Charles W. Ranson Consulting Group, LLC
Trusts & Estates Litigation Consulting & Expert Witness Testimony

The Uniform Prudent Investor Act: A Default Rule for Fiduciaries Managing Trust Portfolios

The Uniform Prudent Investor Act (UPIA) constitutes a pivotal evolution in fiduciary investment practices as provided within the Restatement (Third) of Trusts (1992) and adopted by the National Conference of Commissioners on Uniform State Law in 1994. The UPIA, which supersedes the prior Prudent Man Rule, dictates more modern risk management practices by applying modern portfolio theory in the construction, management, and monitoring of trust investment portfolios. The UPIA’s alignment with modern portfolio theory enables fiduciaries to prudently construct and diversify trust portfolios while selecting investment opportunities that maximize overall returns within an acceptable level of risk. Under the UPIA, a trustee must align market risk with beneficiary risk tolerance and manage market risk exposure on an ongoing basis. The UPIA not only requires trustees to manage a trust portfolio with “an overall investment strategy having risk and return objectives reasonably suited to the trust” and to “diversify the investments of the trust,” but also empowers trustees to consider the ever-growing complex investment opportunities in global markets with a disciplined approach to diversification.

The UPIA further mandates that trustees manage trust investments in compliance with the trust’s terms and purpose while quantifying the appropriate level of risk based on the beneficiary’s circumstances and time horizon. Trust diversification begins with a prudent asset allocation between asset classes such as stocks, bonds, real estate, commodities, and alternative investment strategies. The trustee’s objective in asset allocation is the selection of assets that are not correlated to each other; thus reducing risk given that different asset classes often perform differently under various market conditions. Once the allocation is determined between asset classes, the diversification process continues by selecting securities based on the trustee’s decision to invest in growth vs. value equities (diversified by market sectors) or fixed-income securities (taxable or tax-exempt) with varying maturity dates based on market outlook and the beneficiaries’ circumstances. Once the portfolio is constructed, the trustee should periodically rebalance to maintain an appropriate asset allocation consistent with the trustee’s ongoing duty to monitor the trust.

In conjunction with the Uniform Fiduciary Income and Principal Act, the UPIA enables trustees greater flexibility in developing investment strategies and asset allocations based on market conditions and beneficiary circumstances. For example, trustees may consider a total return investment approach; allowing trustees to consider both income and capital appreciation. This flexibility is vital for aligning the investment strategy with the trust’s long-term objectives and the beneficiary’s interests. Trustees must also regularly review the portfolio to ensure it remains aligned with the trust’s terms and purpose and market conditions, reflecting the dynamic nature of prudent investment management.

UPIA elevates the standard of care required of trustees. Trustees must exercise reasonable care, skill, and caution while affording due consideration to the trust’s terms, purpose, and distributional requirements. If a trustee possesses or purports to have special skills, then the trustee is obligated to utilize those skills diligently.

Corporate and professional fiduciaries must leverage their expertise and resources to manage the trust effectively. Failure to do so can result in liability for any resulting losses, underscoring the UPIA’s elevated standard of care.

A critical aspect of the UPIA is the duty of trustees to seek and engage expert advice when managing trust portfolios. While professional or corporate trustees can rely on their extensive experience and specialized knowledge, untrained or layperson trustees, in exercising prudence, should seek advice from qualified consultants or advisors to ensure prudent trust investment management.

The UPIA provides a robust framework for evaluating trustee conduct in fiduciary litigation. In breach of fiduciary duty claims, the trustee’s conduct, not the investment outcome or performance, is evaluated by the trier of fact. Courts assess whether trustees have adhered to the UPIA’s standards, acted in compliance with the trust instrument, and afforded due consideration to the beneficiary circumstances, and any other case-specific facts and circumstances.

In summary, the UPIA establishes a forward-thinking fiduciary framework that mandates trust asset class diversification and flexibility for implementing prudent investment strategies while allowing trustees to engage third-party experts in managing trust assets if necessary. The UPIA requires that fiduciaries exercise reasonable skill, care, and caution and monitor and review – on an ongoing basis portfolio performance and investment strategy. The UPIA requires that trustees navigate the ever-changing and complex investment universe by applying basic principles of modern portfolio theory and the fundamental duty of prudence to safeguard the trust, its assets, and the beneficiaries’ interests.

In fiduciary accounting proceedings in which the trustee serves the beneficiaries, a formal judicial accounting is required which accounts for the trustee’s administration of the trust, including receipts, disbursements, and all investments purchased and sold during the accounting period. In evaluating the prudent or imprudent conduct of the trustee in fiduciary accounting proceedings, the UPIA provides the standard of care for assessing whether a trustee is in breach of the standard of care established by the UPIA. Charles W. Ranson, as an expert witness in trust and estate litigation matters have assisted both plaintiffs and defendants in fiduciary accounting proceedings by applying the standards established by the UPIA.


By Professors Robert H. Sitkoff & Max M. Schanzenbach
Discussion Paper No. 816 March 2015
Harvard Law School Cambridge, MA 02138