“Prudent” sounds like a vague, almost old-fashioned word to build a legal standard around. In practice, it’s precise, and it’s the actual rulebook a trustee is judged against. Here’s what the prudent investor standard actually requires, in plain terms, and why it changes how a trust portfolio should be built compared to an ordinary investment account.
Prefer to watch? I walk through the five investment duties Pennsylvania gives a new trustee in about nine minutes.
Where the standard comes from
The prudent investor standard traces back to the Uniform Prudent Investor Act (UPIA), drafted by the Uniform Law Commission in 1994 and approved by the American Bar Association in 1995. It replaced an older rule, the Prudent Man Rule, which had judged individual investments in isolation and often pushed trustees toward overly conservative choices out of fear of second-guessing. UPIA modernized that framework around modern portfolio theory, and nearly every state, including Pennsylvania, has since adopted some version of it.
Pennsylvania’s version is codified in the state’s Prudent Investor Rule, 20 Pa.C.S. Chapter 72 (§ 7203). One detail worth knowing if you’re a Pennsylvania trustee specifically: the state’s rule is phrased as reasonable diversification, and Pennsylvania adds its own exception for assets a trust received in kind. Both are covered below.
At a glance
The old rule versus Pennsylvania’s rule today
| Older Prudent Man Rule | Prudent investor rule today | |
|---|---|---|
| How decisions are judged | One holding at a time | The portfolio as a whole, at the time of the decision, not by hindsight (§ 7213) |
| Income versus growth | Pushed toward income-producing assets | Total return: growth and income together |
| Diversification | Weighed investment by investment | Reasonably diversify, or document why not (§ 7204) |
| Hiring a manager | Traditionally limited | Allowed, with care in choosing and monitoring (§ 7206) |
Section numbers refer to Title 20 of the Pennsylvania Consolidated Statutes.
The whole portfolio is judged, not each individual holding
This is the single biggest shift from the old rule. A prudent investor standard evaluates a trust’s investment strategy as a whole, not by picking apart any one holding after the fact. A concentrated, higher-risk position isn’t automatically imprudent if it plays a sensible role within a portfolio built around the trust’s actual risk and return objectives. What matters is whether the overall strategy was reasonable given the purposes of the trust, not whether any single investment turned out well.
20 Pa.C.S. § 7203(c)
What a Pennsylvania trustee has to weigh
None of these is decided in isolation. Together they shape one strategy for the whole portfolio.
Diversification is required, with room for judgment
Pennsylvania requires a trustee to reasonably diversify the trust’s investments, unless the trustee reasonably determines that not diversifying is in the beneficiaries’ interests, taking into account the purposes, terms and other circumstances of the trust (20 Pa.C.S. § 7204). This isn’t a rigid formula. It’s a documented, reasoned judgment call specific to the trust in front of you, which is exactly why the reasoning behind investment decisions needs to be recorded, not just the decisions themselves.
Pennsylvania adds an exception that matters to many Lancaster County families. A trustee may keep an asset the trust received in kind, such as shares of a family business or a stock held for decades, even if it makes up a disproportionately large share of the portfolio, as long as the trustee exercises reasonable care, skill and caution (20 Pa.C.S. § 7205). Keeping it is still a decision, and the reasoning should be written down.
Diversification in Pennsylvania
Two paths, one rule: write down why
Total return replaces the old income-versus-principal divide
Older trust law often pushed trustees toward income-generating assets specifically, since income beneficiaries and principal (remainder) beneficiaries had sharply separated interests. The prudent investor standard allows trustees to invest for total return, meaning growth and income together, rather than being boxed into an income-focused portfolio that may not actually serve the trust’s beneficiaries well over time. That flexibility comes with a corresponding duty to allocate the results fairly between income and remainder beneficiaries, typically through the state’s principal and income allocation rules.
Duty of loyalty: solely in the interest of beneficiaries
A trustee has to manage trust assets solely in the interest of the beneficiaries, full stop. Self-dealing and conflicts of interest are treated harshly under this duty. If a trustee buys trust property for themselves, or directs trust assets somewhere that happens to benefit the trustee, courts generally presume the transaction improper regardless of whether the price was fair or the trustee acted in good faith.
Duty of impartiality: balancing beneficiaries who want different things
Where a trust has more than one beneficiary, and especially where some beneficiaries want current income and others care more about long-term growth of principal, the trustee has to weigh both fairly rather than favoring one. This is often the most practically difficult part of managing a trust portfolio well, since a decision that helps one beneficiary can genuinely cost another.
Duty of impartiality
How the investment mix can tilt between beneficiaries
| Portfolio leans toward | Tends to favor | The risk for the other side |
|---|---|---|
| Mostly bonds and cash | Income beneficiaries today | Remainder beneficiaries may lose ground to inflation |
| Mostly stocks | Remainder beneficiaries later | Current income may fall short of what the trust intends |
| A total-return balance | Both, by design | Needs a clear, written distribution approach |
Pennsylvania asks trustees to treat beneficiaries equitably, not necessarily equally (20 Pa.C.S. § 7773). General illustration only; the right mix depends on the trust.
Costs have to be reasonable
A trustee may only incur costs that are appropriate and reasonable relative to the trust’s assets, purposes, and the skills actually being applied. Unnecessarily expensive investment products or excessive trading activity can themselves be a breach of the standard, independent of investment performance.
Delegation is allowed, but doesn’t remove responsibility
Unlike older trust law, the prudent investor standard permits a trustee to delegate investment and management functions to an agent, such as a professional portfolio manager. But delegation isn’t a way to hand off responsibility entirely. The trustee retains a duty to exercise reasonable care in selecting the agent, establishing the scope of that delegation, and periodically monitoring the agent’s performance.
20 Pa.C.S. § 7206
When a trustee hires an investment manager
The trustee keeps
- Choosing the manager with reasonable care
- Setting the scope and terms of the arrangement
- Reviewing the manager’s work periodically
The manager takes on
- Following the scope and terms set by the trustee
- Using reasonable care, skill and caution
- Liability to the trust for failing to do so
A trustee who handles their side with care is not responsible for the manager’s individual investment decisions.
What this means in practice
Put together, the standard asks for a portfolio that’s diversified (or has a documented reason not to be), built around the trust’s actual purposes and beneficiaries, managed with reasonable costs, monitored on an ongoing basis, and clearly reasoned rather than just decided. That’s a meaningfully different job than managing an individual investment account, and it’s why trust account management benefits from someone who treats the standard as the actual operating framework, not a compliance afterthought.
A trustee’s checklist
- Diversified, or a documented reason not to be
- Built around the trust’s purposes and beneficiaries
- Costs that are reasonable for the work being done
- Monitored on an ongoing basis
- Reasoned in writing, not just decided
If you’re a trustee trying to understand what this looks like for your specific trust, or an attorney or CPA whose client needs trust account portfolio management built around this standard specifically, reach out and we can talk through it directly.
This article is for general educational purposes only and does not constitute legal or personalized investment advice. Trustee duties are governed by state law and the specific terms of each trust. Consult a qualified estate planning attorney regarding your specific fiduciary obligations.
Robert Reese
Founder of Reese Legacy Capital, a fee-only fiduciary adviser in Lancaster County, PA. About Robert
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