Table of Contents
Why Trustees Must Diversify Trust Assets Under California Law
Why Diversification Matters for Beneficiaries
When a Trustee May Not Need to Diversify Trust Assets
Key Takeaways
- California follows the Uniform Prudent Investor Act (UPIA), which requires trustees to diversify trust investments unless it is objectively prudent not to do so.
- Diversification is a core fiduciary duty that reduces risk and protects beneficiaries from unnecessary losses.
- Narrow exceptions exist, such as when the trust terms prohibit diversification or when assets will be distributed shortly.
- Beneficiaries may pursue court action, including surcharges, if a trustee’s failure to diversify results in financial harm.
- The Grossman Law Firm helps California beneficiaries enforce trustee duties and resolve trust investment disputes.
When a trustee chooses a single investment, takes unnecessary risks, or fails to protect trust assets, beneficiaries often sense something is not right. Under California law, trustees have strict fiduciary obligations, one of the most important being the duty to diversify investments unless specific circumstances justify sticking with a concentrated position.
At The Grossman Law Firm, Attorney Scott Grossman has spent more than twenty years guiding beneficiaries through trust administration disputes, investment-related breaches of fiduciary duty, and trustee removal actions throughout California. Understanding how diversification works and when a trustee violates their duties empowers beneficiaries to act before the trust suffers additional losses.
Why Trustees Must Diversify Trust Assets Under California Law
California’s investment standards for trustees come from the Uniform Prudent Investor Act (Probate Code §§16045–16054). This law requires trustees to make decisions based on modern investment principles, including the central requirement of diversification.
Under the Act:
“The trustee must diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.”
Diversification is required because:
- It reduces the risk of significant losses.
- It prevents a trust from relying on the success of a single investment or market sector.
- It increases the likelihood of steady long-term performance.
Trustees cannot “bet” trust assets on a single stock, company, or investment idea. If they lack the expertise to diversify properly, they must hire professionals such as financial advisors. Failing to do so can constitute a breach of the duty of care.
If you’re noticing signs that your trustee isn’t managing trust investments responsibly, it’s essential to understand the full scope of what may be going wrong. You can review 20 Ways Your Trustee May Be Breaching Their Fiduciary Duties to see the most common misconduct issues and how they show up in real California cases. From there, we can help you determine whether their failure to diversify is part of a larger pattern and what steps you can take to protect your inheritance.
Why Diversification Matters for Beneficiaries
For beneficiaries, diversification directly impacts the safety and value of their inheritance. When a trustee refuses to diversify or ignores modern investment standards, several issues can arise:
The trustee may be acting outside their authority
A trustee who handles investments without proper care violates the duty of prudence and may expose beneficiaries to avoidable financial losses.
The trustee may not understand their responsibilities
Some trustees mistakenly believe they can follow personal investment preferences. California law requires decisions to be made for the trust, not based on a trustee’s personal beliefs or comfort level.
Failure to hire advisors is often a red flag
A trustee does not have to be a financial expert, but they must recognize when professional assistance is needed. Refusing to consult an investment advisor may indicate the trustee is not complying with their duties.
The trust may lose value unnecessarily
If the trustee’s failure to diversify directly caused the trust to lose money, beneficiaries can ask the court to “surcharge” the trustee (i.e., order them to repay the losses).
When a Trustee May Not Need to Diversify Trust Assets
Although diversification is the default rule in California, there are specific scenarios where a trustee may be justified in keeping assets as they are.
1. The trust document requires a specific investment approach
If the settlor included instructions limiting or prohibiting diversification, the trustee must follow those directions unless doing so would violate other legal duties.
2. The trust property is expected to be distributed soon
When a trustee anticipates an outright distribution in the near future, diversification may not be necessary.
3. A beneficiary intends to receive a specific asset
If a beneficiary wants a family home or a particular item of property, the trustee may retain it rather than sell it for purposes of diversification.
4. The trust includes gifts of tangible personal property
The trustee does not have to sell such items to diversify. If the trust directs the distribution of a specific object, artwork, furniture, or jewelry, it must remain intact.
These exceptions are narrow. If a trustee improperly claims that diversification “doesn’t apply,” beneficiaries should examine whether the exception makes sense under California law.
What to Do If Your Trustee Is Not Diversifying Trust Assets
A trustee who ignores diversification rules or refuses to manage risk carefully may be breaching their fiduciary duties. If this results in financial harm, beneficiaries can pursue court action.
Potential remedies include:
1. Surcharge the trustee
A surcharge is a court-ordered monetary judgment holding the trustee personally liable for losses caused by their misconduct.
2. Seek prejudgment interest
This compensates beneficiaries for the time value of the lost funds.
3. Seek post-judgment interest
This adds interest from the date of judgment until the trustee pays what is owed.
4. Demand trustee removal
If the trustee’s investment behavior shows poor judgment, self-interest, or neglect, beneficiaries may petition the court for removal and appointment of a qualified successor trustee.
5. Compel the trustee to diversify going forward
If the trust has not yet suffered losses, the court may order corrective action to protect the assets.
Beneficiaries should act promptly. The longer a trustee mishandles concentrated assets, the more severe the financial damage can become.
Related Resources
FAQ
What is considered a breach of the duty to diversify?
A breach occurs when the trustee fails to diversify without a legitimate, legally supported reason, thereby exposing the trust to unnecessary risk or causing a financial loss.
Does a trustee need the beneficiaries’ permission to diversify?
No. Diversification is a legal requirement, not a discretionary choice, unless the trust states otherwise.
Can a trustee rely on their personal investing experience?
Only if their decisions comply with the UPIA, meaning that the trustees must make investment choices for the trust, not based on personal habits or preferences.
What if the trust document contradicts California’s diversification rules?
Trust terms usually control, but the trustee still must act prudently. A term ordering reckless investment behavior may not excuse a breach.
How The Grossman Law Firm Can Help
At The Grossman Law Firm, we help beneficiaries and heirs throughout California enforce their rights in probate and trust litigation. Our team can step in quickly to evaluate whether your trustee’s investment decisions violate California’s prudent investor rules and explain your options for holding them accountable. We regularly help beneficiaries recover losses, remove negligent trustees, and protect the value of their inheritance through focused, results-driven trust litigation.
Call (888) 443-6590 or fill out our Get Help Now form.
Our Intake Specialists can evaluate your case to assess your situation at no cost to you. Qualifying cases will be scheduled for a Free Phone Consultation with Attorney Scott Grossman.
Originally Published July 8, 2022