A New York trustee who sits on a trust's money, keeps it all in one stock, or hands it to an advisor and never looks again may be violating a specific statute: the Prudent Investor Act, Estates, Powers and Trusts Law (EPTL) § 11-2.3. The law sets the standard of care every trustee must meet when investing trust property, and it gives beneficiaries a yardstick for measuring the trustee's conduct.

What does EPTL § 11-2.3 require of a New York trustee?

EPTL § 11-2.3 imposes an affirmative duty to invest and manage trust property as a prudent investor would.

"A trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined by this section, except as otherwise provided by the express terms and provisions of a governing instrument within the limitations set forth by section 11-1.7 of this chapter."

— New York Estates, Powers and Trusts Law (EPTL) § 11-2.3(a)

The statute applies to "any investment made or held on or after January first, nineteen hundred ninety-five by a trustee".

The core standard appears in subparagraph (b)(2): the trustee "shall exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument."

Is a trustee liable just because the trust lost money?

No. The Prudent Investor Act judges how the trustee made decisions, not whether the market cooperated.

"The prudent investor rule requires a standard of conduct, not outcome or performance. Compliance with the prudent investor rule is determined in light of facts and circumstances prevailing at the time of the decision or action of a trustee."

— New York Estates, Powers and Trusts Law (EPTL) § 11-2.3(b)(1)

That cuts both ways. A trustee who followed a sound process is not liable simply because a well-chosen investment later fell in value. The statute says a trustee "is not liable to a beneficiary to the extent that the trustee acted in substantial compliance with the prudent investor standard or in reasonable reliance on the express terms and provisions of the governing instrument." In a dispute, the question is what the trustee knew and considered, and whether that process was reasonable when the decision was made.

What must a trustee consider before investing?

The statute requires the trustee to pursue "an overall investment strategy" designed to make appropriate present and future distributions to the beneficiaries, "in accordance with risk and return objectives reasonably suited to the entire portfolio". Subparagraph (b)(3)(B) then lists the factors the trustee must weigh, to the extent relevant, including:

The trustee must also watch costs. The standard authorizes a trustee "to incur costs only to the extent they are appropriate and reasonable in relation to the purposes of the governing instrument, the assets held by the trustee and the skills of the trustee."

Does a New York trustee have to diversify?

Yes, as the default rule. Diversification is one of the specific requirements of the prudent investor standard, but the statute builds in an exception.

"to diversify assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes and terms and provisions of the governing instrument"

— New York Estates, Powers and Trusts Law (EPTL) § 11-2.3(b)(3)(C)

Two features of the exception matter. First, the determination must be reasonable; a trustee's personal preference for a stock is not enough. Second, it must be made in the interests of the beneficiaries, not the trustee. The statute separately authorizes the trustee to consider "an asset's special relationship or value to some or all of the beneficiaries if consistent with the trustee's duty of impartiality".

The trust document can also change the default. Because the duty applies "except as otherwise provided by the express terms and provisions of a governing instrument", a will or trust that clearly authorizes the trustee to hold a concentrated position can relieve the trustee of the duty to sell it. Vague language is a weak shield; the statute refers to express terms.

What about the assets the trust started with?

A trustee cannot simply inherit a portfolio and leave it untouched indefinitely. The prudent investor standard requires the trustee, "within a reasonable time after the creation of the fiduciary relationship, to determine whether to retain or dispose of initial assets."

Why does the law judge the portfolio as a whole?

Because the risk of any single investment depends on what else the trust holds. The statute says a trustee may invest "in any type of investment consistent with the requirements of this paragraph, since no particular investment is inherently prudent or imprudent for purposes of the prudent investor standard".

So a beneficiary cannot win a case simply by pointing to one volatile holding, and a trustee cannot defend a lopsided portfolio by noting that each holding, in isolation, was a respectable company. The measure is the overall strategy. The statute defines "portfolio" broadly: it "includes all property of every kind and character held by a trustee as defined in this section."

Are banks and professional trustees held to a higher standard?

Yes. EPTL § 11-2.3(b)(6) sets a heightened standard for a "bank, trust company or paid professional investment advisor" serving as trustee, and for any other trustee "representing that such trustee has special investment skills". Those trustees must exercise "such diligence in investing and managing assets as would customarily be exercised by prudent investors of discretion and intelligence having special investment skills."

Can a trustee delegate investment decisions to an advisor?

Yes, but delegation does not end the trustee's responsibility. The standard authorizes a trustee "to delegate investment and management functions if consistent with the duty to exercise skill, including special investment skills". Subdivision (c) then sets out what the trustee must do with care, skill and caution:

  1. select a delegee suitable to exercise the delegated function, considering the nature and value of the assets and the delegee's qualifications;
  2. establish the scope and terms of the delegation consistent with the purposes of the governing instrument;
  3. periodically review the delegee's exercise of the delegated function and compliance with the scope and terms of the delegation; and
  4. control the overall cost of the delegation.

The advisor also owes duties. Under subdivision (c)(2), the delegee "has a duty to the trustee and to the trust to comply with the scope and terms of the delegation and to exercise the delegated function with reasonable care, skill and caution." An agreement excusing the advisor from that duty does not work: the statute declares such an exoneration "contrary to public policy and void." And by accepting the delegation from the trustee of a trust subject to New York law, the delegee submits to the jurisdiction of the New York courts "even if a delegation agreement provides otherwise".

Can a will or trust excuse the trustee from the prudent investor rule?

Partly. The instrument can change investment rules through express terms, but EPTL § 11-1.7 limits how far it can go. That section declares contrary to public policy an attempted grant to an executor or trustee of "[t]he exoneration of such fiduciary from liability for failure to exercise reasonable care, diligence and prudence."

A clause of that kind is void, but the rest of the will or trust stays in effect. Beneficiaries also do not risk their inheritance by challenging it: under EPTL § 11-1.7(c), any person interested may contest such a grant "without diminishing or affecting adversely his or her interest in the estate or trust any provision in any will or trust to the contrary notwithstanding."

Does the Prudent Investor Act apply to executors too?

Yes. For purposes of the section, the term "trustee" includes "a personal representative, trustee, guardian", along with several other fiduciaries listed in subdivision (e)(1). An executor or administrator holding estate assets for a long administration is held to the same prudent investor standard as a trustee.

What can a beneficiary do when a trustee ignores the prudent investor rule?

A beneficiary can bring the trustee before the Surrogate's Court, demand a full account of every investment decision, and in serious cases seek the trustee's removal. The main tools are these.

Compel an accounting under SCPA § 2205

Under Surrogate's Court Procedure Act (SCPA) § 2205, the court may order a fiduciary "to file an intermediate or final account within such time and in such manner as directed by it". A "person interested" is among those who may petition for that order. The account shows what the trustee bought, sold, held and paid in fees, which is usually the first real evidence of whether the trustee followed a prudent investor process. See our guide to accounting proceedings against New York fiduciaries.

Seek removal under SCPA § 711

SCPA § 711(2) expressly lists investment misconduct as a ground for suspending or revoking a fiduciary's letters: where the fiduciary has "made investments unauthorized by law or otherwise improvidently managed or injured the property committed to his charge". For a testamentary trustee, § 711(10) adds cases where the trustee "has violated or threatens to violate his trust". For a lifetime (inter vivos) trustee, § 711(11) allows a person interested to petition for removal where the supreme court, if it had jurisdiction, would have cause to remove the trustee. We cover the procedure in detail in how to remove an executor or trustee in New York for breach of fiduciary duty.

Hold the trustee responsible for the loss

The statute's liability shield covers a trustee only "to the extent that the trustee acted in substantial compliance with the prudent investor standard". Where the process fell short, beneficiaries can ask the court to hold the trustee accountable for the resulting loss as part of the accounting or a related proceeding. The broader framework of loyalty, impartiality and care that sits around the investment duty is explained in our article on fiduciary duties and breach of trust in New York.

Before filing, gather the trust instrument, every statement you have received, and any correspondence with the trustee about investments.

Talk to a New York trust litigation attorney

If a trustee or executor is holding trust assets in one stock, leaving them idle, paying unexplained fees, or refusing to explain investment decisions, Estate Law New York can review the trust instrument and the accounts with you. Managing Attorney Alan Vaitzman, Esq. meets clients at our office on the 17th Floor, 299 Broadway, New York, NY 10007. Schedule a free consultation to discuss your options.

Frequently Asked Questions

Can a New York trustee be sued just because the trust investments lost value?

Not on that basis alone. EPTL § 11-2.3(b)(1) says the prudent investor rule requires a standard of conduct, not outcome or performance, and compliance is judged by the facts and circumstances at the time of the trustee's decision.

Does a trustee in New York have to diversify the trust's investments?

Diversification is the default requirement under EPTL § 11-2.3(b)(3)(C). A trustee may decline to diversify only if the trustee reasonably determines that not diversifying is in the interests of the beneficiaries, or if the governing instrument's express terms provide otherwise.

Can a trustee let a financial advisor manage the trust money?

Yes. EPTL § 11-2.3(c) allows delegation, but the trustee must use care, skill and caution in selecting the advisor, setting the scope and terms of the delegation, periodically reviewing the advisor's work, and controlling the overall cost.

Can a will or trust say the trustee is never liable for bad investments?

Not fully. EPTL § 11-1.7 declares void any attempt to exonerate an executor or trustee from liability for failure to exercise reasonable care, diligence and prudence, and a beneficiary may challenge such a clause without affecting his or her interest.

Does the prudent investor rule apply to executors?

Yes. EPTL § 11-2.3(e)(1) defines "trustee" for this section to include a personal representative, so executors and administrators holding estate assets are covered.

How can a beneficiary find out how a trustee invested the trust assets?

A person interested can petition the Surrogate's Court under SCPA § 2205 for an order requiring the fiduciary to file an intermediate or final account. The account shows the trust's holdings, transactions and expenses.

Can a trustee be removed for making poor investments?

SCPA § 711(2) lists, as a ground for suspending or revoking letters, a fiduciary who has made investments unauthorized by law or otherwise improvidently managed or injured the property in his or her charge. The court decides whether the conduct makes the fiduciary unfit to continue.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. No attorney-client relationship is formed by reading this publication. Prior results do not guarantee a similar outcome. Reviewed by Alan Vaitzman, Esq. — Managing Attorney at Estate Law New York. Working in estate law since 2017. J.D., New York Law School (2021); B.A. in Psychology, Brooklyn College (2016). Admitted to practice in New York (Reg. No. 5989199), New Jersey, and Florida (Bar No. 1040681). Office: 299 Broadway, 17th Floor, New York, NY 10007.