PR 07240.010 District of Columbia
A. PR 01-225 Investment of Conserved Funds
DATE: August 3, 2001
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.
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:
Which types of investments are considered appropriate under the "prudent man" rule?
What are the rules governing trustees regarding the investment of funds with which they are entrusted?
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.
District of Columbia
The District of Columbia has adopted the Uniform Prudent Investor Act, which provides that a trustee shall invest trust assets "as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust." D.C. Code Ann. § 28-4702(a) (1999). The "prudent investor" rule applies to all trustees unless the provisions of the trust provide otherwise. D.C. Code Ann. § 28-4701 (1999). In order to satisfy the "prudent investor" rule, the trustee must "exercise reasonable care, skill, and caution." Id. The trustee should consider the following circumstances in investing trust assets:
(1) General economic conditions;
(2) The possible effect of inflation or deflation;
(3) The expected tax consequences of investment decisions or strategies;
(4) The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;
(5) The expected total return from income and the appreciation of capital;
(6) Other resources of the beneficiaries;
(7) Needs for liquidity, for regularity of income, and for preservation or appreciation of capital; and
(8) An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
D.C. Code Ann. § 28-4702(c) (1999).
The D.C. Code further provides that, subject to the previously described "prudent man" standard, a trustee may invest "in any kind of property or type of investment." D.C. Code Ann. § 28-4702(e) (1999); see Superior Court Rules of the Probate Division, Rule 5(a)(2) (explaining that a fiduciary is "authorized to acquire every kind of property, real, personal, or mixed and every kind of investment").
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 rules are determined by reference to state law. POMS GN 00603.040. Accordingly, we looked at the rules followed by trustees in each state and district within our region to determine what rules representative payees should follow in investing conserved funds.
District of Columbia
Pursuant to the Uniform Prudent Investor Act adopted by the District of Columbia, a trustee is bound by the "prudent investor" rule previously discussed. D.C. Code Ann. § 28-4701 et seq. (1999). The Uniform Prudent Investor Act contains additional rules that must be followed by trustees in investing trust assets. First, a trustee who has "special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise" is required to use his or her special skills or expertise in investing trust assets. D.C. Code Ann. § 28-4702(f) (1999). Second, a trustee must "take reasonable steps to verify facts relevant to the investment" of trust assets. D.C. Code Ann. § 28-4702(d) (1999). Third, a trustee must diversify the investments of a trust "unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying." D.C. Code Ann. § 28-4703 (1999). Fourth, a trustee must invest trust assets "solely in the interest of the beneficiaries." D.C. Code Ann. § 28-4705 (1999). Fifth, in investing trust assets, a trustee "may incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee." D.C. Code Ann. § 28-4707 (1999). Finally, a trustee may delegate to an agent investment functions that "a prudent trustee of comparable skills could properly delegate under the circumstances." D.C. Code Ann. § 28-4709(a) (1999). The trustee must exercise "reasonable care, skill, and caution in selecting an agent, establishing the scope of the delegation, and periodically reviewing the agent's actions. Id.
PARENTS AS PAYEES
District of Columbia
District of Columbia statutes and case law do not address the issue of what standard a parent must follow in investing the funds of his or her minor children.