The Markets Are Unstable — But the Florida Trust Code Doesn’t Change With the Economy

When the stock market drops, many trustees freeze — not knowing what Florida law requires them to do. The answer might surprise you. The Prudent Investor Rule applies just as strictly in a bear market as it does in a bull market.

The Prudent Investor Rule: Active, Not Passive

Florida’s Prudent Investor Rule (codified in the Florida Trust Code) requires trustees to invest and manage trust assets as a prudent investor would, given the purposes, terms, and circumstances of the specific trust. This is an active standard — it requires ongoing evaluation and decision-making, not passive observation. A trustee who simply watches a portfolio decline without evaluating whether action is warranted may be violating the rule.

What Trustees Must Do During Volatile Markets

During periods of market instability, Florida trustees must:

• Assess whether the trust’s current asset allocation is still appropriate given market conditions and the trust’s objectives
• Consider the trust’s liquidity needs, time horizon, and risk tolerance in light of changed market conditions
• Evaluate whether diversification adjustments are warranted
• Document their investment review process and the reasoning behind all material decisions
• Communicate with beneficiaries about portfolio performance as required by the duty to inform

When Can a Trustee Be Personally Liable for Investment Losses?

A trustee who fails to comply with the Prudent Investor Rule can be personally surcharged for losses — meaning the trustee must pay the trust back from personal funds. The exposure is greatest when a trustee: fails to review the portfolio during a significant market event; maintains an allocation that is clearly inappropriate for the trust’s needs; delegates investment management without proper oversight; or makes speculative investments without adequate justification.

Documentation: The Trustee’s Most Important Protection

Whatever investment decisions a Florida trustee makes, the single most important protection against personal liability is thorough documentation. Courts evaluating trustee conduct will examine the decision-making process, not just the outcome. A trustee who can show: (1) what conditions existed when decisions were made; (2) what investment objectives guided the decision; (3) what professional advice was considered; and (4) why the decision was reasonable under the circumstances — has a strong defense even if results were poor.

Frequently Asked Questions

Does the Prudent Investor Rule require trustees to avoid all risk?

No. The Prudent Investor Rule requires reasonable risk management, not risk elimination. Diversified investment portfolios carry market risk, and trustees are not personally liable for market losses as long as the investment decisions were made in compliance with the Prudent Investor Rule — with reasonable care, skill, and caution.

Can a Florida trustee delegate investment decisions to a financial advisor?

Yes, under Florida Statute §736.0807. But delegation does not eliminate trustee responsibility. The trustee must: select the advisor with reasonable care; establish clear terms for the delegation; and monitor the advisor’s performance on an ongoing basis. A trustee who delegates and then disappears remains personally liable for inadequate oversight.

What is the duty to diversify for Florida trustees?

Florida’s Prudent Investor Rule includes a duty to diversify investments unless the specific circumstances of the trust make non-diversification clearly reasonable. A trustee who maintains a highly concentrated portfolio in a single stock, sector, or asset class without documented justification may be in breach of this duty.