§ 11-2.3 — Prudent investor act

New York § 11-2.3

• Jurisdiction: New York
• Law EPT: Estates, Powers & Trusts
• Part 2: Investments By Fiduciaries: Powers and Duties Relating Thereto
• Art. 11: Fiduciary: Powers, Duties and Limitations; Actions By or Against In Representative or Individual Capacities

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§ 11-2.3 Prudent investor act\n (a) Prudent investor rule.\n A trustee has a duty to invest and manage property held in a fiduciary\ncapacity in accordance with the prudent investor standard defined by\nthis section, except as otherwise provided by the express terms and\nprovisions of a governing instrument within the limitations set forth by\nsection 11-1.7 of this chapter. This section shall apply to any\ninvestment made or held on or after January first, nineteen hundred\nninety-five by a trustee.\n (b) Prudent investor standard.\n (1) The prudent investor rule requires a standard of conduct, not\noutcome or performance. Compliance with the prudent investor rule is\ndetermined in light of facts and circumstances prevailing at the time of\nthe decision or action of a trustee. A trustee is not liable to a\nbeneficiary to the extent that the trustee acted in substantial\ncompliance with the prudent investor standard or in reasonable reliance\non the express terms and provisions of the governing instrument.\n (2) A trustee shall exercise reasonable care, skill and caution to\nmake and implement investment and management decisions as a prudent\ninvestor would for the entire portfolio, taking into account the\npurposes and terms and provisions of the governing instrument.\n (3) The prudent investor standard requires a trustee:\n (A) to pursue an overall investment strategy to enable the trustee to\nmake appropriate present and future distributions to or for the benefit\nof the beneficiaries under the governing instrument, in accordance with\nrisk and return objectives reasonably suited to the entire portfolio;\n (B) to consider, to the extent relevant to the decision or action, the\nsize of the portfolio, the nature and estimated duration of the\nfiduciary relationship, the liquidity and distribution requirements of\nthe governing instrument, general economic conditions, the possible\neffect of inflation or deflation, the expected tax consequences of\ninvestment decisions or strategies and of distributions of income and\nprincipal, the role that each investment or course of action plays\nwithin the overall portfolio, the expected total return of the portfolio\n(including both income and appreciation of capital), and the needs of\nbeneficiaries (to the extent reasonably known to the trustee) for\npresent and future distributions authorized or required by the governing\ninstrument;\n (C) to diversify assets unless the trustee reasonably determines that\nit is in the interests of the beneficiaries not to diversify, taking\ninto account the purposes and terms and provisions of the governing\ninstrument; and\n (D) within a reasonable time after the creation of the fiduciary\nrelationship, to determine whether to retain or dispose of initial\nassets.\n (4) The prudent investor standard authorizes a trustee:\n (A) to invest in any type of investment consistent with the\nrequirements of this paragraph, since no particular investment is\ninherently prudent or imprudent for purposes of the prudent investor\nstandard;\n (B) to consider related trusts, the income and resources of\nbeneficiaries to the extent reasonably known to the trustee, and also an\nasset's special relationship or value to some or all of the\nbeneficiaries if consistent with the trustee's duty of impartiality;\n (C) to delegate investment and management functions if consistent with\nthe duty to exercise skill, including special investment skills; and\n (D) to incur costs only to the extent they are appropriate and\nreasonable in relation to the purposes of the governing instrument, the\nassets held by the trustee and the skills of the trustee.\n (5) Trustee's power to adjust.\n (A) Where the rules in article 11-A apply to a trust and the terms of\nthe trust describe the amount that may or must be distributed to a\nbeneficiary by referring to the trust's income, the prudent investor\nstandard also authorizes the trustee to adjust between principal and\nincome to the extent the trustee considers advisable to enable the\ntrustee to make appropriate present and future distributions in\naccordance with clause (b)(3)(A) if the trustee determines, in light of\nits investment decisions, the consideration factors incorporated in\nclause (b)(5)(B), and the accounting income expected to be produced by\napplying the rules in article 11-A, that such an adjustment would be\nfair and reasonable to all of the beneficiaries.\n (B) In deciding whether and to what extent to exercise the power\nconferred by clause (b)(5)(A), a trustee may consider, in addition to\nthe factors stated in clauses (b)(3)(B) and (b)(4)(B), the following\nfactors to the extent relevant:\n (i) the intent of the settlor, as expressed in the governing\ninstrument; the assets held in the trust; the extent to which they\nconsist of financial assets, interests in closely held enterprises,\ntangible and intangible personal property, or real property; the extent\nto which an asset is used by a beneficiary; and whether an asset was\npurchased by the trustee or received from the settlor;\n (ii) the net amount allocated to income under article 11-A and the\nincrease or decrease in the value of the principal assets, which the\ntrustee may estimate as to assets for which market values are not\nreadily available; and\n (iii) whether and to what extent the terms of the trust give the\ntrustee the power to invade principal or accumulate income or prohibit\nthe trustee from invading principal or accumulating income, and the\nextent to which the trustee has exercised a power from time to time to\ninvade principal or accumulate income.\n (C) A trustee may not make an adjustment:\n (i) with respect to a charitable remainder unitrust described in\nsection 664 of the United States internal revenue code of 1986;\n (ii) that changes the amount payable to a beneficiary as a fixed\nannuity or a fixed fraction of the value of the trust's assets;\n (iii) from any amount that is permanently set aside for charitable\npurposes under a will or the terms of a trust unless the income\ntherefrom is also permanently devoted to charitable purposes;\n (iv) if possessing or exercising the power to make an adjustment\ncauses an individual to be treated as the owner of all or part of the\ntrust for income tax purposes, and the individual would not be treated\nas the owner if the trustee did not possess the power to make an\nadjustment;\n (v) if possessing or exercising the power to make an adjustment causes\nall or part of the trust assets to be included for estate tax purposes\nin the estate of an individual who has the power to remove a trustee or\nappoint a trustee, or both, and the assets would not be included in the\nestate of the individual if the trustee did not possess the power to\nmake an adjustment;\n (vi) if the trustee is a current beneficiary or a presumptive\nremainderman of the trust;\n (vii) if the trustee is not a current beneficiary or a presumptive\nremainderman, but the adjustment would benefit the trustee directly or\nindirectly (which, however, shall not include the possible effect on a\ntrustee's commission); or\n (viii) if the trust is an irrevocable lifetime trust which provides\nincome to be paid for life to the grantor, and possessing or exercising\nthe power to make an adjustment would cause any public benefit program\nto consider the adjusted principal or income to be an available resource\nor available income and the principal or income or both would in each\ncase not be considered as an available resource or income if the trustee\ndid not possess the power to make an adjustment;\n (D) An adjustment otherwise prohibited by items (b)(5)(C)(i) through\n(viii) may be made if the terms of the trust, by express reference to\nthis section, provide otherwise. If item (b)(5)(C) (iv), (v), (vi) or\n(vii) applies to a trustee and there is more than one trustee, the\ntrustee or trustees to whom the provision does not apply may make the\nadjustment unless the exercise of the power by the remaining trustee or\ntrustees is prohibited by the terms of the trust. If there is no trustee\nqualified to make the adjustment, it may be made if so directed by the\ncourt upon application of the trustee or of an interested party.\n (E) A trustee may release the entire power conferred by clause\n(b)(5)(A) or may release only the power to adjust from income to\nprincipal or the power to adjust from principal to income if the trustee\nis uncertain about whether possessing or exercising the power will cause\na result described in items (b)(5)(C)(i) through (vi) or (b)(5)(C)(viii)\nor if the trustee determines that possessing or exercising the power\nwill or may deprive the trust of a tax benefit or impose a tax burden\nnot described in clause (b)(5)(C). The release may be permanent or for a\nspecified period, including a period measured by the life of an\nindividual.\n (F) Terms of a trust that limit the power of a trustee to make an\nadjustment between principal and income are not contrary to this section\nunless it is clear from the terms of the trust that the terms are\nintended to deny the trustee the power of adjustment conferred by clause\n(b)(5)(A).\n (G) Any exercise of the power to adjust under this subparagraph,\nwhether from income to principal or from principal to income, shall\nconstitute a re-characterization of the transferred amount from income\nto principal or from principal to income, as the case may be, for\npurposes of calculating commissions under article twenty-three of the\nsurrogate's court procedure act and, for such purposes, such\nre-characterization shall be deemed to take effect on the date that such\ntransfer from income to principal or from principal to income, as the\ncase may be, is made on a trust's records.\n (6) Special investment skills.\n For a bank, trust company or paid professional investment advisor\n(whether or not registered under any federal securities or investment\nlaw) which serves as a trustee, and any other trustee representing that\nsuch trustee has special investment skills, the exercise of skill\ncontemplated by the prudent investor standard shall require the trustee\nto exercise such diligence in investing and managing assets as would\ncustomarily be exercised by prudent investors of discretion and\nintelligence having special investment skills.\n (c) Delegation of investment or management functions.\n (1) Delegation of an investment or management function requires a\ntrustee to exercise care, skill and caution in:\n (A) selecting a delegee suitable to exercise the delegated function,\ntaking into account the nature and value of the assets subject to such\ndelegation and the expertise of the delegee;\n (B) establishing the scope and terms of the delegation consistent with\nthe purposes of the governing instrument;\n (C) periodically reviewing the delegee's exercise of the delegated\nfunction and compliance with the scope and terms of the delegation; and\n (D) controlling the overall cost by reason of the delegation.\n (2) The delegee has a duty to the trustee and to the trust to comply\nwith the scope and terms of the delegation and to exercise the delegated\nfunction with reasonable care, skill and caution. An attempted\nexoneration of the delegee from liability for failure to meet such duty\nis contrary to public policy and void.\n (3) By accepting the delegation of a trustee's function from the\ntrustee of a trust that is subject to the law of New York, the delegee\nsubmits to the jurisdiction of the courts of New York even if a\ndelegation agreement provides otherwise, and the delegee may be made a\nparty to any proceeding in such courts that places in issue the\ndecisions or actions of the delegee.\n (d) Investment in securities of related investment companies.\n A trustee holding funds for investment may invest the same in\nsecurities of any management type investment company or trust registered\npursuant to the federal investment company act of nineteen hundred\nforty, as amended, notwithstanding that the trustee or an affiliate of\nthe trustee acts as investment advisor, custodian, transfer agent,\nregistrar, sponsor, distributor, manager or provides other services to\nthe investment company or trust. Unless the will, lifetime trust or\norder appointing the trustee provides otherwise, the trustee shall elect\nannually either (i) to receive or have its affiliate receive\ncompensation for providing such services to such investment company or\ntrust for the portion of the trust invested in such investment company\nor trust or (ii) to take annual corporate trustees' commissions with\nrespect to such portion.\n (e) As used in this section:\n (1) the term "trustee" includes a personal representative, trustee,\nguardian, donee of a power during minority, guardian under article\neighty-one of the mental hygiene law, committee of the property of an\nincompetent person, and conservator of the property of a conservatee,\nbut does not include an institutional fund as defined in section 551 of\nthe not-for-profit corporation law;\n (2) the term "trust" includes any fiduciary entity with property owned\nby a trustee as defined in this section;\n (3) the term "governing instrument" includes a court order; and\n (4) the term "portfolio" includes all property of every kind and\ncharacter held by a trustee as defined in this section.\n