Prudent Investor Rule: How Ontario Trustees Must Invest Trust Money

If you have been named a trustee, or you are a beneficiary wondering how trust or estate money is being handled, investing is often where worry starts. Money sitting in a trust has to be put somewhere, and the law sets a standard for how that is done.

In Ontario, that standard is the prudent investor rule in the Trustee Act. This article explains what it asks of a trustee, how the trust's own terms fit in, when a trustee is protected from losses, and what a beneficiary can do if they have concerns.

What the prudent investor standard requires

When investing trust property, a trustee must use the care, skill, diligence and judgment of a prudent investor. The test is about the process and the judgment used, not simply whether the investments went up or down.

In plain words, a trustee is not expected to be a market genius. They are expected to act the way a careful, sensible investor would when managing money for other people.

Criteria, diversification and advice

The Trustee Act goes further than a general standard. A trustee must consider listed criteria when planning investments, must diversify to an appropriate extent, and may obtain investment advice.

• Consider the listed criteria when putting an investment plan together.
• Diversify to an appropriate extent rather than concentrating the money in one place.
• Get investment advice where it makes sense; the Act allows it.
• Keep a written record of why decisions were made, so the reasoning can be shown later.

What counts as appropriate diversification depends on the trust: its size, its purpose, who the beneficiaries are and when they need the money. A lawyer or financial adviser can help apply this to a particular trust.

Handing investment work to an agent

A trustee does not have to manage the portfolio personally. A trustee may delegate investment functions to an agent. This is useful when the trustee has little investing experience.

Delegating does not mean forgetting about it. A trustee who hires an agent should still understand the plan, keep in touch and keep records of what was decided and why.

The trust's own terms come first

The Trustee Act's investment powers do not authorize or require a trustee to act inconsistently with the terms of the trust. If a will or trust document limits what the trustee may invest in, or gives specific directions, those terms matter.

Read the document closely before making investment decisions. If its wording is unclear or seems to conflict with what the trust needs, that is a good time to get legal advice.

Protection from loss, and what does not protect a trustee

So honesty alone is not a safety net for investment losses. What protects a trustee is having a sound plan and following it.

A trustee who is unsure what to do may apply to the Superior Court of Justice, without starting an action, for the court's opinion, advice or direction on managing trust property.

If you are a beneficiary, or a trustee, what to do next

A person who appears to have a financial interest in an estate may bring a motion for an order requiring the estate trustee to pass accounts. Passing accounts is the court process for a trustee's accounts of their dealings with the trust, and rules 74.17 and 74.18 of the Rules of Civil Procedure govern it for estate trustees.

Timing matters. The general limitation period in Ontario is two years from the day a claim was discovered, and a claim is discovered when the claimant knew, or reasonably ought to have known, of it. There are exceptions, for example for minors and incapable persons, so the facts of your case matter.

• Trustees: read the trust document and note any investment limits.
• Trustees: write down an investment plan and keep records of advice received.
• Trustees: ask for court directions if you are unsure.
• Beneficiaries: ask for statements and accounts, and keep your copies.
• Beneficiaries: note the dates you learned of any concern, and speak to a lawyer promptly.

Frequently asked questions