PR 07235.029 Montana
A. PR 05-007 Prudent Investment of Conserved Funds for Marc J. E~, Child Beneficiary, by Mark B. E~, Father RE: Marc J. E~ ~
DATE: October 4, 2004
The parent representative payee's investment of his/her minor child's conserved funds in real estate which is not properly titled to show the beneficiary's ownership of the property is not a prudent investment. This type of investment in its current form violates both Federal regulations and SSA policies. To re-title the property to reflect joint ownership by the payee both individually and in trust for the beneficiary (the minor child) is also prohibited because it would violate State law governing trusts.
Mark B. E~ is the father and representative payee of Marc J. E~, a minor. Mr. E~ has invested $22,602 of his son's Title II benefits in real estate in Sandy, Utah. The property is titled in Mr. E~'s name alone. You have asked:
(1) Do we agree that an investment in real property is a prudent investment for the child's conserved funds?
(2) Should you request Mr. E~ to re-title the property to show his child as part owner?
(3) If so, how should the title be formulated to indicate the child's proportionate share of ownership?
(4) What mechanism should be in place to assure that the child's share is updated in the event that additional conserved Social Security benefits are used to pay the mortgage?
The investment in its current form violates Federal regulations and SSA policy. To re-title the property to reflect joint ownership by Mr. E~ both individually and in trust for his son is also prohibited because it would violate State law governing trusts.
Mr. E~'s Representative Payee Report, dated May 15, 2003, indicates: (1) between April 1, 2002, and March 31, 2003, he received benefits of $8,238 on his son's behalf; (2) during the previous year he saved $14,364 of benefits he received on his son's behalf; and (3) he invested all of these saved benefits ($22,602) in real estate located in Sandy, Utah.
The mortgage note and tax notices you provided reflect that the property consists of two lots, 11303 and 11313 South High Mesa Drive, Sandy, Utah. A building exists on one of the lots, but the documents provided do not state the nature of the structure (e.g., primary residential, secondary residential, commercial). The mortgage note, tax notices, and loan payment notice, however, identify Mr. E~'s address as 16 Beartooth Court, Gallatin Gateway, Montana 59730. Therefore, we suspect the Sandy, Utah, property is not the family's primary residence.
The mortgage note identifies Mr. E~ as the borrower and First Community Industrial Bank in Salt Lake City, Utah, as the lender. The note indicates that Mr. E~ purchased the property on March 30, 2001, with a loan of $120,785.00. The amount of Mr. E~'s down payment at the time of purchase and what portion of the down payment consisted of conserved funds are not stated in the documents provided.
The mortgage note, tax notices, loan payment notice, and Representative Payee Report indicate that the property is titled in Mr. E~'s name alone. The property is subject to five-year mortgage with a variable rate of interest, minimum and maximum interest rates of 7.25% and 15.25%, respectively, and an initial interest rate of 9.25% per annum. The loan payment notice, dated April 11, 2004, reflects a remaining principal balance of $100,896.18, a currently monthly payment of $1,245.16, and a current interest rate of 7.25%. Mr. E~ indicates, by way of a Wells Fargo checking account statement, that he contributes all of his son's monthly benefits ($708.00) to the monthly mortgage payment. His son's current monthly benefit is, therefore, approximately 57% of the current monthly mortgage payment.
Federal regulations require that any benefit payments certified to a representative payee that are not used for the beneficiary's current maintenance "shall be conserved or invested on behalf of the beneficiary." See 20 C.F.R. § 404.2045(a). "Conserved funds should be invested in accordance with the rules followed by trustees. Any investment must show clearly that the payee holds the property in trust for the beneficiary." Id. "Preferred investments for excess funds are U.S. Savings Bonds and deposits in an interest or dividend paying account in a bank, trust company, credit union, or savings and loan association which is insured under either Federal or State law. The account must be in a form which shows clearly that the representative payee has only a fiduciary and not a personal interest in the funds." See 20 C.F.R. § 404.2045(b).
The POMS state the policy principle that preferred investments for conserved Title II benefits are U.S. Savings Bonds, but that "[b]enefits may also be invested in accordance with State law governing the investment of trust estates by trustees." See POMS § GN 00603.001(A)(1).
Mr. E~ has apparently invested $22,602 of his son's benefits in real estate titled in his own name. None of the documents you have provided suggests that he holds the property, or any portion thereof, in trust for his son. Therefore, this investment violates 20 C.F.R. § 404.2045 and POMS § GN 00603.001(A)(1). His son has no legal interest in the property or in any proceeds from its sale absent an equitable action to impose a constructive trust.
You asked if this investment in real estate would be a prudent if Mr. E~ were to transfer a portion of the property to himself in trust for his son, and if so, how title should be formulated to show the son's proportionate share of ownership, and what mechanism should be in place to reflect additional investments of conserved funds. "Specific investments are not per se prudent or imprudent." Restatement (Third) of Trusts, § 227, "General Standard of Prudent Investment." "[I]nvestment in land is not prohibited by the flexible principles of the prudent investor rule." Id. It is not prudent, however, for a trustee to "disregard the complexities, burdens, and special risks associated with a decision to commit a portion of the trust estate to such investments. High transaction costs are to be expected. . . . Furthermore, important differences in the potential for gain enhancement and risk exposure turn on the specifics of the structure, terms, and circumstances of each real estate investment." Id. We question, therefore, whether Mr. E~'s investment of all his son's conserved funds in real estate subject to a mortgage with a variable interest rate of 7.25% to 15.25% is a prudent one. In addition, the proportion of his and his son's respective interests in the property would be ever-changing and difficult to determine without the services of an accountant, whether or not additional conserved funds are used in making future mortgage payments.
Whether such an investment would be prudent, however, is a moot question because it would violate State law governing trusts. Regardless of whether Montana or Utah law controls, for Mr. E~ to commingle his own funds with funds held in trust for his son would be a violation of his fiduciary duty as trustee. "A trustee shall keep trust property separate from the trustee's own property." U.C.A. § 75-7-808. "A trustee has a duty to keep trust property separate from other property not subject to the trust." M.C.A. § 72-34-110. Joint ownership of this property by Mr. E~ individually and in trust for his son is, therefore, prohibited.
We recommend you advise Mr. E~ that his use of $22,602 of his son's Social Security benefits to make mortgage payments on property titled in his own name is prohibited by Federal regulations; and that he is, therefore, required to prudently invest that amount (and all future benefits paid on behalf of his son that are not used for his son's maintenance) on his son's behalf. Any investment must clearly show that he holds the property in trust for his son. Preferred investments for excess funds are U.S. Savings Bonds and deposits in an interest or dividend paying account in a bank, trust company, credit union, or savings and loan association which is insured under either Federal or State law.
Deana R. E~-L~, III
Regional Chief Counsel
Thomas S. I~
Assistant Regional Counsel