stated in two sentences and then qualified by the sentence that people skip.

A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

Subdivision 1(b) is the qualifier: the prudent investor rule is a default rule, and it may be expanded, restricted, eliminated, or otherwise altered by the trust instrument, with the trustee not liable to a beneficiary to the extent it acted in reasonable reliance on the instrument. Before measuring a trustee against the statute, read the document.

Where it does apply, the measurement is portfolio-wide, and it is taken as of the decision rather than after it. Individual investment decisions are evaluated not in isolation but in the context of the trust portfolio as a whole, as part of an overall strategy with risk and return objectives reasonably suited to the trust. The trustee must diversify unless it reasonably determines that special circumstances make the trust’s purposes better served without diversifying. And under subdivision 6, compliance is judged on the facts existing at the time of the decision and not by hindsight: “The prudent investor rule is a test of conduct and not of resulting performance.”

Where the word shows up

In the trust instrument, often as one of the eight phrases subdivision 7 collects: “investments permissible by law for investment of trust funds,” “legal investments,” “authorized investments,” the long common-law formulation beginning “using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs,” “prudent man rule,” “prudent trustee rule,” “prudent person rule,” and “prudent investor rule.” Each authorizes any investment or strategy the section permits, unless the instrument otherwise limits or modifies it. A trust that recites the long formulation is inside subdivision 7 all the same.

It also shows up in what a trustee is allowed to charge. Under subdivision 5 a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the trustee’s own skills — which makes an expensive investment program a question about the trust rather than a matter of taste.