EPTL 11-2.3: The Prudent Investor Act — Investment Duties of New York Trustees

EPTL 11-2.3, known as the Prudent Investor Act, is the statute that tells every New York trustee how trust money must be invested — and tells every beneficiary when a trustee's investment losses cross the line from bad luck into a surcharge (personal liability). In plain terms, the statute requires a trustee to invest the way a careful professional would invest someone else's money: with an overall strategy, appropriate diversification, attention to the beneficiaries' actual needs, and documented reasoning. A trustee is not a guarantor of investment results, but a trustee who ignores the process the statute prescribes can be forced in Surrogate's Court to repay losses out of the trustee's own pocket.

Who the Statute Applies To

Under EPTL 11-2.3(a), the prudent investor standard applies to investments made or held by a trustee on or after January 1, 1995. "Trustee" here is read broadly to include fiduciaries generally — trustees of testamentary trusts, trustees of lifetime trusts (both revocable trusts and irrevocable trusts), and executors and administrators managing estate assets during administration. The word "held" matters: even a trust funded decades ago is governed by the Act today, because the trustee is holding the investments now. There is no grandfathering of an old portfolio.

The same subsection contains an important escape hatch: the prudent investor standard applies "except as otherwise provided by the express terms and provisions of a governing instrument." A will or trust agreement can expand, restrict, or modify the trustee's investment duties — for example, by expressly authorizing the retention of a family business or a concentrated stock position. Courts read such clauses narrowly. Boilerplate language authorizing "retention of assets" generally does not excuse a trustee from monitoring a dangerous concentration; only clear, specific language directed at the asset in question reliably alters the statutory duty.

What the Prudent Investor Standard Actually Requires

EPTL 11-2.3(b) defines the standard. Its key features:

1. A portfolio-wide, total-return approach

The statute requires the trustee to pursue an overall investment strategy for the entire portfolio, considering risk and return objectives reasonably suited to the trust. No single investment is judged in isolation. A speculative position that would have been imprudent by itself under older law can be prudent as a small piece of a diversified portfolio — and, conversely, a "safe" portfolio composed entirely of low-yield bank deposits can be imprudent if it ignores inflation and the remainder beneficiaries' interests.

2. Mandatory consideration of specific factors — EPTL 11-2.3(b)(3)(B)

The trustee must consider, to the extent relevant:

• The size of the portfolio;
• The nature and estimated duration of the fiduciary relationship;
• The liquidity and distribution requirements of the trust;
• General economic conditions and the possible effect of inflation or deflation;
• The expected tax consequences of investment decisions;
• The role each investment plays within the overall portfolio;
• The expected total return, including both income and appreciation of capital;
• The needs of the beneficiaries, to the extent reasonably known, for present and future distributions.

This list is the trustee's working checklist. In litigation, the single most damaging fact for a trustee is usually the absence of any record showing these factors were ever considered.

3. The duty to diversify — EPTL 11-2.3(b)(3)(C)

The trustee must diversify the trust's assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes and terms of the governing instrument. This is the most frequently litigated provision of the Act. Concentration cases — where a trust holds 40%, 60%, or 90% of its value in one stock or one piece of real estate — generate more surcharge decrees than any other category of investment claim.

4. The duty to review original assets — EPTL 11-2.3(b)(3)(D)

Within a reasonable time after the fiduciary relationship begins, the trustee must affirmatively determine whether to retain or dispose of the assets the trust started with. Inherited portfolios are the classic trap: a trustee who simply keeps whatever the decedent owned, without analysis, violates this subsection even if the trustee never made a single affirmative "investment." New York courts have treated periods of a few months to roughly a year as the outer boundary of "reasonable time" for reviewing a concentrated position, depending on market conditions and the complexity of the holding.

5. No hindsight — EPTL 11-2.3(b)(1)

Compliance is judged "in light of facts and circumstances prevailing at the time of the decision or action," not with the benefit of hindsight. A trustee who followed a prudent process is protected even if the market moved against the trust. This cuts both ways: a trustee who took a reckless gamble that happened to pay off has still breached the duty, though without damages there is usually nothing to surcharge.

6. Reasonable costs and broad investment authority

EPTL 11-2.3(b)(4)(A) authorizes investment in any type of asset consistent with the standard — there is no statutory "legal list" of permitted investments in New York. EPTL 11-2.3(b)(5) permits the trustee to incur costs only to the extent they are appropriate and reasonable relative to the assets and purposes of the trust; layered or excessive investment fees are themselves a basis for objection.

7. Higher standard for professionals

A trustee who has special investment skills — a bank, trust company, or paid professional investment advisor, or an individual who represented special skills to obtain the appointment — is held to the standard of a prudent investor with those skills. Corporate trustees cannot defend a concentration case by pointing to what an unsophisticated lay trustee might have done.

Delegation of Investment Functions — EPTL 11-2.3(b)(4)(C)

Unlike older New York law, which barred delegation of investment discretion, the Act expressly permits a trustee to delegate investment and management functions. But delegation is not abdication. The delegating trustee must:

1. Exercise care, skill and caution in selecting the delegee (typically an investment advisor or manager);
2. Establish the scope and terms of the delegation consistent with the purposes of the governing instrument;
3. Periodically review the delegee's performance and compliance with the terms of the delegation; and
4. Retain responsibility for the overall investment strategy.

A trustee who hires a manager and then never reads a statement for five years has not complied with (b)(4)(C) and remains exposed for the manager's losses. For a fuller discussion of how these duties fit within a trustee's broader role, see our page on trustee selection, powers, and duties in irrevocable trusts.

The Leading Case: Matter of Janes

The New York Court of Appeals' decision in Matter of Janes, 90 N.Y.2d 41 (1997), remains the touchstone for concentration and diversification claims. There, an estate held roughly 71% of its value in a single stock. The corporate fiduciary retained the position without any documented analysis while the stock declined severely. The Court of Appeals affirmed a surcharge and, critically, held that damages for imprudent retention are measured by the "lost capital" method: the value of the asset on the date it should have been sold, minus the value actually received when it was later sold (or its value at the accounting), plus interest. The court rejected the more speculative "lost profits" measure that would ask what a hypothetical diversified portfolio would have earned. Although Janes arose under the predecessor prudent person rule, Surrogate's Courts apply its damages framework and its diversification reasoning to EPTL 11-2.3 cases today.

Worked Example: How a Surcharge Is Calculated

Assume a testamentary trust is funded in January 2020 with $2,000,000: $1,400,000 (70% of the portfolio) in 14,000 shares of a single publicly traded stock at $100 per share, and $600,000 in diversified funds. The trustee never analyzes the concentration, never consults an advisor, and keeps no records. The stock declines steadily and the trustee finally sells all 14,000 shares in 2023 at $40 per share, receiving $560,000.

On the beneficiaries' objections, the Surrogate finds that a prudent trustee, complying with EPTL 11-2.3(b)(3)(C) and (D), would have diversified the position within six months of funding — by July 2020, when the stock traded at $95. The lost capital calculation:

• Value on the date the stock should have been sold: 14,000 × $95 = $1,330,000
• Proceeds actually received: 14,000 × $40 = $560,000
• Surcharge (lost capital): $1,330,000 − $560,000 = $770,000

The court may add interest on the surcharge from the date of the loss, in its discretion, at up to the statutory 9% rate — which on $770,000 can add roughly $69,000 per year. The court may also deny or reduce the trustee's commissions otherwise payable under SCPA 2307, since a fiduciary found to have breached the duty of prudent investment frequently forfeits some or all compensation for the period of the breach.

Now change one fact: the trustee obtained a written analysis from an investment advisor in March 2020 concluding that an orderly sale over eighteen months was prudent given tax consequences and market volatility, and the trustee followed that plan. Even with the identical market loss, the trustee likely prevails, because EPTL 11-2.3(b)(1) judges the process at the time, not the result.

Enforcing EPTL 11-2.3 in Surrogate's Court: Step by Step

Investment-duty claims are almost always resolved in a trust accounting proceeding in Surrogate's Court. The typical sequence:

1. Demand an informal accounting. Beneficiaries are entitled to information about the trust's investments. A written demand for statements and an account often resolves matters or exposes the problem.
2. Petition to compel an accounting — SCPA 2205 and 2206. If the trustee refuses, an interested person petitions the Surrogate's Court to order the trustee to file a judicial account. The court issues process; if the trustee ignores the order, the court can hold the trustee in contempt or revoke letters.
3. The trustee files the account. Alternatively, a trustee may voluntarily petition for judicial settlement of the account — commonly at the trust's termination or the trustee's resignation. The account itemizes principal received, investment gains and losses, income, commissions, and expenses. Losses on specific holdings appear on the account's schedules, which is where concentration problems become visible.
4. Examine the trustee — SCPA 2211. Before filing objections, a beneficiary may examine the accounting trustee under oath and demand production of records: brokerage statements, investment policy statements, delegation agreements, internal memoranda. This examination is often where the absence of any (b)(3)(B) analysis is established.
5. File objections. Objections must be filed by the deadline set by the court — typically fixed at the return date of the citation or by stipulation/scheduling order after the SCPA 2211 examination. Missing this deadline is fatal: a decree settling the account without objections is binding.
6. Discovery, trial, decree. The proceeding continues like civil litigation, usually with expert testimony from investment professionals on both sides regarding what a prudent investor would have done and when. The Surrogate's decree fixes any surcharge, interest, and commission forfeiture, and judicially settles the account.
7. Related relief. Where the breach is ongoing, beneficiaries may simultaneously seek suspension or removal of the trustee under SCPA 711 and 719, and interim restraints on further transactions.

Deadlines and Limitations Traps

• Open repudiation rule. The limitations period for a beneficiary's claim against a trustee generally does not begin to run until the trustee openly repudiates the fiduciary obligation or judicially settles the account. Old losses can therefore still be surchargeable — one reason trustees should account periodically rather than let decades of transactions accumulate.
• Receipts and releases. A beneficiary who signs a receipt, release, and waiver in connection with an informal accounting may be barred from later objections, unless the release was procured without adequate disclosure. Beneficiaries should never sign a release without reviewing the underlying investment records.
• Res judicata of the decree. Once a judicial decree settles an account, claims covered by the accounting period are extinguished. Objections must be raised in the proceeding or lost.
• Objection deadlines. Objections are due on the schedule the court sets — often the citation return date. Always confirm the deadline on the citation and any scheduling order; extensions require court approval or stipulation.

Common Pitfalls Under EPTL 11-2.3

• Passive retention of inherited concentrations. "The decedent loved that stock" is not a defense. Absent express authorization in the instrument, sentiment does not satisfy (b)(3)(C) or (b)(3)(D).
• No paper trail. Trustees who considered the statutory factors but never documented the analysis fight the case at a severe disadvantage. Contemporaneous memos, advisor reports, and minutes are the trustee's best evidence.
• Misreading retention clauses. General boilerplate authorizing retention of "any property received" is routinely held insufficient to eliminate the duty to monitor and diversify.
• Delegation without oversight. Hiring a money manager and never reviewing performance violates (b)(4)(C) and leaves the trustee liable.
• Ignoring the income/remainder tension. Investing 100% for the income beneficiary's yield — or 100% for growth — breaches the duty of impartiality embedded in the portfolio factors. Where the instrument permits, a unitrust election under EPTL 11-2.4 can ease this tension.
• Beneficiaries who wait. Losses compound, records disappear, and releases get signed. A beneficiary who suspects imprudent investing should demand records promptly and, if refused, compel an accounting under SCPA 2205.
• Confusing prudence with performance. Underperforming an index is not, by itself, a breach; the question is process. Conversely, a decree settling losses does not require proof of bad faith — negligent process is enough.

How EPTL 11-2.3 Interacts With the Rest of Trust Administration

Investment prudence is one strand of a trustee's obligations, alongside the duties of loyalty, impartiality, and full disclosure. A trustee's compensation under SCPA 2307 assumes faithful performance; a surcharge proceeding routinely puts commissions at risk as well. And the scope of the investment duty always begins with the governing instrument — which is why careful drafting of trustee powers, retention language, and exculpation clauses when the trust is created matters as much as the trustee's later conduct.

Albert Goodwin represents both trustees defending their investment decisions and beneficiaries pursuing surcharge claims in accounting proceedings throughout New York's Surrogate's Courts.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].