The ability to restrict a trust’s investments in specific industries is a common request from settlors – the individuals creating the trust. It reflects a growing trend of aligning financial portfolios with personal values, often referred to as socially responsible investing or ESG (Environmental, Social, and Governance) investing. Steve Bliss, as an estate planning attorney in San Diego, frequently encounters clients wanting to exclude investments in industries like tobacco, firearms, fossil fuels, or those involved in practices they morally oppose. While generally permissible, these restrictions require careful drafting to ensure they’re enforceable and don’t unduly hamper the trustee’s ability to fulfill their fiduciary duty of generating reasonable returns.
What are the legal limitations on restricting trust investments?
Trust law generally grants trustees broad discretion in investment decisions, but that discretion isn’t absolute. A trustee has a fiduciary duty to act prudently and in the best interest of the beneficiaries. Simply stating a desire to avoid a specific industry might be insufficient. Restrictions must be clearly defined, reasonable, and not conflict with the trust’s overall purpose. A complete prohibition could be problematic if it severely limits investment options and potential returns, particularly if the trust is established for long-term income generation. Approximately 65% of millennials and Gen Z investors prioritize ESG factors when making investment decisions, according to a recent study by Morgan Stanley, making these requests increasingly common.
How specific do I need to be when outlining prohibited industries?
Specificity is paramount. Vague language like “unethical” or “harmful” is open to interpretation and could lead to disputes. Instead, clearly define the prohibited industries using objective criteria. For instance, instead of “companies that harm the environment,” specify “companies deriving more than 20% of their revenue from coal mining or the production of single-use plastics.” Additionally, consider including a “de minimis” threshold, allowing for incidental investments in prohibited industries if the percentage is extremely small. Steve Bliss emphasizes the importance of balancing personal values with financial practicality. He often advises clients to consider the potential impact on diversification and returns before implementing overly restrictive clauses.
Can a trustee be held liable for violating my investment restrictions?
Yes, a trustee can be held liable for violating properly drafted investment restrictions. If a trustee knowingly invests in a prohibited industry, despite clear instructions in the trust document, they could be subject to legal action by the beneficiaries. However, a trustee can also seek court approval to deviate from the restrictions if they demonstrate that adhering to them would jeopardize the trust’s financial health. The Uniform Prudent Investor Act (UPIA), adopted in most states, provides guidance on balancing investment restrictions with the trustee’s duty of care. The trustee must demonstrate a reasonable basis for believing that the deviation is in the best interest of the beneficiaries.
What happens if my restrictions significantly limit investment options?
If the restrictions severely limit investment options, it could create challenges for the trustee. They may struggle to achieve diversification, potentially increasing risk and reducing returns. In such cases, a court might modify the restrictions to allow for a more balanced portfolio. It’s crucial to work with an estate planning attorney like Steve Bliss to assess the potential impact of the restrictions on the trust’s investment strategy. He can help you craft language that aligns with your values while ensuring the trust remains financially viable. Approximately 30% of trusts include some form of socially responsible investing clause, indicating a growing awareness of this issue.
I had a friend, Eleanor, who believed strongly in environmental conservation. She created a trust with a strict prohibition on investing in any company involved in fossil fuels. However, she didn’t define “involved” clearly. The trustee, interpreting this broadly, excluded even companies with minimal involvement in fossil fuels, like those using it for transportation. This severely limited the trust’s investment options, and the portfolio underperformed significantly. Eleanor was devastated when she realized her well-intentioned restriction had inadvertently harmed the beneficiaries. It became a lengthy and expensive legal battle to modify the trust terms.
Eleanor’s case highlighted the importance of clear and precise drafting. Steve Bliss always urges clients to be specific when outlining investment restrictions, considering all potential interpretations. He stresses that ambiguity can lead to disputes and ultimately undermine the trust’s intended purpose.
Then there was Mr. Henderson, a retired physician. He wanted to ensure his trust’s investments aligned with his ethical beliefs, specifically excluding companies involved in the production of tobacco and weapons. Working with Steve Bliss, we drafted a clause that precisely defined “involved” as deriving more than 10% of revenue from those industries. The clause also included a provision allowing the trustee to invest in companies that were actively transitioning away from those industries. Years later, Mr. Henderson’s trust performed well, aligning with his values and providing for his grandchildren.
Mr. Henderson’s experience demonstrated how thoughtful drafting can successfully balance ethical concerns with financial responsibility. He understood the importance of working with a knowledgeable estate planning attorney to create a trust that reflected his values and protected his family’s future.
What about negative or exclusionary screening versus positive screening?
There are two main approaches to socially responsible investing: negative or exclusionary screening, which avoids certain industries, and positive screening, which actively seeks out companies with strong ESG performance. While negative screening is more common, positive screening can be equally effective and may offer greater potential for growth. Steve Bliss often recommends a blended approach, combining both strategies to achieve a balance between ethical considerations and financial returns. He believes that a well-diversified portfolio can align with your values without sacrificing performance. It’s also important to remember that the landscape of ESG investing is constantly evolving, and it’s crucial to stay informed about the latest trends and best practices.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
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Feel free to ask Attorney Steve Bliss about: “How are trusts taxed?” or “Can I contest a will based on undue influence?” and even “Can I create a pet trust in California?” Or any other related questions that you may have about Trusts or my trust law practice.