[Close this window]

  §§ 11-2.3 Prudent investor act
(a) Prudent investor rule.
A trustee has a duty to invest and manage property held in a fiduciary
capacity in accordance with the prudent investor standard defined by
this section, except as otherwise provided by the express terms and
provisions of a governing instrument within the limitations set forth by
section 11-1.7 of this chapter. This section shall apply to any
investment made or held on or after January first, nineteen hundred
ninety-five by a trustee.
(b) Prudent investor standard.
(1) The prudent investor rule requires a standard of conduct, not
outcome or performance. Compliance with the prudent investor rule is
determined in light of facts and circumstances prevailing at the time of
the decision or action of a trustee. A trustee is not liable to a
beneficiary to the extent that the trustee acted in substantial
compliance with the prudent investor standard or in reasonable reliance
on the express terms and provisions of the governing instrument.
(2) A trustee shall exercise reasonable care, skill and caution to
make and implement investment and management decisions as a prudent
investor would for the entire portfolio, taking into account the
purposes and terms and provisions of the governing instrument.
(3) The prudent investor standard requires a trustee:
(A) 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 under the governing instrument, in accordance with
risk and return objectives reasonably suited to the entire portfolio;
(B) to consider, to the extent relevant to the decision or action, the
size of the portfolio, the nature and estimated duration of the
fiduciary relationship, the liquidity and distribution requirements of
the governing instrument, general economic conditions, the possible
effect of inflation or deflation, the expected tax consequences of
investment decisions or strategies and of distributions of income and
principal, the role that each investment or course of action plays
within the overall portfolio, the expected total return of the portfolio
(including both income and appreciation of capital), and the needs of
beneficiaries (to the extent reasonably known to the trustee) for
present and future distributions authorized or required by the governing
instrument;
(C) to diversify assets unless the trustee reasonably determines that
it is in the interests of the beneficiaries not to diversify, taking
into account the purposes and terms and provisions of the governing
instrument; and
(D) within a reasonable time after the creation of the fiduciary
relationship, to determine whether to retain or dispose of initial
assets.
(4) The prudent investor standard authorizes a trustee:
(A) to invest in any type of investment consistent with the
requirements of this paragraph, since no particular investment is
inherently prudent or imprudent for purposes of the prudent investor
standard;
(B) to consider related trusts, the income and resources of
beneficiaries to the extent reasonably known to the trustee, and also an
asset's special relationship or value to some or all of the
beneficiaries if consistent with the trustee's duty of impartiality;
(C) to delegate investment and management functions if consistent with
the duty to exercise skill, including special investment skills; and
(D) to incur costs only to the extent they are appropriate and
reasonable in relation to the purposes of the governing instrument, the
assets held by the trustee and the skills of the trustee.
(5) Trustee's power to adjust.
(A) Where the rules in article 11-A apply to a trust and the terms of
the trust describe the amount that may or must be distributed to a
beneficiary by referring to the trust's income, the prudent investor
standard also authorizes the trustee to adjust between principal and
income to the extent the trustee considers advisable to enable the
trustee to make appropriate present and future distributions in
accordance with clause (b)(3)(A) if the trustee determines, after
applying the rules in article 11-A, that such an adjustment would be
fair and reasonable to all of the beneficiaries, so that current
beneficiaries may be given such use of the trust property as is
consistent with preservation of its value.
(B) In deciding whether and to what extent to exercise the power
conferred by clause (b)(5)(A), a trustee may consider, in addition to
the factors stated in clauses (b)(3)(B) and (b)(4)(B), the following
factors to the extent relevant:
(i) the intent of the settlor, as expressed in the governing
instrument; the assets held in the trust; the extent to which they
consist of financial assets, interests in closely held enterprises,
tangible and intangible personal property, or real property; the extent
to which an asset is used by a beneficiary; and whether an asset was
purchased by the trustee or received from the settlor;
(ii) the net amount allocated to income under article 11-A and the
increase or decrease in the value of the principal assets, which the
trustee may estimate as to assets for which market values are not
readily available; and
(iii) whether and to what extent the terms of the trust give the
trustee the power to invade principal or accumulate income or prohibit
the trustee from invading principal or accumulating income, and the
extent to which the trustee has exercised a power from time to time to
invade principal or accumulate income.
(C) A trustee may not make an adjustment:
(i) that diminishes the income interest in a trust that requires all
of the income to be paid at least annually to a spouse and for which an
estate tax or gift tax marital deduction is claimed;
(ii) that reduces the actuarial value of the income interest in a
trust to which a person transfers property with the intent to qualify
for a gift tax exclusion;
(iii) that changes the amount payable to a beneficiary as a fixed
annuity or a fixed fraction of the value of the trust's assets;
(iv) from any amount that is permanently set aside for charitable
purposes under a will or the terms of a trust unless the income
therefrom is also permanently devoted to charitable purposes;
(v) if possessing or exercising the power to make an adjustment causes
an individual to be treated as the owner of all or part of the trust for
income tax purposes, and the individual would not be treated as the
owner if the trustee did not possess the power to make an adjustment;
(vi) if possessing or exercising the power to make an adjustment
causes all or part of the trust assets to be included for estate tax
purposes in the estate of an individual who has the power to remove a
trustee or appoint a trustee, or both, and the assets would not be
included in the estate of the individual if the trustee did not possess
the power to make an adjustment;
(vii) if the trustee is a current beneficiary or a presumptive
remainderman of the trust;
(viii) if the trustee is not a current beneficiary or a presumptive
remainderman, but the adjustment would benefit the trustee directly or
indirectly; or
(ix) if the trust is an irrevocable lifetime trust which provides
income to be paid for life to the grantor, and possessing or exercising
the power to make an adjustment would cause any public benefit program
to consider the adjusted principal or income to be an available resource
or available income and the principal or income or both would in each
case not be considered as an available resource or income if the trustee
did not possess the power to make an adjustment.
(D) If item (b)(5)(C)(v), (vi), (vii), or (viii) applies to a trustee
and there is more than one trustee, a co-trustee to whom the provision
does not apply may make the adjustment unless the exercise of the power
by the remaining trustee or trustees is not permitted by the terms of
the trust.
(E) A trustee may release the entire power conferred by clause
(b)(5)(A) or may release only the power to adjust from income to
principal or the power to adjust from principal to income if the trustee
is uncertain about whether possessing or exercising the power will cause
a result described in items (b)(5)(C)(i) through (vi) or (b)(5)(C)(viii)
or if the trustee determines that possessing or exercising the power
will or may deprive the trust of a tax benefit or impose a tax burden
not described in clause (b)(5)(C). The release may be permanent or for a
specified period, including a period measured by the life of an
individual.
(F) Terms of a trust that limit the power of a trustee to make an
adjustment between principal and income are not contrary to this section
unless it is clear from the terms of the trust that the terms are
intended to deny the trustee the power of adjustment conferred by clause
(b)(5)(A).
(6) Special investment skills.
For a bank, trust company or paid professional investment advisor
(whether or not registered under any federal securities or investment
law) which serves as a trustee, and any other trustee representing that
such trustee has special investment skills, the exercise of skill
contemplated by the prudent investor standard shall require the trustee
to exercise such diligence in investing and managing assets as would
customarily be exercised by prudent investors of discretion and
intelligence having special investment skills.
(c) Delegation of investment or management functions.
(1) Delegation of an investment or management function requires a
trustee to exercise care, skill and caution in:
(A) selecting a delegee suitable to exercise the delegated function,
taking into account the nature and value of the assets subject to such
delegation and the expertise of the delegee;
(B) establishing the scope and terms of the delegation consistent with
the purposes of the governing instrument;
(C) periodically reviewing the delegee's exercise of the delegated
function and compliance with the scope and terms of the delegation; and
(D) controlling the overall cost by reason of the delegation.
(2) The delegee has a duty to the trustee and to the trust to comply
with the scope and terms of the delegation and to exercise the delegated
function with reasonable care, skill and caution. An attempted
exoneration of the delegee from liability for failure to meet such duty
is contrary to public policy and void.
(3) By accepting the delegation of a trustee's function from the
trustee of a trust that is subject to the law of New York, the delegee
submits to the jurisdiction of the courts of New York even if a
delegation agreement provides otherwise, and the delegee may be made a
party to any proceeding in such courts that places in issue the
decisions or actions of the delegee.
(d) Investment in securities of related investment companies.
A trustee holding funds for investment may invest the same in
securities of any management type investment company or trust registered
pursuant to the federal investment company act of nineteen hundred
forty, as amended, notwithstanding that the trustee or an affiliate of
the trustee acts as investment advisor, custodian, transfer agent,
registrar, sponsor, distributor, manager or provides other services to
the investment company or trust. Unless the will, lifetime trust or
order appointing the trustee provides otherwise, the trustee shall elect
annually either (i) to receive or have its affiliate receive
compensation for providing such services to such investment company or
trust for the portion of the trust invested in such investment company
or trust or (ii) to take annual corporate trustees' commissions with
respect to such portion.
(e) As used in this section:
(1) the term "trustee" includes a personal representative, trustee,
guardian, donee of a power during minority, guardian under article
eighty-one of the mental hygiene law, committee of the property of an
incompetent person, and conservator of the property of a conservatee;
(2) the term "trust" includes any fiduciary entity with property owned
by a trustee as defined in this section;
(3) the term "governing instrument" includes a court order; and
(4) the term "portfolio" includes all property of every kind and
character held by a trustee as defined in this section.

[Close this window]