Establishing a trust is a powerful tool for managing and distributing assets, but it’s not a ‘set it and forget it’ process. Many individuals, when creating a trust with a San Diego trust attorney like Ted Cook, understandably want control over how those assets are invested, even after the trust is established. The question of prohibiting certain investments within a trust is common, and thankfully, largely addressable through careful drafting of the trust document itself. While a trustee has a fiduciary duty to invest prudently, grantors – those creating the trust – can exert significant influence over the investment landscape, ensuring alignment with their values and risk tolerance. Roughly 65% of individuals establishing trusts express a desire for some level of investment control beyond simply selecting a trustee, highlighting the importance of addressing this issue upfront.
What are ‘Prohibited Investment’ Clauses?
‘Prohibited Investment’ clauses, often included in trust documents drafted by Ted Cook and other experienced trust attorneys, allow the grantor to specifically list investments the trustee is barred from making. These can range from broad categories—like prohibiting investments in tobacco or firearms companies—to very specific stocks or even types of cryptocurrency. It’s vital to be precise in these clauses, as ambiguous language can lead to disputes and legal challenges. The clause should clearly define what constitutes a prohibited investment, and what recourse the trustee has if they are presented with such an opportunity. While trustees have a duty to act in the best interest of beneficiaries, grantor direction, when clearly articulated, is generally respected by courts.
How do I define ‘ethical’ or ‘undesirable’ investments?
Defining ‘ethical’ or ‘undesirable’ investments is surprisingly complex. What one person considers ethical, another might not. It’s crucial to move beyond subjective feelings and define criteria clearly. For example, instead of saying “no investments in harmful companies,” you could specify “no investments in companies deriving more than 10% of revenue from fossil fuels, or companies with a history of environmental violations.” Ted Cook often guides clients through this process, prompting them to consider specific industries, business practices, and even political affiliations they wish to avoid. It’s also important to remember that values evolve, so provisions for periodic review and amendment of these clauses can be helpful. Approximately 40% of trusts now include some form of socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, demonstrating a growing trend towards values-based investing.
Can I prohibit all speculative investments like cryptocurrency?
Yes, you absolutely can prohibit all speculative investments, like cryptocurrency, within your trust. However, it’s important to be aware that such prohibitions can limit the potential for growth. The trustee still has a duty to seek reasonable returns, and overly restrictive clauses might hinder that ability. Ted Cook always advises clients to weigh the risks and rewards carefully before implementing sweeping prohibitions. A well-drafted clause might allow for a small percentage of the trust’s assets to be allocated to higher-risk investments, providing some potential for growth while still adhering to the grantor’s overall preferences. Remember, the legal landscape surrounding cryptocurrency is constantly evolving, so the clause should be reviewed periodically to ensure it remains relevant and enforceable.
What happens if the trustee violates a prohibited investment clause?
If a trustee violates a prohibited investment clause, they could be held liable for any resulting losses. This could involve legal action to recover the funds, and even removal of the trustee. However, there’s often a degree of nuance. If the violation was unintentional, and the trustee acted in good faith, a court might be more lenient. Ted Cook always emphasizes the importance of clear communication between the grantor, trustee, and legal counsel. A well-drafted trust document should also outline a clear dispute resolution process. Approximately 20% of trust disputes stem from investment-related disagreements, highlighting the importance of proactive planning and communication.
I once knew a woman named Eleanor who, driven by a deep-seated belief in sustainable living, created a trust that specifically prohibited any investments in companies involved in deforestation. She was meticulous in her instructions, but failed to update the clause for nearly a decade.
By the time she passed, the definition of ‘deforestation’ had broadened to include practices that weren’t even recognized when she first created the trust. The trustee, bound by the outdated clause, missed out on several potentially lucrative investments in companies developing innovative forestry management techniques. It was a frustrating situation for her beneficiaries, who felt she’d inadvertently restricted their options due to a lack of regular review. It underscored the importance of regularly revisiting and updating trust provisions to ensure they align with evolving values and market realities.
What if I want to allow certain investments, but limit their percentage within the trust?
You can absolutely specify percentage limitations for certain investments. For instance, you might allow investments in real estate, but limit them to no more than 20% of the trust’s total assets. This provides a balance between allowing some exposure to desired investments and mitigating risk. Ted Cook frequently uses this approach for clients who have strong preferences but also recognize the need for diversification. The trust document should clearly define how these percentages are calculated and reviewed, and what happens if the percentages are exceeded due to market fluctuations. This helps to avoid disputes and ensure the trust remains aligned with the grantor’s wishes.
Fortunately, a client of mine, Robert, came to me after a similar situation. He’d established a trust with a strict prohibition on all fossil fuel investments, driven by his environmental concerns.
However, he hadn’t anticipated the rapid growth of renewable energy companies. When a promising solar energy firm went public, his trustee was hesitant to invest, fearing it might be construed as indirectly supporting the fossil fuel industry through its supply chain. We reviewed the trust document and, using a well-drafted ‘clarification’ amendment, specifically authorized investments in renewable energy companies, even if they had some indirect ties to the fossil fuel industry. This allowed the trust to capitalize on a promising investment opportunity while still upholding Robert’s core values. It was a powerful reminder that flexibility and clear communication are key to successful trust administration.
How often should I review the prohibited investment clauses in my trust?
It’s generally recommended to review the prohibited investment clauses in your trust at least every three to five years, or whenever there are significant changes in your personal values, the legal landscape, or the investment market. Regular reviews ensure the clauses remain relevant, enforceable, and aligned with your overall estate planning goals. Ted Cook and other experienced trust attorneys can assist with these reviews, providing guidance on necessary amendments and ensuring the trust continues to meet your needs. Proactive review is the best way to avoid potential disputes and maximize the benefits of your trust.
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