Investing and Managing Trusts Under the New Prudent Investor Rule : A Guide for Trustees, Investment Advisors, and Lawyers

List of Figures and Tables xv(2) Acknowledgments xvii(2) Introduction xix CHAPTER 1 TRUSTS AND TRUSTEES 1(18) THE TRUST 1(7) Origin of the Trust 1(1) Trusts Defined 2(1) Parties to a Trust 3(1) Trust Characteristics 3(1) Qualifications of Trustees 4(1) Income Beneficiaries 5(1) Principal Beneficiaries 5(1) Per Stirpes and Per Capita 6(1) Power to Invade Principal 6(1) Power of Appointment 7(1) MAIN TYPES OF TRUSTS 8(5) Testamentary 8(1) Living 9(1) Specific Types of Irrevocable Trusts 10(3) DUTIES OF A TRUSTEE 13(5) Duty to Exercise Reasonable Care, Skill, and Caution 13(1) Duty Not to Delegate 14(1) Duty to Keep and Render Accounts 15(1) Duty to Take and Keep Control 16(1) Duty to Preserve the Trust Property 16(1) Duties to Enforce Claims and Defend Actions 17(1) Duty to Keep Trust Property Separate 17(1) Duty to Make the Trust Property Productive 18(1) SUMMARY 18(1) CHAPTER 2 PRUDENCE IN PERSPECTIVE 19(16) THE MEANING OF PRUDENCE 19(1) CARE, SKILL, AND CAUTION 19(1) THE OLD PRUDENT MAN RULE: HARVARD V. AMORY 20(5) THE NEW PRUDENT INVESTOR RULE 25(4) Duty to Conform to General Fiduciary Standards 26(2) Caution and Risk Management 28(1) Diversification 28(1) THE UNIFORM PRUDENT INVESTOR ACT 29(1) SUMMARY OF THE MODEL ACT 30(5) Risk/Reward 30(1) Strategy 30(2) Diversification 32(1) Initial Review 33(1) Loyalty 33(1) Impartiality 33(1) Costs 34(1) Delegation 34(1) CHAPTER 3 MANAGING A TRUST UNDER THE NEW RULE 35(14) PROCEDURES 35(4) Prudence Is Conduct 35(1) Understand the Purposes and Terms 36(1) Establish a Strategy and a System 36(3) COPING WITH TRUSTEE LIABILITY 39(3) Specific Measures 41(1) TRUSTEE COMPENSATION 42(2) TRUSTEES AND THE IRS 44(2) PROXIES 46(3) CHAPTER 4 INVESTING UNDER THE NEW RULE 49(50) DIVERSIFICATION 49(6) Investing Versus Gambling 54(1) RISK 55(2) INFLATION AND DEFLATION 57(4) SOURCES OF INFORMATION 61(4) A Trustee's Information Sources 61(2) Market Letters 63(2) TECHNICAL ANALYSIS 65(3) INVESTMENT VEHICLES 68(9) Mutual Funds 68(4) Index Funds 72(1) Hedge Funds 73(3) Options and Commodities 76(1) Art 76(1) Exchange Funds 77(1) ESTABLISHING AN INVESTMENT PROGRAM 77(6) Understand the Terms of the Trust and the Governing Law 78(1) Understand the Needs of the Beneficiaries 78(2) Analyze the Recent Management of the Portfolio 80(1) Develop a Formal Written Statement of Investment Policy 80(1) Make Arrangements with Outside Managers, Custodians, and Brokers 81(1) Design an Appropriate Hypothetical Portfolio 82(1) Execute Transactions 83(1) Monitor Activity 83(1) Periodically Reconsider the Entire Process 83(1) TRUST INVESTMENT STRATEGIES 83(5) Growth Investing 84(1) "Value" Investing 84(2) Trading Philosophies 86(1) Exotica 87(1) INVESTMENT DELEGATION 88(3) SELECTING AN INVESTMENT MANAGER 91(4) Establishing the Scope and Terms of the Delegation 91(3) Performance 94(1) USING AN INVESTMENT MANAGER 95(2) Rebalancing 96(1) SELECTING A CUSTODIAN 97(2) CHAPTER 5 FOR INVESTMENT MANAGERS 99(6) DISCRETIONARY AND NONDISCRETIONARY MANAGEMENT 99(4) Nondiscretionary Accounts 100(3) Monitoring 103(1) Revocable Trusts 103(1) Terms of the Trust Exception for Private Trusts 103(1) SUMMARY 103(2) CHAPTER 6 FOR LAWYERS 105(22) THE NEW RULE 106(1) BASIC FIDUCIARY PRINCIPLES IMBEDDED IN THE NEW RULE 107(5) Applicability of the New Rule 108(2) Applicability Issues 110(2) EXISTING IRREVOCABLE TRUSTS 112(1) THE MODEL ACT AND APPLICABILITY 112(2) SPECIAL AREAS OF INTEREST UNDER THE NEW RULE 114(4) "Sole" or "Absolute" Discretion (Section 228) 114(1) Original Investments (Section 229) 114(1) Power to Delegate, the Requirement of Skill, and the Duty to Control Costs 115(3) EXECUTORS AND PERSONAL REPRESENTATIVES 118(1) EXONERATION 118(5) Trustee Liability and Measure of Damages 119(1) Duty of Impartiality 120(1) Inflation 121(1) "Total Return" Trusts 121(1) Marital Deduction Trusts 122(1) REFORMATION 123(1) GENERATION-SKIPPING TRUSTS 124(1) SUMMARY 124(3) CHAPTER 7 FOR TRUSTEES AND DIRECTORS OF TAX-EXEMPT ENTITIES 127(6) CHARITABLE TRUSTS AND CHARITABLE CORPORATIONS 127(1) THE UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT 128(5) APPENDIXES 133(120) APPENDIX 1 Specimen Trust 135(16) APPENDIX 2 Specimen Trust Digest 151(8) APPENDIX 3 The New Prudent Investor Rule 159(4) APPENDIX 4 Uniform Prudent Investor Act 163(8) APPENDIX 5 Uniform Management of Institutional Funds Act 171(8) APPENDIX 6 States That Have Passed the Uniform Prudent Investor Act and the Uniform Management of Institutional Funds Act 179(4) APPENDIX 7 Specimen Request for Proposal 183(16) APPENDIX 8 Specimen Preliminary Management Questionnaire 199(6) APPENDIX 9 Specimen Extensive Management Questionnaire 205(12) APPENDIX 10 Specimen Investment Management Agreement 217(8) APPENDIX 11 Specimen Statement of Investment Objectives 225(6) APPENDIX 12 Checklist for Monitoring an Investment Account 231(6) APPENDIX 13 Form ADV, Uniform Application for Investment Adviser Registration 237(16) Glossary 253(20) Index 273(8) About the Authors 281