This post originally appeared on Dummies.com.
Among the myriad of duties you assume as trustee is a duty to protect the trust assets. In today’s financial world, protecting the assets most likely doesn’t mean hanging on to those assets with which the trust was funded — unless those assets consist of shares of a closely held business, a family-owned farm, or the like that the grantor specifically instructed be retained in the trust.
You will look to diversify the assets to allow for modest gains while preventing losses. You may choose to enlist the help of investment advisors, trust companies banks, and brokerages. Additionally, attorneys, accountants, and enrolled agents can be of aid in the process of managing the assets of a trust.
In that case, you fulfill your duty as trustee by retaining the asset and seeing that it’s managed as competently as possible. However, barring an instruction in the document to retain specific assets, as trustee you must constantly look at the assets to determine whether they’re the most appropriate to serve the trust purposes.
Diversifying the trust’s assets
“Don’t put all your eggs in one basket” doesn’t just apply on the farm. One of the cornerstones of today’s investment philosophy is to diversify assets into different classes, such as stocks and bonds, and into different industries, such as transportation, healthcare, consumer goods, energy stocks, and so on. By spreading the risk among several classes of investments and several industries, the danger of overall loss lessens.
The theory is that not all investments respond in the same way to all market conditions, so you’re better prepared for market changes in one class or asset or one industry if you invested in several. Diversified mutual funds or mutual funds families can be one answer to diversifying assets in a smaller trust.
Unlike investing your own money, where you’re allowed to invest in anything that’s legal, investing as a trustee requires that you exercise due diligence in researching investments and assume only moderate risk. Speculating, although not specifically prohibited, is strongly discouraged. Your goal shouldn’t be to scale great heights but rather to allow modest gains and prevent drastic losses.
Failing to adequately diversify the assets held inside the trust (except those assets which the grantor specifically requires that you retain) can leave you open to accusations of incompetence (or worse) from the trust beneficiaries or remaindermen. If you choose an investment policy that runs counter to the standard wisdom, document your reasoning and be prepared to defend your choices — in court, if necessary.
Check out the rest of the tips on Dummies.com.