On behalf of the Acting Associate Commissioner for Program Benefits, you requested
that we research the laws in Region IX's states and territories concerning the authority
of representative payees to invest conserved funds of beneficiaries. You noted that
the applicable regulations provide that conserved funds be invested in accordance
with the rules followed by trustees.
Arizona, California and Hawaii have adopted the Uniform Prudent Investor Act which
sets out the duties of a trustee. Although the Act does not expressly mandate or prohibit
specific types of investments, a trustee must exercise reasonable care, skill and
caution in managing and investing assets. The Uniform Prudent Investor Act does not
impose special rules on parents acting as trustees.
Guam and Nevada have not adopted the Uniform Prudent Investor Act. In Guam, a trustee
must obey the trust and has a duty to provide reasonable security for the assets.
He must at least accumulate simple interest on monies held in trust. A guardian must
manage assets frugally and without waste, and apply the assets as necessary for the
comfort and suitable support, maintenance and education of the ward. In Nevada, a
trustee may acquire any kind of investment which "persons of prudence, discretion
and intelligence acquire or retain for their own account." A custodian of a minor's
property must observe the standard of care that would be observed by a prudent person
dealing with the property of another.
The following is a summary of each state/territory's law in alphabetical order.
1. Which types of investments are considered appropriate under the “prudent man” rule?
The Prudent Investor Act does not specify what investments may be appropriate, but
applies a set of guidelines for consideration. In general, the trustees' investment
actions are to be considered as a whole, “having risk and return objectives reasonably suited to the trust.” Probate Code § 16047(b) . This Section lists several factors to consider in making
investments such as: general economic conditions, the effects of inflation and deflation,
tax consequences, the expected return and appreciation of capital, the role each investment
plays within the context of the trust portfolio, other resources, the need for liquidity,
and the special role or significance an asset may have to the trust or trust beneficiaries.
Probate Code § 16047(c). There is a duty to diversify investments unless, it is prudent
not to do so. Probate Code § 16047(c).
The California Act differs from general “prudent man” standards in that no investment is inherently prudent or imprudent, investment decisions
are reviewed not in hindsight, but at the time decisions are made, the trustee is
subject to a standard of risk management, rather than risk awareness, and the trustee
may delegate investment responsibility.
California case law offers no guidance in defining appropriate types of investments.
The case of Pierce v. Lyman, 3 Cal. Rptr. 2d 236 (1991), decided prior to the enactment of the Prudent Investor
Act, noted several types of imprudent investment schemes. The court found that the
former trustees had breached their fiduciary duty by recommending a program of investment
that included the purchase of volatile and risky stock, short sales, the trading of
“puts” and “calls” (both “covered” and “naked”), and investments in limited partnerships with little or no opportunity for return
on investment. Pierce v. Lyman, at 239. The court went on to say the investments were inappropriate for the Trust
and were not transactions which would have been undertaken by a reasonably prudent
investor or trustee. Id.
2. Under California law, are parent payees permitted to invest the funds belonging
to their minor children differently than other types of investments?
Under the Prudent Investor Act, there are no special provisions for parents who are
investing the funds of their minor children. There is a prudent investor provision
for the county treasurer who holds the funds of a minor in trust. The money must be
deposited to earn interest at the highest rate the county can reasonably obtain as
a “prudent investor.” Probate Code § 3412.
Under Probate Code § 2453, the guardian or conservator may deposit money belonging
to the estate in an insured account in a financial institution in the state. Conservators
and guardians are required to use “ordinary care and diligence.” Probate Code § 2401.
It appears that funds belonging to minors would require at least the prudent man standards
of prudence, discretion and intelligence in seeking a reasonable income and preservation
3. What are the rules followed by trustees regarding the investment of funds with
which they are entrusted?
California has adopted the Uniform Prudent Investor Act. The rules which govern the
investment of funds are described in Probate Code §§ 16045-16054. § 16047 provides
that “A trustee shall invest and manage trust assets as a prudent investor would, by considering
the purposes, terms, distribution requirements, and other circumstances of the trust.
In satisfying this standard, the trustee shall exercise reasonable care, skill,
The Uniform Prudent Investor Act applies to trustees, except if there are trust provisions
which expand or limit the Rule. The standard of care changes for these special trust
provisions. Section 16040(a) provides that “The trustee shall administer the trust with reasonable care, skill, and caution under
circumstances then prevailing that a prudent person, acting in a like capacity would
use in the conduct of an enterprise of like character and with like aims to accomplish
the purposes of the trust as determined by the trust instrument.”
California trustees are governed by the Prudent Investor Rules , except where trust
terms may expand or limit the trustee's authority, then the trustee is to apply the
standards of a “prudent man.”
The California Prudent Investor Act applies to trustees and the Act does not classify
specific investments as appropriate or inappropriate. There are no cases defining
what types of investments are appropriate under the Act.