Administration of a deceased person’s inheritance or trust estate may include substantial financial investment assets (eg, brokerage accounts) and/or cash (eg, bank accounts).
Brokerage account values are constantly changing and may include assets that are too risky and inappropriate given the administration.
The administration will need to determine the amount of money needed to pay the deceased’s debts, administration expenses, and make gifts (usually at the end of the administration).
On the other hand, too much uninvested cash (eg bank deposits) means unproductive assets that do not generate sufficient income and gradually lose value due to inflation. This becomes increasingly problematic as months pass before the distribution is made to the beneficiaries.
A personal representative or fiduciary, as the case may be, may wish to invest cash, reinvest assets already invested, and/or sell investments to create the cash needed to pay debts, expenses, and give gifts to beneficiaries.
What investment powers does a personal representative in an estate or a trustee in a trust administration have to manage the assets of the deceased?
Let’s first consider the issue 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 should manage the property of the estate with the care of a prudent person dealing with the property of others. He must be careful and must not make speculative investments. With the exception of checking accounts intended for current administrative expenses, estate accounts must earn interest.
First, if the personal representative has full authority under the Independent Administration of Estates Act (“IAEA”), then they may invest in certain very low risk debt assets.
Then, with the permission of the beneficiaries (and sometimes also other persons), the personal representative may also invest in certain additional low-risk debt securities (eg bonds and debentures).
Second, if probate involves the will of a deceased, the will may include powers of investment. In this case, the personal representative can invest using these powers, but only if certain important conditions guaranteeing the payment of the debts and the administration costs of the deceased are met beforehand. This cannot happen before four months from the start of the registration. 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 return all assets to be economically productive, unless the trust provides otherwise. The obligation to make the assets income-producing becomes increasingly important as the administration of the trust takes time and the value of the trust estate increases.
In all cases, however, the trustee must assess the appropriateness of the risks and returns associated with the existing investments in the contest of administering the trust.
The trustee’s investment powers are found, first, in the trust itself and, second, in the Probate Code. A trust may expand or restrict the standard obligations and limitations of the trustee in the Probate Code. Generally speaking, a trustee can invest in assets that are often prohibited in a probate administration.
California’s Prudent Investor Rule requires a trustee to consider the trust’s objectives, terms, distribution requirements, and other relevant circumstances when establishing an overall investment strategy.
Investment decisions, including the balance between investment risk and investment return objectives, should be made within the context of an overall investment strategy. No asset is considered in isolation and diversity of investments is the general rule.
Under the prudent investor rule, a trustee can delegate investment decisions to a professional investment adviser. If the trustee follows the following three rules, the trustee will not be liable to the beneficiaries for following the investment advice: (1) The trustee must select the adviser with care; (2) the trustee must establish the scope and terms of the delegation in accordance with the purposes and terms of the trust; and (3) the trustee must periodically monitor the advisor’s performance and compliance with the delegation.
Choosing an adviser carefully means interviewing several different advisers and considering each adviser’s credentials, experience with investing trust assets in similar situations, and any possible conflicts of interest. This process should be documented.
The above is not legal or investment advice. Anyone facing these issues in administering a deceased’s estate should consult with legal counsel and an investment advisor before proceeding.