If you are a trustee managing trust assets, you are governed by the Uniform Prudent Investor Act (UPIA). Adopted in some form by nearly every state, the UPIA sets the legal standard for how you must invest and manage trust property. The standard is not about performance. It is about process.
And here is the problem: most private trustees cannot prove they followed the process.
The UPIA does not ask whether your investments performed well. It asks whether you had a documented investment strategy, whether you considered risk and return in the context of the entire portfolio, whether you diversified unless you had a specific reason not to, and whether you reviewed your decisions periodically. If a beneficiary sues you for investment losses, the court will not look at your returns. The court will look at your records. And if your records consist of brokerage statements and a vague sense that you “did your best,” you will lose.
This article explains what the prudent investor rule actually requires, where trustees systematically fail to document compliance, and how to build a defensible investment governance system before someone challenges your decisions.
The Five Obligations of the Prudent Investor Rule
The UPIA, codified in most states as a version of the Uniform Prudent Investor Act of 1994, restated the common-law prudent person rule that had governed trust investing since Harvard College v. Amory (1830). The old rule judged each investment individually. The new rule judges the portfolio as a whole. That distinction matters more than any other.
The UPIA imposes five core obligations on every trustee:
1. Invest as a prudent investor would
The statute says a trustee “shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and tax considerations of the trust.” This is a conduct standard, not an outcome standard. You are judged by your decision-making process at the time you made the decision, not by hindsight performance.
What does “prudent” mean in practice? It means you considered the trust’s objectives, evaluated the risk-return profile of your investment choices, and made a reasoned decision. It does not mean you picked winners. A trustee who loses money on a well-researched, appropriately diversified investment has complied with the rule. A trustee who makes money on a concentrated, undocumented bet has not.
2. Balance risk and return
The UPIA explicitly requires trustees to “pursue an overall investment strategy to enable the trustee to make appropriate present and future distributions to or for the benefit of the beneficiaries, in accordance with risk and return objectives reasonably suited to the entire portfolio.”
This means you cannot simply park trust assets in a savings account and call it prudent. Inflation erodes the corpus. The beneficiary who needs income today and the remainder beneficiary who needs growth tomorrow both have interests the trustee must balance. The UPIA introduced the concept of “total return investing” — evaluating performance based on income plus capital appreciation, not just yield — to replace the old income-preservation model that systematically harmed remainder beneficiaries.
Your investment strategy must reflect this balance. If the trust requires current income, your strategy should address how you are generating it without sacrificing long-term growth. If the trust is purely growth-oriented, your strategy should address how you are managing volatility. Either way, the reasoning must be documented.
3. Diversify unless you have a specific reason not to
This is the obligation that generates the most litigation. The UPIA says a trustee shall “diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust, or the provisions of the governing instrument, it is in the interests of the beneficiaries not to diversify.”
Diversification is the default. The burden is on the trustee to justify a concentrated position, not on the beneficiary to prove concentration was wrong. And “special circumstances” is a narrow exception. The trust instrument itself may direct retention of a specific asset. The asset may be illiquid or unmarketable. Tax consequences of selling may outweigh diversification benefits. These are legitimate reasons. “I thought the stock would go up” is not.
The April 2026 New York Law Journal article “How Much Is Too Much? A View on Concentration of Assets in Trusts” by Moritt Hock & Hamroff provides a useful framework. The authors identify several factors courts have accepted as justifying concentrated positions: illiquidity and lack of marketability, tax consequences, settlor intent, and the nature of closely held business interests. But in every case where the court upheld concentration, the trustee had documented its reasoning. In every case where the court found a breach, the trustee had not.
4. Conduct an initial review of inherited assets
The UPIA requires a trustee, “within a reasonable time after the creation of the fiduciary relationship, to determine whether to retain or dispose of initial assets.” When you take over a trust, you cannot simply continue whatever the prior trustee was doing. You must evaluate the existing portfolio against the prudent investor standard and decide whether each asset should be retained.
Courts give trustees more latitude to retain assets received in-kind than to purchase new investments. In In re JP Morgan Chase Bank, N.A., 133 A.D.3d 1292 (4th Dep’t 2015), the court noted that a trustee’s retention of an inherited asset may be prudent even when purchasing the same asset would not be. But that latitude depends on documenting the review. A trustee who inherits a concentrated position and does nothing — no analysis, no written decision, no timeline for diversification — is treating the inherited portfolio as if the UPIA does not apply to it. It does.
5. Delegate appropriately
Unlike the old prudent person rule, which prohibited delegation, the UPIA permits trustees to delegate investment and management functions to professionals. But delegation is not abdication. The trustee must select the delegatee prudently, establish the scope and terms of the delegation, and periodically review the delegatee’s performance.
For family trustees who are not investment professionals, delegation is often the right answer. But the delegation must be documented. A trustee who hands the portfolio to a broker and never reviews the arrangement has not delegated prudently. A trustee who hires an investment advisor, defines the scope of authority in writing, and reviews performance annually has.
Where Trustees Fail the Documentation Test
The UPIA is a process standard, and process must be documented. Here are the five most common documentation failures that expose trustees to surcharge liability:
1. No written investment policy statement
An Investment Policy Statement (IPS) is the single most important document a trustee can produce. It defines the trust’s investment objectives, risk tolerance, asset allocation targets, permitted and prohibited investments, rebalancing methodology, and review schedule. It is the document that proves you had a strategy.
Most private trustees do not have one. They have a brokerage account and a general sense of what they are trying to accomplish. When a beneficiary challenges an investment loss, the trustee’s defense collapses because there is no document showing the decision was part of a reasoned strategy. The court sees an undisciplined retail investor managing someone else’s money.
A proper IPS does not need to be complex. For a typical family trust, a two- to three-page document covering the following elements is sufficient:
- Investment objectives: What is the trust trying to achieve? Current income, long-term growth, capital preservation, or a balance?
- Risk tolerance: How much volatility can the trust tolerate? What is the maximum acceptable drawdown?
- Asset allocation: Target percentages for equities, fixed income, cash, and alternative investments, with acceptable ranges around each target
- Liquidity requirements: How much cash or near-cash must be maintained to meet distribution requirements?
- Constraints: Tax considerations, restrictions from the trust instrument, concentrated positions that require a diversification plan
- Performance benchmarks: How will investment performance be measured and compared to expectations?
- Review schedule: How often will the portfolio be reviewed, and what triggers a rebalancing decision?
If you do not have an IPS, your first priority as a trustee is to write one. If you cannot write one yourself, hire an investment professional to help. The cost is a fraction of what you will spend defending a surcharge petition.
2. No documented initial review
When you became trustee, did you review the existing portfolio and decide whether to retain each asset? Did you document that review? Most trustees skip this step entirely. They inherit the portfolio, glance at it, and continue managing it as before.
The UPIA requires an initial review “within a reasonable time” after accepting the trusteeship. “Reasonable time” is not defined, but 30 to 90 days is the standard most courts apply. The review should evaluate each position against the trust’s objectives and the prudent investor standard. Positions that should be sold should be identified, with a timeline for sale. Positions that should be retained should be justified.
If the trust holds a concentrated position — a single stock comprising more than 15-20% of the portfolio, a family business, real property — the initial review must specifically address the concentration. Either document the reasons for retention (illiquidity, tax consequences, settlor intent) or develop a diversification plan. Doing nothing is not an option.
3. No evidence of periodic review
The UPIA does not specify a review frequency, but case law and professional standards converge on at least annual review. Some trusts with complex portfolios or volatile markets may require quarterly review.
The review must be documented. A note in your calendar saying “reviewed portfolio” is not documentation. A written memo or meeting minutes summarizing what was reviewed, what decisions were made, and why, is documentation. The review should address:
- Has the portfolio drifted from the target asset allocation? If so, should it be rebalanced?
- Have any positions become concentrated (above the threshold defined in the IPS)? If so, what is the plan?
- Are the investment objectives still appropriate given changes in beneficiary needs or market conditions?
- If investment management has been delegated, is the delegatee performing adequately?
In In re HSBC Bank USA, 37 Misc. 3d 875 (Sur. Ct. Erie County 2012), the court upheld the trustee’s concentrated holdings because the trustee could show it reviewed the portfolio at least annually, had internal policies governing acceptable equity holdings, and documented its investment strategy. The process, not the outcome, was what the court evaluated.
4. Concentrated positions with no diversification plan
This is the pattern that generates the most surcharge awards. A trustee inherits a concentrated position — often a single stock from the settlor’s estate — and does nothing. The stock declines. The beneficiary sues. The trustee argues the position was inherited and the trust instrument did not require diversification. The court applies the UPIA and finds a breach.
In In re Janes, 90 N.Y.2d 278 (1997), the foundational New York case on concentration, the trustee inherited a portfolio heavily concentrated in Kodak stock. Rather than evaluating and diversifying, the trustee allowed the concentration to persist as Kodak declined from $139 to $40 per share. The court found the trustee liable and surcharged it for the lost capital.
In In re Hunter, 100 A.D.3d 996 (2d Dep’t 2012), the court found a breach where the trustee “never formulated any investment plan for the trust that included diversification of the concentration of the stock, acted contrary to its own internal policies, and failed to establish that it took steps to determine whether it was in the interests of the beneficiaries to retain non-diversified holdings.”
The lesson is consistent across cases: concentration without a documented plan is a breach. Concentration with a documented rationale, a review schedule, and a diversification timeline may be defensible. The difference is the paper trail.
5. Reliance on exculpation clauses that no longer protect
Many trust instruments contain exculpation clauses purporting to shield trustees from liability. Trustees often assume these clauses protect them from investment claims. They may not.
New York’s EPTL §11-1.7, as amended in 2018, provides that trustees of inter vivos trusts executed on or after August 24, 2018 cannot be exonerated from liability for “failure to exercise reasonable care, diligence and prudence.” Other states have similar provisions. Even where exculpation remains broader, courts consistently hold that exculpation does not protect trustees from bad faith, reckless indifference, or self-dealing.
If your defense against an investment claim is “the trust instrument says I cannot be sued,” you need to verify that the clause actually applies under your state’s current law. In many states, it does not protect you from a failure to follow the prudent investor standard.
The Practical System: What Trustees Should Do
Compliance with the prudent investor rule is a documentation problem. Here is the system that solves it:
Step 1: Write an Investment Policy Statement
Before making another investment decision, write an IPS. If you need help, hire a fiduciary investment advisor. The IPS should define objectives, risk tolerance, asset allocation, constraints, benchmarks, and review schedule. It should be dated and signed. It should be reviewed and updated at least annually.
Step 2: Conduct and document an initial review
Within 30 days of accepting the trusteeship, review every position in the portfolio. Document the review in writing. For each position, state whether it will be retained or sold, and why. For concentrated positions, either document the justification for retention or create a diversification plan with a timeline.
Step 3: Review quarterly, document annually
At minimum, conduct a documented annual review of the entire portfolio. The review should compare the portfolio to the IPS, identify any drift from target allocation, assess concentrated positions, and document any rebalancing or strategy adjustments. Quarterly reviews are better, especially for volatile portfolios.
Step 4: Document every significant investment decision
When you make a significant investment decision — buying or selling a position, changing asset allocation, hiring or firing an investment manager — document the decision and the reasoning. A one-page memo is sufficient. The memo should state what you decided, why you decided it, what alternatives you considered, and how the decision aligns with the IPS.
Step 5: If you delegate, delegate properly
If you are not an investment professional, delegate. But do it correctly. Select the delegatee through a documented process. Define the scope of authority in a written agreement. Review the delegatee’s performance at least annually. Keep records of the delegation, the agreement, and every review.
Step 6: Address concentration proactively
If the trust holds a concentrated position, do not wait for a beneficiary to raise the issue. Document your analysis of the concentration, your reasoning for retention or diversification, and your timeline. If you decide to retain, document the factors justifying retention: illiquidity, tax consequences, settlor intent, closely held business considerations. If you decide to diversify, document the plan and execute it. Either way, the decision must be made deliberately and recorded.
How TrustOffice Helps
The prudent investor rule is a process standard, and TrustOffice is built to manage and document that process.
TrustOffice’s investment governance module provides an IPS template and tracking system. Define your trust’s investment objectives, risk parameters, and asset allocation targets in the platform. The system tracks the portfolio against the IPS and flags drift from target allocation. You always know whether your portfolio matches your documented strategy.
Concentration risk is monitored automatically. TrustOffice flags any position that exceeds the concentration threshold you define in the IPS. When a concentrated position develops — through market appreciation, inheritance, or asset sale — the system prompts you to document your retention or diversification decision. You will not accidentally carry an undocumented concentrated position for years.
Every investment decision is logged with context. When you buy, sell, or rebalance, TrustOffice records the decision, the date, the rationale, and the supporting documentation. If a beneficiary challenges a decision three years later, your defense is in the system, not in your memory.
Annual reviews are scheduled and documented. TrustOffice’s governance calendar tracks your review schedule and generates a review template covering allocation drift, concentration analysis, objective alignment, and delegatee performance. The completed review is stored with the trust’s governance record.
Delegation is managed, not assumed. If you delegate investment management, TrustOffice tracks the delegatee agreement, scope of authority, and review history. You can demonstrate that you selected the delegatee prudently, defined the relationship clearly, and monitored performance consistently.
The trustees who lose surcharge cases are not the ones who made bad investments. They are the ones who cannot prove they followed a process. TrustOffice makes the process visible, documented, and defensible.
The Bottom Line
The prudent investor rule is not a suggestion. It is the legal standard governing every investment decision you make as a trustee. The standard judges your process, not your performance. And process that is not documented, for legal purposes, does not exist.
If you are a trustee and you do not have a written investment policy statement, you are exposed. If you have not conducted a documented review of the portfolio in the last 12 months, you are exposed. If you are carrying a concentrated position without a written justification or diversification plan, you are exposed.
The fix is not complicated, but it requires a system. Write the IPS. Review the portfolio. Document the decisions. Repeat annually. If the system feels overwhelming, that is a sign you need a tool to manage it — not a sign that the prudent investor rule does not apply to you.
Book a free call to see how TrustOffice can systematize your investment governance, generate audit-ready IPS documentation, and keep you on the right side of the prudent investor rule, or subscribe for $79/month and start building your trust governance system today.
