PR 07240.009 Delaware

A. PR 01-225 Investment of Conserved Funds

DATE: August 3, 2001

1. SYLLABUS

The District of Columbia and the States of Virginia and West Virginia have adopted The Uniform Prudent Investor Act (UPIA) within their laws. The States of Delaware, Maryland and Pennsylvania follow “prudent investor” rules which are very similar to 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.

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.

In Pennsylvania and Virginia, a parent is the guardian of his or her child and, therefore, is bound by the same investment rules as trustees. The statutes and case laws in Delaware, the District of Columbia, Maryland, and West Virginia do not address what standard a “non-guardian” parent must follow when investing the property of his or her minor children.

2. OPINION

QUESTIONS PRESENTED

You asked us to provide an opinion examining the law of each state and district within our region with respect to the following three questions:

  1. Which types of investments are considered appropriate under the "prudent man" rule?

  2. What are the rules governing trustees regarding the investment of funds with which they are entrusted?

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

INVESTMENTS UNDER THE "PRUDENT MAN" RULE

The Programs Operations Manual System (POMS) provides that representative payees must invest benefits "in accordance with the rules applying to the investments of trust estates by trustees." POMS GN 00603.040(A). If a state applies a "prudent man" rule to investments by fiduciaries, representative payees must invest benefits in a manner that complies with this rule. POMS GN 00603.040(B). Accordingly, we looked at state law in each of our five states and our one district in order to determine what investments are appropriate under the "prudent man" law as applied in that state or district.

Delaware

Pursuant to the Delaware Code, the term "fiduciary" includes trustees. Del. Code Ann. tit. 12, § 3301(b) (2000). Delaware law provides that a fiduciary, when investing, "shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use to attain the purposes of the account." Del. Code Ann. tit. 12, § 3302(a) (1999). In making investment decisions, a fiduciary may consider "the general economic conditions, the anticipated tax consequences of the investment and the anticipated duration of the account and the needs of its beneficiaries." Id.

Delaware law further provides that a fiduciary may acquire:

Every kind of investment, wherever located, whether within or without the United States, including, but not by way of limitation, bonds, debentures and other corporate obligations, stocks, preferred or common, shares or interests in common funds or common trust funds, securities of any open-end or closed-end management type investment company or investment trust registered under the Federal Investment Company Act of 1940 (15 U.S.C. § 801-1 et seq.), options, futures, warrants, limited partnership interests and life insurance.

Del. Code Ann. tit. 12, § 3302(b) (1999). The list of possible investments is not intended to be exclusive, and "no investment made by a fiduciary shall be deemed imprudent solely because the investment is not specifically mentioned in this subsection." Id. The Supreme Court of Delaware has rejected the old approach of prohibiting trustees to invest in "stocks, bonds or other securities of a private corporation without permission in the terms of a trust or in a statute." Law v. Law, 753 A.2d 443, 448 (Del. 2000).

RULES GOVERNING TRUSTEES REGARDING INVESTMENT

Conserved funds must be invested in accordance with the "rules followed by trustees." 20 C.F.R. § 2045(a) (2000). These