The most common thing a beneficiary says about a trustee is that the account went down. The most common thing a trustee says in response is that the account went up. Under Minnesota law, both are close to irrelevant.
Minn. Stat. § 501C.0901, subd. 6 says it in one sentence:
Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight. The prudent investor rule is a test of conduct and not of resulting performance.
That sentence decides most Minnesota trust investment disputes before anyone opens a statement. A trustee who built a written strategy, considered the statutory factors, diversified or documented why not, and reviewed the portfolio on a schedule is defensible even after a bad year. A trustee who inherited the settlor’s concentrated position in one company and simply left it there is exposed even if the stock tripled — because subdivision 4 imposed a duty that had nothing to do with performance, and the trustee never performed it.
Where does Minnesota’s prudent investor act actually live?
In chapter 501C, in a single section, and if you are citing chapter 501B you are citing repealed law.
The Minnesota Prudent Investor Act is Minn. Stat. § 501C.0901, titled “Investment and Management of Trust Assets.” It is the only section under the “Prudent Investor Act” heading in chapter 501C, and subdivision 12 confirms it: “This section may be cited as the ‘Minnesota Prudent Investor Act.’”
The Act formerly lived at Minn. Stat. § 501B.151. That section — along with essentially all of the general trust provisions in chapter 501B — was repealed by 2015 Minn. Laws ch. 5, art. 16, § 2, and recodified in the new chapter 501C. Chapter 501B is now titled “Charitable Trusts,” and its table of sections shows most of its old numbers marked “MS 2014 [Repealed, 2015 c 5 art 16 s 2].” Section 501C.0901 was enacted in the same 2015 act (2015 Minn. Laws ch. 5, art. 9, § 1) and has not been amended since.
Trust instruments, trustee-liability policies, and older briefs still cite § 501B.151. If you are reading a document that does, it is at minimum ten years out of date, and that is worth knowing about the document.
What is the actual standard?
Subdivision 2(a) sets it:
A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
And subdivision 2(b) supplies the framing that changes how a claim is proved:
A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.
That is the portfolio rule, and it is a rule of proof as much as a rule of conduct. A beneficiary cannot make a case by finding the one holding that lost money. A trustee cannot defend by finding the one holding that made money. Both arguments are asking the court to evaluate an individual asset in isolation, which is what subdivision 2(b) forbids.
Subdivision 2(c) lists eight circumstances a trustee may consider “without limitation,” ending with clause (8): an asset’s “special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries if consistent with the trustee’s duty of impartiality.”
That last one matters more than it looks. It is the statutory hook for keeping the family cabin, the farm, or the closely held company shares. But it is expressly conditioned on impartiality, and Minn. Stat. § 501C.0803 requires a trustee with two or more beneficiaries to “administer the trust impartially, giving due regard to the beneficiaries’ respective interests.” A trustee who holds an illiquid family asset because one beneficiary wants it, at the expense of another beneficiary’s income, has used clause (8) exactly the way the proviso forbids.
Subdivision 2(d) confirms there is no category of forbidden investment: “A trustee may invest in any kind of property or type of investment consistent with the standards of this section.” And subdivision 2(e) raises the bar for professionals: “A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise.” A bank trust department and a brother-in-law are not held to the same standard — and the brother-in-law who told the settlor he was a sophisticated investor is held to the standard he claimed.
Does the trustee have to diversify?
Yes, by default, and the exception is narrower than trustees think. Subdivision 3, in full:
A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.
Read the exception element by element:
- The trustee must actually determine something. Not drift, not inherit, not fail to act. A determination is an event.
- The determination must be reasonable. It is tested objectively.
- There must be “special circumstances.” Not general reluctance, not tax cost alone as an afterthought, not sentiment.
- The conclusion must be that the purposes of the trust are better served by not diversifying — the trust’s purposes, not the trustee’s convenience and not one beneficiary’s preference.
There are real cases of this. A trust whose stated purpose is to hold and operate a family farm. A trust holding voting shares in an operating business where selling would surrender control the settlor plainly meant to preserve. A concentrated low-basis position where a documented analysis of embedded tax cost against concentration risk, weighed against the trust’s actual distribution needs and time horizon, comes out on the side of holding. Each of those is defensible. What each requires is the analysis, in writing, at the time.
The failure mode is not aggressive investing. It is inertia. A trustee who never diversified because no one asked has not made a reasonable determination based on special circumstances; the trustee has made no determination at all, and subdivision 3 has been breached regardless of what the market did afterward.
The inherited-portfolio duty almost nobody performs
This is subdivision 4, and it is the single most-breached provision in the section:
Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust, and with the requirements of this section.
Note the verbs: review, make, implement. Not “consider.” Not “be aware of.” The duty attaches on accepting the trusteeship or receiving the assets, and it runs on a “reasonable time” clock that starts at that moment.
Now put subdivision 4 next to subdivision 8, which is where trustees get confused:
Unless the trust instrument or a court order specifically directs otherwise, a trustee need not dispose of any property . . . or any kind of investment, in the trust, however acquired, until the trustee determines in the exercise of a sound discretion that it is advisable to dispose of the property. Nothing in this subdivision excuses the trustee from the duty to exercise discretion at reasonable intervals and to determine at those intervals the advisability of retaining or disposing of property.
Subdivision 8 is read by trustees as permission to hold. It is not. It is permission to decide to hold — and its second sentence imposes an affirmative, recurring duty to exercise discretion at reasonable intervals and to make that decision again. Read together, subdivisions 4 and 8 mean:
- On day one: review everything you received and implement decisions.
- At reasonable intervals thereafter: decide again, each time, whether to keep it.
- At no point: simply leave it alone because the settlor bought it.
“However acquired” in subdivision 8 is deliberate. It reaches assets the settlor contributed. The settlor’s purchase decision is not the trustee’s defense.
Subdivision 5 adds the cost discipline: “In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.” Layered fees — a trustee fee, plus a manager fee, plus fund-level expenses, on the same dollars — are measured against that standard.
Can the trust document change the standard?
Yes, and more completely than in most areas of the Trust Code. Subdivision 1:
(a) Except as otherwise provided in paragraph (b), a trustee who invests and manages trust assets shall comply with the prudent investor rule set forth in this section.
(b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the trust instrument. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the trust instrument.
“Eliminated” is a strong word and it is the statute’s own. A settlor can direct retention of a specific asset, waive diversification by name, or displace the rule entirely — and a trustee who reasonably relies on that direction is protected to that extent.
But the elimination is not total, because § 501C.0901 sits inside a code with mandatory floors. Under Minn. Stat. § 501C.0105(b), the terms of a trust prevail over the chapter except as to, among other things, “the duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries” (clause (2)), “the requirement that a trust and its terms be for the benefit of its beneficiaries, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve” (clause (3)), and “the effect of an exculpatory term under section 501C.1008” (clause (8)). And § 501C.1008(a)(1) makes any exculpation unenforceable to the extent it relieves a trustee of liability for a breach committed “in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.”
So the honest statement of Minnesota law is: the prudent investor rule is waivable; good faith is not. A retention direction protects a trustee who holds the asset and keeps thinking. It does not protect a trustee who holds the asset, watches it collapse, and does nothing while a beneficiary starves.
Two further limits worth knowing. Subdivision 9 preserves the court’s power: the section “does not restrict the power of a court of proper jurisdiction to permit a trustee to deviate from the terms of a will, agreement, court order, or other instrument” relating to investment or retention of trust property — which is the escape valve when a mandatory retention clause has become destructive. And subdivision 7 provides that older formulations in a trust instrument — “legal investments,” “authorized investments,” “prudent man rule,” “prudent person rule,” and the long “judgment and care under the circumstances then prevailing” clause — all authorize any investment or strategy permitted under the modern section, “unless otherwise limited or modified.” A 1974 trust does not lock the trustee into 1974 investment law.
What about the fight between the income beneficiary and the remainder?
The portfolio standard creates the fight, and a different section resolves it.
Once a trustee is investing for total return rather than for yield, the traditional split between “income” to the current beneficiary and “principal” to the remainder stops tracking economic reality. Minnesota’s answer is Minn. Stat. § 501C.1112, the trustee’s power to adjust between principal and income. Subdivision 1 conditions the power on exactly the thing this article is about: the trustee may adjust “if the trustee invests and manages the trust assets as a prudent investor and the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income.” Subdivision 2 lists the factors, including the trust’s nature, purpose, and expected duration; the settlor’s intent; the beneficiaries’ circumstances; and whether an asset “was purchased by the trustee or received from the settlor.”
The practical point: a trustee holding a growth portfolio and telling the income beneficiary there is nothing to distribute because the portfolio yields little may have a § 501C.1112 problem layered on top of a § 501C.0803 impartiality problem. The power to adjust exists precisely so that prudent total-return investing does not silently disinherit the current beneficiary.
What a defensible file looks like
Neither the statute nor this article requires anything fancy. It requires evidence that decisions were made.
- An investment policy statement tied to this trust’s purposes, terms, distribution requirements, time horizon, and beneficiaries — the subdivision 2(a) and 2(b) factors, in writing.
- A dated day-one inventory and review memo recording what was received and what was decided about each holding, satisfying subdivision 4’s “review . . . make and implement.”
- A diversification memo where the portfolio is concentrated: the special circumstances, the analysis, and the conclusion that the trust’s purposes are better served without diversifying — subdivision 3.
- Periodic review minutes on a stated interval, each recording the decision to retain or dispose — subdivision 8’s second sentence.
- A fee analysis showing why the total cost stack is appropriate and reasonable — subdivision 5.
- Delegation documentation if an outside manager is used. A trustee may delegate under Minn. Stat. § 501C.0807, but must use reasonable care in selecting the agent, setting the scope and terms, and “periodically reviewing the agent’s actions in order to monitor the agent’s performance and that the agent is acting in compliance with the terms of the delegation.” Hiring a manager is not the end of the duty; it is a different duty. (Direction is a different structure again — see directed trusts and trust protectors.)
- Impartiality notes where beneficiaries’ interests conflict — § 501C.0803 — and adjustment analysis under § 501C.1112 where they conflict about income.
For a beneficiary, that same list is the document request. If none of it exists, the trustee’s defense will consist of performance numbers, and subdivision 6 says performance is not the test.
Two things this does not decide
Losses are not a claim. Minn. Stat. § 501C.1003(b): “Absent a breach of trust, a trustee is not liable for a loss or depreciation in the value of trust property or for not having made a profit.” A down market, standing alone, is not a case.
And filing is not free of deadlines. A claim against a trustee is governed by Minn. Stat. § 501C.1005 — three years from a report that adequately disclosed the potential claim, six years otherwise — and those periods cannot be varied by the trust instrument. If a trustee has been sending you statements about a concentrated position for years, the clock has been running. That analysis is here. If the concern is not how the trustee invests but who the trustee is, decanting and the comparison to South Dakota-style structures are the neighboring questions.
Madgett Law, LLC
We evaluate Minnesota trust investment claims from the file rather than from the account balance — whether a day-one review under § 501C.0901, subd. 4 ever happened, whether a diversification determination under subd. 3 was ever made or merely assumed, and whether periodic review under subd. 8 exists as anything other than a statement being mailed. We represent beneficiaries pursuing those claims and trustees defending them. If you are a trustee holding a concentrated position you did not choose, get the analysis done and dated now; if you are a beneficiary watching one, the documents you need are the trustee’s, and there is a deadline. Call 612-470-6529 or send us a message.
Sources: Minn. Stat. § 501C.0901 (Investment and Management of Trust Assets) — subd. 1(a)–(b) (prudent investor rule; default rule that may be expanded, restricted, eliminated, or otherwise altered; reasonable reliance on the trust instrument), subd. 2(a) (prudent investor standard; reasonable care, skill, and caution), subd. 2(b) (portfolio-as-a-whole evaluation), subd. 2(c)(1)–(8) (circumstances a trustee may consider, including an asset’s special relationship or special value subject to impartiality), subd. 2(d) (any kind of property or investment), subd. 2(e) (duty to use special skills or expertise), subd. 3 (duty to diversify and the special-circumstances exception), subd. 4 (duty within a reasonable time after accepting a trusteeship or receiving assets to review and make and implement retention/disposition decisions), subd. 5 (only appropriate and reasonable costs), subd. 6 (conduct not hindsight; test of conduct and not of resulting performance), subd. 7 (older instrument language authorizes any investment permitted under the section), subd. 8 (no forced disposition until the trustee determines it advisable; continuing duty to exercise discretion at reasonable intervals), subd. 9 (court’s power to permit deviation preserved), subd. 11 (application to trusts existing on and created after January 1, 1997), subd. 12 (“This section may be cited as the ‘Minnesota Prudent Investor Act.’”). Also Minn. Stat. § 501C.0105(b)(2), (b)(3), (b)(8) (mandatory rules the trust terms cannot override); § 501C.0803 (impartiality); § 501C.0807(a)(1)–(3) (delegation; selection, scope and terms, and periodic review of the agent); § 501C.1003(b) (no liability for loss or depreciation absent a breach); § 501C.1005 (limitation of action against trustee); § 501C.1008(a)(1) (exculpation unenforceable as to bad faith or reckless indifference); § 501C.1112, subds. 1–2 (trustee’s power to adjust between principal and income; factors). Repeal and recodification: Minn. Stat. § 501B.151 (Minnesota Prudent Investor Act) and the general trust provisions of chapter 501B were repealed by 2015 Minn. Laws ch. 5, art. 16, § 2, as shown in the chapter 501B table of sections; § 501C.0901 was enacted by 2015 Minn. Laws ch. 5, art. 9, § 1 and has not been amended. All sections retrieved from the Minnesota Office of the Revisor of Statutes. This article is general legal information about Minnesota law, not legal or investment advice, and reading it does not create an attorney–client relationship. Whether a particular investment decision met the prudent investor standard depends on the trust instrument, the portfolio, and the record. No outcome is promised or implied.