A fiduciary has the responsibility of acting on behalf of another person and putting that person’s best interests ahead of their own. In Michigan, a fiduciary “includes, but is not limited to, a personal representative, funeral representative, guardian, conservator, trustee, plenary guardian, partial guardian, and successor fiduciary” as defined under the Estates and Protected Individuals Code. MCL 700.1104(e). All of these roles may involve the handling of assets, financial accounts and investments of other persons and estates. Since these assets and investments are held and managed for the benefit of either the ward or other beneficiaries, the fiduciary must observe a level of risk and care that may be more reserved than what the fiduciary might be willing to do with his or her own assets.
Michigan’s Estates and Protected Individuals Code imposes a duty on fiduciaries to observe the “prudent investor rule”. Generally, the rule demands that “[a] A fiduciary shall invest and manage assets held in a fiduciary capacity as a prudent investor would, taking into account the purposes, terms, distribution requirements expressed in the governing instrument, and other circumstances of the fiduciary estate. To satisfy this standard, the fiduciary must exercise reasonable care, skill, and caution.” MCL 700.1502(1).
Here are the specifics of Michigan’s prudent investor rule:
- WHO IS AFFECTED?: “The Michigan prudent investor rule applies to a fiduciary estate that exists on or is created after [April 1, 2000].” MCL 700.1512. “As applied to a fiduciary estate that exists on [April 1, 2000], the Michigan prudent investor rule governs only a decision or action that occurs after that date.” Id. Nearly all fiduciaries appointed or governed under the Estates and Protected Individuals Code that handle property of another are subject to the prudent investor rule. For example, if investing or reinvesting estate property, “[a] conservator must invest or reinvest the property in accordance with the Michigan prudent investor rule.” MCL 700.5423(2)(e). A personal representative making investments is permitted to do so, even with investment companies that he or she is affiliated with, “if the investment otherwise complies with the Michigan prudent investor rule.” MCL 700.3713(4). In addition, “[t]he trustee [of a trust] shall act as would a prudent person in dealing with the property of another, including following the standards of the Michigan prudent investor rule.” MCL 700.7803.
- WHAT ARE THE FIDUCIARY’S DUTIES UPON FIRST ACQUIRING AN ESTATE?: “Within a reasonable time after accepting appointment as a fiduciary or receiving fiduciary assets, a fiduciary shall review the assets, and make and implement decisions concerning the retention and disposition of assets, in order to bring the fiduciary portfolio into compliance with the purposes, terms, distribution requirements expressed in the governing instrument, and other circumstances of the fiduciary estate, and with the requirements of the Michigan prudent investor rule.” MCL 700.1505. The fiduciary should not delay in marshaling the assets within a reasonable time to identify the proper goals and objectives.
- WHAT PORTFOLIO STRATEGY MUST THE FIDUCIARY CONSIDER?: “A fiduciary’s investment and management decisions with respect to individual assets shall be evaluated not in isolation, but rather in the context of the fiduciary estate portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the fiduciary estate.” MCL 700.1503(1). “A fiduciary shall make a reasonable effort to verify facts relevant to the investment and management of fiduciary assets.” MCL 700.1503(3). “Among circumstances that a fiduciary must consider in investing and managing fiduciary assets are all of the following that are relevant to the fiduciary estate or its beneficiaries (MCL 700.1503(2)):”
- “General economic conditions.”
- “The possible effect of inflation or deflation.”
- “The expected tax consequences of an investment decision or strategy.”
- “The role that each investment or course of action plays within the overall portfolio, which may include financial assets, interests in closely-held enterprises, tangible and intangible personal property, and real property.”
- “The expected total return from income and the appreciation of capital.”
- “Other resources of the beneficiaries.”
- “The need for liquidity, regularity of income, and preservation or appreciation of capital.”
- An asset’s special relationship or special value, if any, to the purposes of the fiduciary estate or to 1 or more of the beneficiaries.
- IS DIVERSIFICATION PREFERRED?: “A fiduciary shall diversify the investments of a fiduciary estate unless the fiduciary reasonably determines that, because of special circumstances, the purposes of the fiduciary estate are better served without diversifying.” MCL 700.1504. The fiduciary should not sink all of the estate’s assets into a single asset like securities in a brand new start-up company.
- WHAT ARE THE FIDUCIARY’S DUTIES TO THE BENEFICIARIES? “A fiduciary shall invest and manage fiduciary assets solely in the interest of the beneficiaries.” MCL 700.1506. “If a fiduciary estate has 2 or more beneficiaries, the fiduciary shall act impartially in investing, managing, and distributing the fiduciary assets, and shall take into account any differing interests of the beneficiaries.” MCL 700.1507.
- WHAT INVESTMENT COSTS ARE APPROPRIATE?: “In investing and managing fiduciary assets, a fiduciary may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the fiduciary estate, and the skills of the fiduciary.” MCL 700.1508.
- WHAT HAPPENS IF INVESTMENTS RESULT IN A LOSS?: “Compliance with the prudent investor rule is determined in light of the facts and circumstances that exist at the time of a fiduciary’s decision or action, and not by hindsight.” MCL 700.1509. “The prudent investor rule requires a standard of conduct, not outcome or performance.” Id. It is not a violation of the rule if the investment turns out to lose money, provided that the fiduciary used due care in making an informed decision after considering all the facts and circumstances before putting money into said investment.
- CAN THE FIDUCIARY DELEGATE INVESTMENT FUNCTIONS?: Fiduciaries are generally allowed to hire professionals to assist them in their duties such as attorneys, accountants and financial advisors. A fiduciary can delegate the duties of financial investments to an agent provided that reasonable case, skill and caution is used in selecting the agent, establishing the scope of delegation, periodically reviewing the agent’s actions and monitoring performance. MCL 700.1510(1). An agent accepting the responsibility for investing on behalf of a fiduciary’s estate “owes a duty to the fiduciary estate to exercise reasonable care to comply with the terms of the delegation” and submits to the jurisdiction of Michigan’s probate court. MCL 700.1510(3).
- WHEN CAN THE “PRUDENT INVESTOR RULE” BE ALTERED?: “The Michigan prudent investor rule is a default rule that may be expanded, restricted, eliminated, or otherwise altered by the provisions of the governing instrument” (e.g. the will, the trust document, etc.). MCL 700.1502(2). “A fiduciary is not liable to a beneficiary to the extent that the fiduciary acted in reasonable reliance on the provisions of the governing instrument.” Id. If the grantor writes into the governing instrument that he or she directs investment into certain companies or assets with estate or trust property, then that should be respected.
A fiduciary who does not follow the prudent investor rule may be considered in breach of their fiduciary duties to the estate or its beneficiaries. As a result, the fiduciary may be removed on the court’s own initiative or on the petition of an interested person. In egregious cases where the fiduciary acted intentionally, reckless or even engaged in self-dealing or outright theft from the estate, that fiduciary can be personally liable for his or her actions and sued in an individual capacity. Mismanaging the property of another is a serious violation of trust and will be punished severely.
Fiduciaries should use all available resources to them to make the best decisions on behalf of their wards or estates. This can also include seeking the advice of a skilled and knowledgeable probate lawyer. Fiduciaries can hire professionals to assist them at the expense of the estate to perform their duties, including legal counsel. A good attorney can help guide you through the requirements of the prudent investor rule and ensure compliance with your responsibilities to avoid a potential breach, legal trouble or personal civil liability.
If you have further questions or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.