How to Protect a Trust’s Assets

As trustee, one of your important fiduciary duties is to protect the trust’s assets. 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 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 something that the grantor specifically instructed be retained in the 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

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. By spreading the risk among several classes of investments and several industries, the danger of overall loss lessens. Diversified mutual funds or mutual fund 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.

Asking for help in managing a trust’s assets

If managing the trust’s assets proves to be a task that you are not comfortable handling on your own, the following types of professionals can provide assistance:

• Investment advisors: An investment advisor is a person or company who advises the trustee as to what investments to make given the purpose of the trust, its size, and the needs of the beneficiaries. If you choose to use an investment advisor, always use one that charges a fee for services, not one who receives a percentage of sales!

• Trust companies, banks, and brokerages: Trust companies and banks that have trust departments can be useful for holding the assets of the trust. They can prepare periodic statements, annual accounts, and income tax returns and also invest the assets (all for a fee, of course). Trust assets may also be placed in a brokerage account or accounts, which provide you with periodic statements and investment advice.

• Lawyers, accountants, and enrolled agents: Lawyers who specialize in trust law can be useful to you in interpreting the trust instrument and guiding with state laws. Depending on individual state laws, law firms may also have trust departments, where the assets of the trust can be invested and the trust can be administered. Accountants and enrolled agents who are familiar with trust administration can prepare accountings and income tax returns.