As an estate planning attorney in San Diego, I frequently encounter clients wanting to exert control over not just *if* their assets are distributed, but *how* those assets are managed after their passing, and a common question is whether they can restrict the types of investments a trustee can make within a trust.
What happens if my trustee makes bad investments?
Generally, trustees have a fiduciary duty to invest prudently, meaning they must act with the care, skill, and caution of a reasonable person managing their own affairs. However, simply disagreeing with an investment choice isn’t grounds for legal action. According to a study by the American Association of Individual Investors, over 60% of investors feel anxious about making the wrong investment decisions, highlighting the pressure trustees face. You *can* specifically prohibit certain investments within the trust document itself. This is achieved by including what are known as “negative restrictions” or “prohibited investment clauses.” For example, you might exclude investments in cannabis stocks, fossil fuels, or specific companies you find objectionable. These restrictions offer a level of comfort and ensure the trust aligns with your values, even after you are gone. It’s important to remember these clauses need to be clearly worded and not overly restrictive, as that could hinder the trustee’s ability to achieve reasonable returns.
What are the risks of overly restrictive investment clauses?
While control is appealing, it’s crucial to strike a balance. Overly restrictive clauses can severely limit the trustee’s investment options, potentially hindering their ability to generate sufficient returns to meet the trust’s objectives. A 2022 report from Cerulli Associates found that portfolios with highly concentrated or restricted investment mandates underperform broader market indices by an average of 1.5% annually. I once worked with a client, Margaret, who vehemently opposed any investment in technology companies, citing a personal negative experience decades prior. She included a very broad prohibition in her trust. Years after her passing, the trustee struggled to find suitable investments that met the trust’s goals *and* adhered to Margaret’s restrictions, ultimately leading to stagnant growth and reduced benefits for her heirs.
How can I ensure my restrictions are legally sound?
The key is careful drafting. Your restrictions must be explicit, reasonable, and not violate the Uniform Prudent Investor Act (UPIA), which governs trustee investment powers in most states, including California. UPIA allows for some degree of restriction, but it emphasizes the trustee’s duty to diversify and seek reasonable returns. Consider including a “savings clause” that allows the trustee to seek judicial guidance if a restriction conflicts with their fiduciary duty. I counsel clients to think about *what* they are prohibiting and *why*. Are the reasons tied to specific ethical concerns, or are they based on personal biases? Clearly articulating the rationale can strengthen the validity of the restriction. It’s also wise to regularly review and update these restrictions to reflect changing market conditions and your evolving values.
What if my trustee ignores my investment prohibitions?
If a trustee violates a properly drafted investment prohibition, you (or your beneficiaries) have legal recourse. You can petition the court to compel the trustee to comply with the trust terms, remove the trustee for breach of fiduciary duty, or seek damages to recover any losses incurred due to the violation. I recall a case involving a client, Arthur, who had explicitly prohibited investments in gambling-related companies. The trustee, despite this clear directive, invested a significant portion of the trust funds in a casino stock. Arthur’s beneficiaries successfully sued the trustee, forcing them to divest the stock and reimburse the trust for any associated losses. However, litigation can be costly and time-consuming, emphasizing the importance of careful trustee selection and clear, enforceable trust provisions. Choosing a professional trustee, like a trust company, can provide an added layer of oversight and accountability, minimizing the risk of violations and ensuring your wishes are respected.
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
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