Why Diversification Is a Legal Duty
Diversification is one of the most fundamental principles of sound investing, and Arizona makes it a legal obligation for trustees. The idea is straightforward: spreading investments across different asset types reduces the risk that a downturn in one area wipes out a significant portion of the trust's value.
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.
A.R.S. § 14-10903The statute does not prescribe a specific allocation formula. It recognizes that every trust is different. A trust designed to hold and operate a family business has different needs than a trust that provides income to a surviving spouse. The trustee must evaluate the trust's goals and make a judgment call about the right mix.
When Concentration May Be Justified
The exception for "special circumstances" is important. Some trusts are created specifically to hold a particular asset, like a family ranch, a closely held business, or a collection. If the settlor's intent was to preserve that asset for the beneficiaries, forcing a sale to diversify would defeat the purpose.
A trustee who decides not to diversify should document the reasoning. Courts will look at whether the decision was thoughtful and reasonable given the trust's purpose, not whether it produced the best possible financial result. Keeping a written record of the analysis protects the trustee if the decision is ever questioned.
