N.Y. Estates, Powers & Trusts Law § 11-2.3: Prudent investor act

§ 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, in light of

its investment decisions, the consideration factors incorporated in

clause (b)(5)(B), and the accounting income expected to be produced by

applying the rules in article 11-A, that such an adjustment would be

fair and reasonable to all of the beneficiaries.

(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) with respect to a charitable remainder unitrust described in

section 664 of the United States internal revenue code of 1986;

(ii) that changes the amount payable to a beneficiary as a fixed

annuity or a fixed fraction of the value of the trust's assets;

(iii) 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;

(iv) 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;

(v) 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;

(vi) if the trustee is a current beneficiary or a presumptive

remainderman of the trust;

(vii) if the trustee is not a current beneficiary or a presumptive

remainderman, but the adjustment would benefit the trustee directly or

indirectly (which, however, shall not include the possible effect on a

trustee's commission); or

(viii) 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) An adjustment otherwise prohibited by items (b)(5)(C)(i) through

(viii) may be made if the terms of the trust, by express reference to

this section, provide otherwise. If item (b)(5)(C) (iv), (v), (vi) or

(vii) applies to a trustee and there is more than one trustee, the

trustee or trustees to whom the provision does not apply may make the

adjustment unless the exercise of the power by the remaining trustee or

trustees is prohibited by the terms of the trust. If there is no trustee

qualified to make the adjustment, it may be made if so directed by the

court upon application of the trustee or of an interested party.

(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).

(G) Any exercise of the power to adjust under this subparagraph,

whether from income to principal or from principal to income, shall

constitute a re-characterization of the transferred amount from income

to principal or from principal to income, as the case may be, for

purposes of calculating commissions under article twenty-three of the

surrogate's court procedure act and, for such purposes, such

re-characterization shall be deemed to take effect on the date that such

transfer from income to principal or from principal to income, as the

case may be, is made on a trust's records.

(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,

but does not include an institutional fund as defined in section 551 of

the not-for-profit corporation law;

(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.