QUESTIONS PRESENTED
You asked us to provide an opinion examining the law of each state and district within
our region with respect to the following three questions:
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1.
Which types of investments are considered appropriate under the "prudent man" rule?
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2.
What are the rules governing trustees regarding the investment of funds with which
they are entrusted?
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3.
Under state law, are parent payees permitted to invest the finds belonging to their
minor children differently than other types of payees?
INVESTMENTS UNDER THE "PRUDENT MAN" RULE
The Programs Operations Manual System (POMS) provides that representative payees must
invest benefits "in accordance with the rules applying to the investments of trust
estates by trustees." POMS GN 00603.040(A). If a state applies a "prudent man" rule to investments by fiduciaries, representative
payees must invest benefits in a manner that complies with this rule. POMS GN 00603.040(B). Accordingly, we looked at state law in each of our five states and our one district
in order to determine what investments are appropriate under the "prudent man" law
as applied in that state or district.
Maryland
Maryland's "prudent investor" rule applies to a trustee only if the trustee "files
with the Commissioner of Financial Regulation a statement that the person elects to
have this section apply to all fiduciary assets controlled by the person." Md. Code
Ann. Est. & Trusts § 15-114 (1996). If the trustee so elects, then he must invest
the trust assets "as a prudent investor would, considering the purposes, terms, distribution
requirements, and other circumstances of the governing instrument and the nature of
the fiduciary appointment." Md. Code Ann. Est. & Trusts § 15-114(b) (1996). In addition,
the trustee must "exercise reasonable care, skill, and caution regarding the anticipated
effect on the fiduciary assets as a whole under the facts and circumstances prevailing
at the time of" his or her investment. Id. In making investment decisions, a trustee may consider:
(1) General economic conditions;
(2) The possible effect of inflation;
(3) The expected tax consequences of investment decisions or strategies;
(4) The role each investment or course of action plays within the investment of the
portfolio of fiduciary assets as a whole;
(5) The expected total return of the investment including both income yield and appreciation
of capital;
(6) The reasonableness of any costs associated with the investment; and
(7) The status of related assets of beneficiaries.
Md. Code Ann. Est. & Trusts § 15-114(b) (1996).
Under the terms of Md. Code Ann. Est. & Trusts § 15-114(c)(1), "no specific investment
or course of action is, taken alone, prudent or imprudent."
RULES GOVERNING TRUSTEES REGARDING INVESTMENT
Conserved funds must be invested in accordance with the "rules followed by trustees."
20 C.F.R. § 2045(a) (2000). These rules are determined by reference to state law.
POMS GN 00603.040. Accordingly, we looked at the rules followed by trustees in each state and district
within our region to determine what rules representative payees should follow in investing
conserved funds.
Maryland
Maryland's legislative guidelines and standards for investments of assets by a trustee
only applies if the trustee "files with the Commissioner of Financial Regulation a
statement that the person elects to have this section apply to all fiduciary assets
controlled by the person." Md. Code Ann. Est. & Trusts § 15-114 (1996). If the trustee
so elects, he must:
(1) Invest and manage not in isolation but in the context of the fiduciary assets
as a whole and as part of an overall investment strategy that incorporates risk and
return objectives reasonably suitable under the terms of the governing instrument
and the nature of the fiduciary appointment;
(2) Diversify investments unless, under the circumstances, the trustee reasonably
believes it is in the best interest of the beneficiaries or furthers the purposes
for which the trustee was appointed not to diversify;
(3) Pursue an investment strategy that considers both the reasonable production of
income and safety of capital, consistent with the trustee's duty of loyalty and impartiality
and the purposes for which the trustee was appointed;
(4) Act with "prudence" in deciding whether and how to delegate authority and in the
selection and supervision of agents;
(5) Incur only costs that are reasonable in amount and appropriate to the investment
responsibilities of the trustee.
Md. Code Ann. Est. & Trusts § 15-114(b) (1996).
PARENTS AS PAYEES
Maryland
The Maryland prudent investor rule applies to a "guardian" who "files with the Commissioner
of Financial Regulation a statement that the person elects to have this section apply
to all fiduciary assets controlled by the person." Md. Code Ann. Est. & Trusts § 15-114
(1996). "Guardian" is defined as a person appointed by a court to manage the property
belonging to a minor or a person appointed by the court to act as guardian of the
person of the minor. Md. Code Ann. Est. & Trusts § 13-101(h) (1999). A parent may
be appointed to be the guardian of his or her minor child. Md. Code Ann. Est. & Trusts
§ 13-207(a)(4) (1999). If a parent has been appointed the guardian of his or her minor
child either pursuant to Md. Code Ann. Est. & Trusts § 13-201 or § 13-701 et. seq.,
then the parent's actions may be governed by the Maryland prudent investor rule, if
he or she has so elected.
Maryland statutes and case law do not address the issue of what standard a non-guardian
parent should follow in investing the property of his or her minor children.