5. Conduct in Investing
With regard to investing, the Personal Representative’s first duty is to protect capital and avoid undo risk. The Personal Representative is also under a duty to use reasonable care and skill to make property productive, within the guidelines of the will and of state law restrictions. If the Personal Representative invests estate assets in speculative ventures, he or she is risking personal liability in the event that a loss is sustained, unless that investment is authorized specifically by the terms of the will. The bottom line is that a Personal Representative must exercise prudence, discretion, and intelligence to safeguard the estate’s principal, but at the same time generate as much income as is reasonably possible.
Fortunately, it is the conduct of the Personal Representative, rather than the investment performance, that is judged by the courts. The Personal Representative will be personally liable only when losses result from his or her imprudent conduct, rather than because investment performance has not been as good as possible. The Personal Representative may retain non-income-producing-assets, but only if the will specifically authorizes him or her to hold those assets (or if there is some overriding reason for keeping them).
Maryland law (Estates’ Article Section 15-106) provides a list of “lawful investments.” This is a list in the statute of various investments, generally an investment guaranteed by the federal or state government or an agency of the federal or state government. The statute establishes guidelines but does not insure protection for the Personal Representative. Reasonable care must still be exercised in selecting securities by the Personal Representative. The fact that there statute providing certain “lawful investments” does not mean that any other investment is unlawful in any sense. The duty to use reasonable care and skill in selecting investments is the fundamental test in reviewing a Personal Representative’s activity.
The Personal Representative must be more concerned with the safety of the principal than with enormous profits. Diversification is the key to safety in this area. Even with special language in the will relieving the Personal Representative of the obligation of diversifying assets, we suggest that the Personal Representative maintain records showing why he or she did not diversify. Again, the key in this area is the use of reasonable care in managing investments.
Estates & Trusts Article §15-114 establishes guidelines and standards for the investment of assets. This provision, by its terms, only applies to trust companies or persons who made an election to be governed by this Section. Generally, §15-114 permits the portfolio as a whole to be reviewed rather than focusing on an examination on an asset by asset basis. Additionally, the guidelines set forth considerations the fiduciary may take into account when making an investment decision, including: the general economic conditions, the possible effect of inflation, the expected tax consequences of a decision, the role each investment plays in the portfolio as a whole, the expected total return of the investments, the reasonableness of any costs associated with an investment, and the status of the related assets of beneficiaries. Although arguably Maryland law already dictates a “whole portfolio” approach to fiduciary investments, we recommend following these guidelines.