Lake County News,California – Estate Planning: Investments during administration of decedent’s estate
Administration of a decedent’s probate or trust estate may include sizable financial investment assets (e.g., brokerage accounts) and/or cash assets (e.g., bank accounts).
Brokerage account values change constantly and may include assets too risky and inappropriate given the administration.
The administration will need to determine how much cash is needed to pay debts of decedent, expenses of administration, and make gifts (typically at the end of administration).
On the other hand, too much uninvested cash (e.g., bank deposits) means unproductive assets that do not earn sufficient income and gradually lose value to inflation. This is increasingly problematic as months pass before distribution is made to beneficiaries.
A personal representative or trustee, as relevant, may want to invest cash assets, reinvest already invested assets, and/or to sell investments to create cash needed to pay debts, expenses, and make gifts to beneficiaries.
What investment powers does a personal representative in a probate or a trustee in a trust administration have to manage the decedent’s assets?
First let us consider the question in a probate. A personal representative is not required or expected to invest in the stock market.
The duties of a personal representative are that he or she must manage the estate assets with the care of a prudent person dealing with someone else’s property. He or she must be cautious and may not make any speculative investments. Except for checking accounts intended for ordinary administration expenses, estate accounts must earn interest.
First, if the personal representative has full authority under the Independent Administration of Estates Act (“IAEA”), then he or she may invest in certain very low risk debt assets.
Next, with permission of the beneficiaries (and sometimes other persons too), the personal representative may also invest in certain additional low-risk debt instruments (e.g., bonds and obligations).
Second, if the probate involves a decedent’s will, the will may include investment powers. If so, the personal representative may invest using such powers, but only if certain important conditions safeguarding payment of the decedent’s debts and expenses of administration are first satisfied. This cannot occur earlier than four months from commencing probate. Sometimes it is necessary or advisable to obtain a court order for certain investments.
Next, in a trust administration, a trustee has a fiduciary (legal) duty to invest and manage trust assets impartially for the benefit of all beneficiaries.
Generally, the trustee must make all assets economically productive, unless the trust provides otherwise. The duty to make assets income producing becomes increasingly important the longer the trust administration takes and the larger the value of the trust estate.
In all events, however, the trustee must evaluate the suitability of the risks and returns associated with the existing investments in the contest of the trust administration.
The trustee’s investment powers are found, first, in the trust itself and, secondarily, in the Probate Code. A trust may expand or restrict the trustee’s standard duties and limitations in the Probate Code. Generally speaking, a trustee may invest in assets that are often off limits in a probate administration.
California’s prudent investor rule requires a trustee to consider the trust’s purposes, terms, distribution requirement and other relevant circumstances when establishing an overall investment strategy.
Investment decisions — including the balancing of investment risk with investment return goals — must be made in the context of an overall investment strategy. No one asset is considered in isolation and investment diversity is the general rule.
Under the prudent investor rule, a trustee can delegate investment decisions to a professional investment advisor. If the trustee follows the following three rules the trustee will not be liable to beneficiaries for following the investment advice: (1) The trustee must select the advisor prudently; (2) trustee must establish the scope and terms of the delegation consistent with the purposes and terms of the trust; and (3) the trustee must periodically monitor the advisor’s performance and compliance with the delegation.
Selecting an advisor prudently means interviewing several different advisors and considering each advisor’s credentials, experience investing trust assets in similar situations, and any possible conflicts of interest. This process should be documented.
The foregoing is not legal or investment advice. Anyone confronting these issues in the administration of a decedent’s estate should seek appropriate legal and investment counsel before proceeding.