PR 07240.006 California
A. PR 01-225 Investment of Conserved Funds
Date: August 7, 2001
In the San Francisco Region, the States of Arizona, California, and Hawaii have adopted The Uniform Prudent Investor Act (UPIA) within their laws. While Nevada has not adopted the UPIA, its laws appear to parallel those of the UPIA.
The UPIA was approved and recommended for enactment in all States by the National Conference of Commissioners on Uniform State Laws in 1994. The UPIA provides investment rules for trustees and like fiduciaries, including representative payees, that result in greater protection of assets while providing a prospect of better income
In each State, trustees must 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. Trustees may invest in every kind of property and type of investment subject to the prudent investor rule. No specific types of investments are required or restricted. No specific investment or course of action is, taken alone, prudent or imprudent. Trustees should diversify investments unless it is in the best interest of the beneficiary not to diversify.
Arizona and Nevada's State laws are silent on the issue of whether parent payees are permitted to invest funds belonging to their minor children differently than other types of payees. However, it appears that both Arizona and Nevada agree in theory with the State laws for California and Hawaii which indicate that parents must follow the same standards as other types of trustees.
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 of capital.
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, and caution.”
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.