Navigating Economic Uncertainty: A Guide for Trustees

Inflation spikes, supply‑chain disruptions, global conflicts — headlines like these can send markets tumbling and portfolios seesawing. In recent years, the world saw some of the highest inflation rates in decades and accompanying market volatility. For trustees, these swings aren’t just numbers on a screen; they translate to real questions about keeping the trust on track. Should you rebalance? How do you reassure beneficiaries when their statements show losses? And what if the trust’s income isn’t covering current needs?

Trustees shoulder the responsibility of preserving assets for future beneficiaries while meeting the present needs of income beneficiaries. Volatile markets can pull these priorities in opposite directions. Lower valuations might signal buying opportunities, yet falling account balances can make beneficiaries nervous about risk. Rising interest rates tempt some to demand safer, higher‑yielding investments, while others see cheap equities as a long‑term bargain. Navigating these competing pressures calls for a clear grasp of your duties and an adaptable plan.

Know Your Duties and the Prudent Investor Rule

Serving as a trustee isn’t just about crunching numbers; it’s a legal relationship defined by trust law. Courts impose several core duties: acting in the best interests of all beneficiaries, exercising reasonable care and skill, avoiding self‑dealing, and following the terms of the trust instrument. You can’t delegate these responsibilities unless the trust or applicable law explicitly allows it. Even in rough markets, you must stick to the grantor’s instructions.

The Prudent Investor Standard, Simplified

Modern trust law is built on the Uniform Prudent Investor Act (UPIA) or similar statutes. Rather than prescribing specific investments, the UPIA requires trustees to invest “as a prudent investor would." Key factors to consider include:

• Risk vs. Return: Match investments to the trust’s goals and the beneficiaries’ timelines. A college fund for a five‑year‑old and a lifetime support trust for an older beneficiary will have different risk tolerances.

• Inflation and Economic Conditions: High inflation can erode the real value of fixed payments. Look at the broader economic environment before making changes.

• Beneficiaries’ Needs: Balance immediate income requirements with the need to preserve principal for remainder beneficiaries.

• Liquidity: Ensure enough cash or cash‑like assets are available for upcoming distributions without forcing a sale at the wrong time.

One non‑negotiable element under the UPIA is diversification. Section 3 states that trustees must diversify trust investments unless the trust’s circumstances or the grantor’s explicit instructions suggest otherwise. Diversification doesn’t guarantee profits, but it spreads risk so that a drop in any single investment or sector won’t jeopardize the entire portfolio.

Failure to diversify has landed trustees in court. In the so‑called Kodak case, a trustee stuck with a huge block of Kodak stock despite a steep decline, arguing that the grantor wanted to maintain the holding. Beneficiaries sued, highlighting the tension between grantor intent and the prudent investor standard. Courts generally look at whether trustees considered diversification and documented their reasoning.

Practical Strategies for Turbulent Markets

A strong investment policy and disciplined approach help trustees avoid being whipsawed by headlines. Here are some strategies, drawn from professional guidance, to consider when the markets get shaky.

1. Stay Calm and Stick to the Plan

Market drops can trigger panic. Yet history shows that markets eventually recover from downturns. In March 2020, major stock indexes plunged more than 30% as the pandemic spread. By the end of the year, the Dow Jones Industrial Average had not only recovered but ended up over 6%. Selling at the bottom locks in losses and can trigger unnecessary tax liabilities. Conversely, those who stayed invested saw the rebound. As a trustee, removing emotion and sticking to the long‑term investment strategy is part of your duty.

2. Diversify Intelligently

It’s tempting to react to downturns by dumping stocks for cash or chasing the latest hot investment. Resist knee‑jerk reactions. A well‑diversified portfolio — across asset classes, industries, and geographies — reduces the impact of a single company or sector’s poor performance. Misaligned strategies and emotional reactions can put trust assets at risk.

Instead, consult a qualified investment advisor to align the portfolio with the trust’s objectives. Remember: diversity doesn’t mean just owning many different stocks; it also means balancing risk and return through bonds, real estate, cash equivalents, and possibly alternative assets, depending on the trust’s terms.

3. Rebalance Regularly

Over time, market movements may cause your portfolio’s allocation to drift. Equities might become overweighted after a bull run, or fixed income might dominate after a flight to safety. Periodic rebalancing brings the portfolio back to the target allocation, ensuring it still reflects the trust’s risk tolerance. Ask yourself: Do you understand the trust’s investment goals and time horizon? Are cash flows sufficient to support distributions in a down market? Will projected income changes require adjusting payouts? If the trust’s terms allow, rebalancing might also include shifting funds between principal and income to meet current obligations.

4. Review and Monitor Performance

Regular reviews are crucial. During calm times, annual reviews might suffice, but in volatile markets, quarterly or even monthly check‑ins are prudent. Confirm that investment managers follow the trust’s investment policy statement (IPS) and that the IPS still fits the trust’s objectives. Tools like projections that account for inflation, various market cycles, and beneficiaries’ ages can help guide adjustments. If managers deviate from the investment style outlined in the prospectus, investigate and document the reasons. A strong paper trail will support your decisions if beneficiaries question them later.

5. Don’t Try to Time the Market

It’s nearly impossible to predict the market’s exact peaks and valleys. While recessions can feel scary, history shows that periods of significant negative returns are often followed by significant growth. After the S&P 500 plunged 56.8% during the 2007–2009 financial crisis, it surged 68.6% in the following 12 months. If you sell when prices drop, you risk missing the recovery and having to buy back at higher prices. Educate beneficiaries about these patterns so they understand why staying invested matters.

6. Document Your Decisions

Every investment decision, reallocation, or change in distribution should be recorded. Detailed notes show that you considered relevant factors — such as risk, return, beneficiaries’ needs, and tax implications — and that you were acting in good faith. A trustee must maintain a meticulous trust accounting; each transaction, distribution, and expense should be documented to prevent confusion and to demonstrate accountability. Courts and beneficiaries respect transparency and thoroughness. If something goes wrong, well‑kept records can protect you.

7. Consult Professionals When Needed

Managing a trust through turbulent markets often requires expertise beyond any single trustee. If you feel overwhelmed or if the trust holds complex investments, consider working with a corporate trustee, investment advisor, or other fiduciary agents. These professionals bring experience, resources, and a level of objectivity that can help navigate tough decisions. Some trustees also choose to purchase errors and omissions insurance as an extra layer of protection.

Talking to Beneficiaries: Clarity and Calm

When statements show losses, beneficiaries may panic. A trustee’s job includes communication: explaining what’s happening, why, and how you’re responding. Here are some guidelines:

1. Proactive Updates: Don’t wait for angry calls. Send updates during times of volatility to reassure beneficiaries that you are monitoring the situation and working with advisors. A short email or quarterly newsletter summarizing market events and the trust’s position can go a long way.

2. Educate Without Jargon: Explain in plain language why the trust is invested in certain assets and the rationale behind diversification. Remind beneficiaries that uninvested cash loses purchasing power when inflation is high. Also note that investing always involves risk and past performance does not predict future results.

3. Invite Dialogue: Encourage beneficiaries to ask questions and express concerns. You can offer one‑on‑one conversations or small group sessions. Clear communication helps build trust and avoid misunderstandings.

4. Leverage Advisors: If you lack investment expertise, rely on your investment advisor to help explain more technical concepts. An advisor can reassure beneficiaries that the strategy is sound even when the market is rocky.

5. Be Honest About Uncertainty: Admit that nobody can predict market movements. Share historical context to illustrate how markets recover over time. By setting realistic expectations, you reduce the chances of beneficiaries demanding immediate — and possibly harmful — changes.

Compliance, Documentation, and Risk Management

Volatile markets don’t excuse trustees from following the law. Tax laws and fiduciary rules still apply, and sometimes new legislation emerges from economic crises. Trustees should stay informed about legal developments, consult attorneys when needed, and adjust the trust’s practices accordingly. Tax compliance is fundamental; failing to file correctly or missing deadlines can result in penalties that reduce the trust’s assets.

Accurate accounting is the backbone of good trust administration. Maintain detailed records of all income, expenses, and distributions. Use trust accounting software or work with a bookkeeper to keep ledgers up to date. If beneficiaries request an accounting or if the trust is audited, comprehensive records will protect you and demonstrate your diligence.

Regular risk assessments help identify potential issues before they become problems. A trustee should develop workflows for unexpected events and conducting risk assessments to uncover vulnerabilities, such as a heavy concentration in one stock or a potential conflict of interest. Consult a certified public accountant and legal counsel to ensure that the trust’s tax filings and legal obligations are met. Document these consultations and any changes you implement — your records should tell the story of why each decision was made.

Supporting Beneficiaries Through Uncertainty

Trustees wear many hats: investor, accountant, and sometimes counselor. When beneficiaries are anxious, your understanding of their individual circumstances can be invaluable.

Tailor Distributions

Trust documents often grant discretion to adjust distributions based on need. A beneficiary who has lost a job may require a temporary increase, while another may benefit from a delay to preserve capital. Any adjustments must align with the trust’s terms and consider the overall health of the portfolio. Clearly document the reasons for changes, referring to the trust’s language and your fiduciary duties.

Provide Resources

Sometimes beneficiaries’ anxiety stems from unfamiliarity with financial matters. Consider sharing resources on budgeting, saving, and investing, or refer them to a qualified financial planner. Educating beneficiaries about their rights and responsibilities under trust law can also prevent misunderstandings and disputes. When beneficiaries feel informed, they’re less likely to panic during market downturns.

Stay Accessible

Make it easy for beneficiaries to reach you. Promptly return calls and emails, and be open to scheduling meetings. Trustees should leverage their advisors (attorney, CPA, financial advisor) to answer complex questions, reinforcing that the trust’s management is a team effort. Responsiveness and transparency build confidence and reduce the fear that something is happening behind closed doors.

Final Thoughts

Serving as a trustee during economic uncertainty is challenging but manageable. A solid understanding of your fiduciary duties, a disciplined investment approach, clear documentation, and open communication provide the roadmap. Diversification, regular reviews, and resisting the urge to time the market are central pillars of prudent trust management. When storms hit, focus on the long game and help beneficiaries see beyond the horizon. Encourage dialogue, educate without jargon, and adjust distributions thoughtfully. Consult professionals when necessary and maintain meticulous records. By following these steps, trustees can steer the trust through turbulence while honoring the grantor’s intent and supporting beneficiaries for years to come.