PR 07240.001 Alabama

A. PR 01-225 Investment of Conserved Funds

Date: August 13, 2001

1. SYLLABUS

All eight States in the Atlanta Region follow slightly different interpretations of the “prudent” person (investor) rule. Each State provides some degree of discretion to fiduciaries, including representative payees, when making decisions regarding investments. Only Georgia and Kentucky specify what investments are acceptable. Alabama and Mississippi allow greater latitude regarding what investments are appropriate. The States of Florida, North Carolina, South Carolina, and Tennessee allow for every kind of investment.

In all States, no special provisions were found for parents to follow when investing funds belonging to their minor children. All fiduciaries, including the parents of minor children, are required to follow the same general rules.

Trustees are required to use reasonable care, skill, and caution with the interest of the beneficiary as the key element. There is an assumption that the trustee will be impartial with no conflict of interest.

2. OPINION

You asked us to research, for the eight states in the Atlanta Region, the laws concerning a representative payee's responsibilities for conserving and investing benefit payments. The specific questions concern the types of investments considered appropriate; whether parent-payees are permitted to invest differently than other types of payees; and what rules are followed by trustees. Our responses to the questions, by state, are as follows:

ALABAMA

What types of investments are considered appropriate under the "prudent man" rule?

The Alabama Code does not list any specific investments that may or may not be appropriate. All fiduciaries, including trustees, are given wide discretion in determining how to invest money, and courts will generally not interfere unless there is a clear abuse of discretion. The Alabama code states that a fiduciary's exercise of discretion is presumed to be "fair and reasonable." Ala. Code § 19-3A-104 (2001).

The courts have provided some clarification of the "prudent man" rule in Alabama. In First Alabama Bank of Huntsville, N.A. v. Spragins, 475 So.2d 512 (Ala. 1985), the Alabama Supreme Court held that "[t]he trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill." Id., at 516. In Birmingham Trust National Bank v. Henley, 371 So.2d 883 (Ala. 1979), the Court stated that the determination of "prudence" is to be based upon the information available to the trustee at the time of the investment, rather than upon subsequently discovered information. Id., at 895-96.

Under state law, are parent-payees permitted to invest the funds belonging to their minor children differently than other types of payees?

We found no special provisions for parents of minor children.

What are the rules followed by trustees regarding the investment of funds with which they are entrusted?

Under the Alabama Code, there is a general duty of "good faith." See Ala. Code § 19-3A-104 (2001). In Spragins , the Alabama Supreme Court specifically stated that it was following the general rules set forth in the Restatement (Second) of Trusts at § 174 (1959). 475 So.2d at 516. Under the Restatement , the standard of care and skill required of a trustee is the external standard of a man of ordinary prudence in dealing with his own property. A trustee is liable for a loss resulting from his failure to use the care and skill of a man of ordinary prudence, although he may have exercised all the care and skill of which he was capable. On the other hand, if the trustee has a greater degree of skill than that of a man of ordinary prudence, he is liable for a loss resulting from the failure to use such skill as he has. So, if the trustee procured his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is liable for a loss resulting from the failure to use such skill. Whether the trustee is prudent in the doing of an act depends upon the circumstances as they reasonably appear to him at the time when he does the act and not at some subsequent time when his conduct is called in question.

CONCLUSION

Each of the states within the Atlanta Region provides significant discretion to fiduciaries making decisions regarding investments. Although each state may have a slightly different definition of "prudent" man or person, only Georgia and Kentucky specifically delineate what