prudent investor rule

Primary tabs

The Prudent Investor Rule serves as a guideline for determining how to calculate interest rates in order to compensate owners who have had their property taken in Fifth Amendment takings cases.

In takings cases, a landowner’s private property is seized by the government, preventing the landowner from making use of that property for investment purposes. When determining how to fully compensate owners in these cases, courts typically view the appropriate measure of compensation as what the owner has lost by not having their property or funds available from the time of the taking to the time of payment. See: United States v. 429.59 Acres of Land.

To calculate this loss, courts use the Prudent Investor Rule to set the appropriate interest rate based on what a “reasonably prudent person” would have invested to produce a “reasonable rate of return.” This standard is objective and does not consider how any one individual owner may have acted.

When applying the Prudent Investor Rule, courts often use interest rates suggested by ratings agencies such as Moody’s to arrive at a reasonable interest rate, such as in Jackson v. United States, 155 Fed. Cl. 689, 719 (2021).

The Prudent Investor Rule may also refer to the fiduciary duty of trustees to act in the best interest of the beneficiary by investing and managing trust assets “as a prudent investor would” with reasonable care and caution. This obligation has been codified in the Uniform Prudent Investor Act.

[Last updated in February of 2024 by the Wex Definitions Team