The “prudent man” or “prudent person” rule governing trust investments is one of the oldest rules in American trust law. Despite undergoing modifications over the years, the fundamentals of the rule did not greatly change from its first expression in 1830 until 1990. Since 1990, however, trust investment law has undergone a revolution. Major criticisms of the prudent man rule in the late 1980s led to the formulation and adoption of the Restatement (Third) of Trusts: Prudent Investor Rule in 1990. In 1994, the Uniform Law Commissioners promulgated the Uniform Prudent Investor Act (UPIA) for adoption by the states. Already a number of states have adopted the Act. The significance of the change is symbolized by the change from “prudent man” or “prudent person” to “prudent investor.” The reformers advocated the use of the lessons of modern financial theory in formulating trust portfolios. Many aspects of the law developed under the prudent man rule are radically changed under the prudent investor formulation. Commentary is beginning to speculate on changes to investment and tax planning under the new rule and what difficulties trustees will face under the prudent investor formulation. The prudent investor rule, in both the Restatement formulation and the Uniform Act, removes many of the restrictions and limitations of the prudent man rule. As a practical matter, the crucial question concerning the prudent investor rule would appear to be whether, if the Uniform Act (or some similar form of the prudent investor rule) were adopted, trustees of personal trusts would formulate trust portfolios on the basis of modern financial theory, free of any inhibitions previously held concerning the illegality of particular investments or investment strategies. That is, if the prudent investor rule is adopted, would trustees of personal trusts invest in accordance with modern financial and economic theory (modified by beneficiary concerns and tax situations) unimpeded by the restrictive law developed under the prudent man rule? This question is extremely difficult to answer, yet it is crucial for a state legislature considering adoption of the prudent investor rule. There are at present few cases involving the new statutes which provide guidance as to trustees' investment practices under modern statutes. This Article attempts to help to answer this question.

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