PR 07235.030 Nebraska
A. PR 02-101 Zachary J. A~, ~; Tara T. A~, ~; Request for a Determination of Whether Investments Meet the "Prudent Person" Standard Required of Benefits Invested by Representative Payees on Behalf of Beneficiaries by Federal Regulations and Nebraska Law
DATE: June 10, 2002
The Kansas City Regional Office requested a formal Regional Attorney opinion on whether a representative payee's specific investments are proper under the "prudent person" standard. The field office had first consulted with a trust officer at the local bank who indicated that the investments do not meet the "prudent person" standard and that the investments should be more diversified. The Regional Attorney agreed and concluded that the investments do not appear to meet the standards required by the regulations and Nebraska State law.
Janice A~ is the representative payee for her two minor children, Zachary J. A~ and Tara T. A~. On the most recent Representative Payee Report, dated December 14, 2001, for the period November 1, 2000 to October 31, 2001, Ms. A~ reported that she saved $5,068.00 in benefits from the previous year, and that she received $5,272.00 in benefits for the report period, for a total accountable amount of $10,340.00. Ms. A~ reported that she did not use any of the $10,340.00 for the care and support of the children, and had saved $5,170.00 for each of the two children. She placed the benefits in college funds under the Uniform Transfers to Minors Act (UTMA) with AIM Charter Mutual Funds and Fidelity Advisor Technology Funds. A trust officer at the Beatrice National Bank in Beatrice, Nebraska, believes that these investments do not meet the "prudent person" standard, and that the investments should be more diversified. The district office has requested a formal opinion from the Regional Attorney pursuant to Program Operations Manual System ("POMS") Regional Supplement-Kansas City GN 00603.001.
You asked whether the State of Nebraska applies the "prudent man" standard to investments made by Ms. A~ as representative payee on behalf of her two children, and if so, whether these investments meet that standard. Based upon the facts presented, we believe that it is reasonable to conclude that these investments do not appear to meet the standard required by the regulations and Nebraska law.
Nebraska Law Required Ms. A~, as Representative Payee for Her Two Minor Children, to Invest the Beneficiaries' Benefits Pursuant to the Prudent Person Standard
The regulations provide that the responsibilities of a representative payee include using the payments for the use and benefit of the beneficiary and in the beneficiary's best interests. 20 C.F.R. § 404.2035(a). The regulations further provide that if there are funds left over, the representative payee shall conserve or invest any remaining amount on behalf of the beneficiary. Conserved funds should be invested in accordance with the rules followed by trustees. 20 C.F.R. § 404.2045(a). Nebraska law requires a custodian dealing with the custodial property of minor children to "[O]bserve the standard of care that would be observed by a prudent person dealing with the property of another." Neb.Rev.St. § 43-2713(2). Thus, the State of Nebraska requires Ms. A~, as representative payee for her childrens' benefits, to adhere to the prudent person standard in investing said benefits.
Whether Ms. A~'s Investments of her Two Minor Children's Benefits in College Account Mutual Funds Meets the Prudent Person Standard is a Question of Fact
As set forth above, Federal regulations and Nebraska law require a representative payee to follow the prudent person standard in conserving and investing excess benefits. Neb.Rev.St. § 43-2713(2). The preferred investments for excess funds are United States 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. 20 C.F.R. §404.2045B. Similarly, operating procedures require that excess benefits be conserved or invested with minimum risk, with preferred investments being United States Savings Bonds. Benefits may also be invested in accordance with state law governing the investment of trust estates by trustees. POMS GN 00603.001.
Whether a representative payee's investments in mutual funds meets the prudent person standard is a question of fact to be resolved by considering the possible risks and advantages of such an investment. General Counsel Opinion re: Paul J. P~, D-11411, dated May 31, 1966. When it is necessary to apply the prudent person standard, the field office may generally find the trust department of a local bank or probate court officer a good source of information. POMS GN 00603.040B. In this case, a trust officer at the Beatrice National Bank in Beatrice, Nebraska, stated that in his opinion, these mutual fund investments standing by themselves do not meet the "prudent person" standard, and that greater diversification in resource allocation is needed, suggesting that the representative payee should have four to five mutual funds, including growth and income, large cap, small cap, etc.
The advantages of Ms. A~'s investments include higher returns on the investment as well as possible tax advantages involved in college/education funds. The risks include possible loss of investment due to stock market volatility, foreign exposure, technology industry concentration, and issuer-specific changes. These funds may have early withdrawal penalties and unfavorable tax consequences.
Based upon the facts presented, the investments do not appear to meet the standard required by the regulations and Nebraska law.
Frank V. S~, III
Regional Chief Counsel
Laurie F. S~
Assistant Regional Counsel