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A Trust Primer for Physicians

By Charles L. Stanley; CFP™ ChFC

Since inception, the Uniform Prudent Investor Act (UPIA) has changed the financial advisory landscape. Essentially, the act modified the legal criteria of “prudent investing” for trusts.

Now, all assets owned by a trust are considered “investments” for purposes of the Uniform Prudent Investor Act. Consequently, for example, if a trust owns a life insurance policy or an annuity, it is considered an investment for purposes of the UPIA. Anointed doctors, and other trustees and their advisors, are subject to the Act.

Background

The UPIA (California Probate Code Article 2.5) was adopted by the Uniform Conference of Commissioners on Uniform State Laws in 1994. When determining whether or not certain investing is “prudent,” the standard is applied to the whole portfolio rather than to individual investments.

Risk Analysis

The UPIA radically changes the analysis of risk. The UPIA considers risk as unavoidable. For example, fixed income instruments carry the risk of loss of purchasing power, even though the principal may not be reduced in terms of real numbers. Risk is often desirable so long as it is sufficiently compensated. The UPIA seeks to compel the trustees to analyze the trade-offs between risks and returns, taking into consideration the needs and objectives of the trust.

Restrictions Eliminated

The restrictions on what type of investments can be held in trust have been eliminated. The doctor trustee, or other, can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investment. The trustee’s duty to diversify trust assets is codified in the UPIA. It is now recognized that proper effective diversification may enhance returns and/or reduce risk at the same time.

Delegation of Duty Permitted

The UPIA rejected the traditional trust rule that generally prohibited “delegation of duty” by trustees, especially the duty of investment of trust assets. Delegation is now permitted, subject to safeguards. Agents are now made liable if they do not follow the new law.

What Must Trustees Do?

To comply with the UPIA, trustees must review trust assets (16049) and make and implement decisions to either keep or discard assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust. For example: 

• The trustee must diversify the assets of the trust unless it is prudent not to do so (16048). Accordingly, it would not be acceptable for the trust to hold all cash, or all municipal bonds.
• The trustee must either comply with the Act in full or have the trust amended to restrict the requirements to diversify trust assets.
• The trustee must delegate if he or she believes that he or she doesn’t the expertise to perform certain functions, this is particularly anticipated in the area of investment management.
• The trustee is expected to document all of the above and to be available for review either by beneficiaries and/or courts should they become involved. This includes a written Investment Policy Statement [IPS], as previously discussed in the Executive-Post. The act doesn’t specifically require this, but how would one prove they had been acting as a prudent trustee without documentation?
• The trustee must periodically review the circumstances, assets, and any professional delegates whom he or she has retained to assist him or her.
• The portfolio must be periodically rebalanced to maintain the established risk/reward characteristics identified in the Investment Policy Statement [IPS]. This is also not specifically stated, but is implied in 16047(b) and is a part of proper portfolio management according to Modern Portfolio Theory [MPT].
• The act requires the costs of management to be “reasonable.”
• The trustee must deal impartially with beneficiaries when there are two or more beneficiaries and must invest impartially, taking into account the differing interests of the beneficiaries.

Assessment

In most states, trust language can draft the trustee out of any and all requirements of the Uniform Prudent Investor Act. Some attorneys are doing this. So medical professionals and others should check trust language carefully. This article is not a “final answer” in regard to compliance with the Uniform Prudent Investor Act. But, we seek your thoughts, ideas, experiences, opinions and comments on the UPIA; especially from medically focused financial advisors and estate attorneys. For example, are there other compliance issues to consider?

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

• PRACTICES: www.BusinessofMedicalPractice.com
• HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
• CLINICS: http://www.crcpress.com/product/isbn/9781439879900
• ADVISORS: www.CertifiedMedicalPlanner.org
• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

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Filed under: Financial Planning, Investing, Portfolio Management, Risk Management |