Skip links

Is A Trustee Responsible For Trust Losses Due To Market Dips?

Attorney Reed Bloodworth is the managing partner of Bloodworth Law with offices in Orlando and Winter Haven, Florida.

Is A Trustee Responsible For Trust Losses Due To Market Dips?

Reed talks about whether a trustee is responsible for trust losses due to market dips while managing a trust.

Prudent Investment Rule

Reed said that the issue “gets into the prudent investor rule which states that as long as a trustee has complied with the prudent investor rule — meaning they have invested the trust assets in a way that a prudent investor would — then they are not going to be held liable for market dips.

“The prudent investor rule basically comes down to whether they do something reasonable,” Reed said. “Let’s say you’re an individual trustee, well, it might be very reasonable for an individual trustee to go hire a professional, go to one of the large trust companies and hire them to invest the assets in such a way that it complies with the terms of the trust.

Have Assets Been Held For Growth?

“Typically a trust wants — if it’s a long-term trust — something where it’s holding the assets for a while, for growth. And so, if that has been complied with, then no, the trustee isn’t going to be held liable for market dips.

Did Trustee Comply with Prudent Investor Rule?

“However, the flip side of that is when a trustee did not comply with a prudent investor rule,” Reed said.

“Let’s say the trustee was a big believer in a certain stock, whatever, Apple, Microsoft, Netflix, Tesla, and they believe so strongly that they’re thinking, ‘I’ve got a five-million-dollar trust, and it’s just sitting in an account right now. I think a great thing to do would be to take three million of it and I’m going to buy three million dollars worth of Apple stock.’

Reasonable Or Not According to Prudent Investor Rule

“That’s not going to be found to be reasonable,” Reed said. “That’s not going to comply with the prudent investor rule.

“Let’s say you’ve got a situation where the trust says you pay out principle once a year on December 1st. Well, they put all their money into one stock, and that stock crashes. When it’s time to make your disbursement, well, you had a five-million-dollar trust, and you just shrunk the principle by 50 percent.

Did Trustee Act Reasonable?

“That’s a situation where, yes, the trustee could be found liable for a dip because what they did wasn’t reasonable. They didn’t diversify. They didn’t do something that a prudent person would. They took a huge gamble and lost.”

Case-Specific and Fact-Specific

So, again, it’s a fact-specific, case-specific analysis of a trust dispute that’s being brought up by a beneficiary, Reed said.

Reed Bloodworth, is managing partner of Bloodworth Law. If you’re a trustee who needs defense against a beneficiary complaint, or, you’re a beneficiary and you’re in a legal dispute with a trustee, talk to Reed about how Bloodworth Law can help you, your family, or, your business.

Consider sharing this post