Prudent Man Rule = Out of date, not really used anymore except in a minority of states, “trustee should invest as a prudent man would”, excludes some investments because they are too risky.
Prudent Investor Rule = Current standard, “trustee should invest as a prudent investor would”, allows all asset classes because diversification can lower overall risk tolerance.
Prudent Person Rule = Prudent Man Rule
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Prudent Person Rule
For more than 150 years, the prudent person rule served as the basis for the investment duties of the trustees of private trusts. The prudent person rule originally appeared in Harvard College v. Amory. According to Harvard College, trustees should “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
In making investments of trust funds the trustee is under a duty to the beneficiary
(a) in the absence of provisions in the terms of the trust or of a statute otherwise providing, to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived;
(b) in the absence of provisions in the terms of the trust, to conform to the statutes, if any, governing investments by trustees;
(c) to conform to the terms of the trust, except as stated in 165-168.8
Prudent Investor Rule
The ALI replaced the prudent person rule with the prudent investor rule in May 1990. In 1992, the ALI revised the pertinent portion of the Restatement (Second) of Trusts by publishing the Restatement (Third) of Trusts (Prudent Investor Rule).9
Section 227 of the Restatement (Third) of Trusts provides that:
The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.
(a) This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.