Why Diversification Is a Legal Duty
Diversification is a core principle of sound investing. The law makes it a duty for trustees. Spreading investments across different asset types lowers the risk of large losses in one area.
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 set a specific allocation formula. Every trust is different.
For example, a trust that holds a family business has different needs. A trust that provides income to a surviving spouse requires its own approach.
The trustee must evaluate the trust's goals and choose the right mix. Under the prudent investor framework, a trustee must use reasonable care, skill, and caution when spreading risk.
When Concentration May Be Justified
The exception for "special circumstances" is important. Some trusts exist to hold one asset, like a family ranch, a business, or a collection. If the settlor's goal was to keep that asset, a forced sale would defeat the purpose.
A trustee who decides not to diversify should document the reasoning. Courts will review whether the choice was thoughtful given the trust's purpose. Keeping a written record protects the trustee if the choice is ever questioned.