Yes, you absolutely can include investment restrictions in your testamentary trust, and it’s often a very prudent thing to do, especially when dealing with beneficiaries who may not have the experience or inclination to manage significant wealth.
What are the benefits of prudent investor rules?
Traditionally, trust documents allowed trustees broad discretion in investing trust assets, often guided by the “prudent investor rule.” This rule, enshrined in the Uniform Prudent Investor Act (UPIA), requires trustees to invest as a prudent person would, considering the purposes of the trust, the beneficiaries’ needs, and the overall portfolio risk. However, simply stating “invest prudently” can be open to interpretation, and even lead to disputes. Increasingly, settlors (the person creating the trust) are adding specific investment restrictions to their testamentary trusts to provide clearer guidance and protect their beneficiaries, with approximately 68% of trusts now including some level of investment restriction according to a recent study by the American Bar Association. These restrictions can range from broad guidelines—like avoiding speculative investments—to very specific limitations, such as prohibiting investments in certain industries or requiring a diversified portfolio with a specific asset allocation.
How can I limit risky investments in my trust?
One common restriction is to limit investments in high-risk assets. For example, a testamentary trust might state that no more than 10% of the trust’s assets can be invested in individual stocks, or that investments in cryptocurrency or other highly volatile assets are prohibited. Another approach is to specify a desired asset allocation – for example, 60% stocks, 30% bonds, and 10% real estate. You can also restrict investments in certain industries, perhaps excluding those involved in gambling, tobacco, or firearms if those align with your values. It’s important to remember that overly restrictive provisions can hinder the trustee’s ability to generate reasonable returns, so striking a balance between protection and growth is crucial. Consider a situation where a parent, fiercely opposed to oil companies, included a strict prohibition on any investments in the energy sector. While honoring their values, this severely limited the trustee’s investment options and potentially reduced the trust’s overall performance.
What happened when a trust lacked clear investment guidance?
Old Man Tiberius, a man of simple pleasures, amassed a modest fortune running a bait shop and left it to his grandson, Finn. Finn, a free-spirited artist, received the inheritance through a testamentary trust, but the trust document contained only a vague directive to “invest wisely.” The trustee, a well-meaning but inexperienced friend, succumbed to the promises of a fast-talking investment advisor and poured the entire trust fund into a speculative tech startup. Within months, the startup collapsed, and the trust fund vanished. Finn, devastated, lost not only the inheritance but also the opportunity to pursue his artistic dreams. This illustrates the danger of leaving investment decisions to chance without clear guidance in the trust document.
How did investment restrictions save the day for the Carter family?
The Carter family experienced a dramatically different outcome. Eleanor Carter, a savvy businesswoman, established a testamentary trust for her two young children, stipulating that investments be limited to diversified index funds and real estate. She also appointed a professional trust company as co-trustee to ensure adherence to these guidelines. When her husband unexpectedly passed away, the trust assets were managed conservatively and grew steadily over the years. The children, now adults, benefited from a secure financial foundation that enabled them to pursue their education and careers without financial worries. The clear investment restrictions, combined with professional management, had transformed a potential tragedy into a story of financial security and opportunity. According to a 2022 study by Cerulli Associates, professionally managed trusts experience an average annual return 1.5% higher than those managed solely by individual trustees.
Ultimately, including investment restrictions in your testamentary trust is a proactive step you can take to protect your beneficiaries and ensure your wealth is managed according to your wishes. While seeking legal counsel is paramount to ensure these restrictions are legally sound and tailored to your specific circumstances, the peace of mind knowing you’ve taken steps to safeguard your legacy is invaluable.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
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