In a S Trust scenario, if Y objects that T should invest in assets with more growth potential, does Y have a case for violation of the prudent investor rule?

• A. Yes, the rule requires diversification for overall risk and return, balancing income and growth.
• B. No, the trustee may invest solely in government bonds.
• C. Yes, but only if the trust instrument requires growth.
• D. No, Y has no standing.

Answer: (A)

The key idea here is the prudent investor rule, which requires a trustee to manage trust assets as a prudent investor would, balancing risk and return in light of the trust’s purposes and needs. Diversification is a central tool to achieve that balance. Growth-oriented investments can be appropriate, but they must be used within a diversified portfolio so that the overall risk is managed and the trust can meet its goals.

If the trustee is pushing for assets with higher growth potential but fails to diversify, that can constitute a breach of the prudent investor duty. The rule doesn’t mandate chasing only growth or only safe assets; it requires prudent diversification to achieve a reasonable return without exposing the trust to excessive risk. So, Y’s concern has merit because diversification is a fundamental requirement to manage risk and return for the trust as a whole.

Likely reasons why the other options don’t fit as well: the rule doesn’t compel investing exclusively in government bonds, nor does it automatically require growth regardless of the instrument, and “standing” isn’t the core issue in this context. The emphasis is on prudent diversification and risk-aware balancing of growth with the trust’s objectives.