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?
Hawaii has adopted the Uniform Prudent Investor Act, codified at Chapter 554C of the
Hawaii Revised Statutes. According to the "Hawaii Uniform Prudent Investor Act," a
trustee may invest in any kind of property or type of investment which is consistent
with the standards of the Act. (see Question #3 below for the Act's standards). Hawaii Revised Statutes (HRS) § 554C-2
Hawaii has also codified the "prudent man rule". Trustees must observe the standards
in dealing with trust assets that would be observed by a prudent person dealing with
the property of another, and if the trustee has special skills or is named trustee
on the basis of representation of special skills or expertise, the trustee is under
a duty to use those skills. HRS § 560:7-302.
Note: Chapter 554 of the Hawaiian Revised Statutes addresses "investments" made by trustees,
other than trust companies. That provision states that every trustee (except if the
trust by its terms provides otherwise or a court orders otherwise) shall invest the
funds of the trust "only in" investments authorized in the cases of trust companies
acting as trustees under article 8 of Chapter 412. HRS § 554-6. Within the limits
of the standard of a prudent investor, a trust company as fiduciary, agent or personal
representative may acquire and retain every kind of property, real, personal or mixed,
and every kind of investment including without limitation bonds, debentures, and other
corporate obligations, and corporate stocks, preferred or common, and securities of
any open-end or closed-end management type investment company or unit investment trust
registered under the federal Investment Company Act of 1940. HRS § 412:8-400.
2. Under State law, are parent payees permitted to invest the funds belonging to
their minor children differently than other types of payees?
No, it does not appear the Hawaii differentiates between a regular trustee and a parent/guardian.
Chapter 560, Article 5, Part 4 addresses the "protection of property of persons under
disability and minors." A guardian of the property is to act as a fiduciary and shall
observe the standards of care applicable to trustees in Article 7; that is, the "prudent
man rule". They must observe the standards in dealing with trust assets that would
be observed by a prudent person dealing with the property of another, and if the trustee
has special skills or is named trustee on the basis of representation of special skills
or expertise, the trustee is under a duty to use those skills. HRS §§ 560:5-417 and
560:7-302. A guardian has the power to invest and reinvest funds of the estate as
would a trustee. HRS § 560:5-424.
Note: Chapter 577, which addresses "children", contains the following provisions: all
parents and guardians shall provide, to the best of their abilities, for the discipline,
support, and education of their children. HRS § 577-7(a). In addition, "to the extent
that the minor child has a beneficial interest in the income or principle of any trust
which is applied for such purposes, parents or guardians shall not be required to
pay the costs of registration, tuition, books, room and board, and other expenses
incurred in connection with the attendance of a minor child at any private grammar,
secondary, industrial arts, or trade school, or college or university." HRS § 577-7(b).
3. What are the rules followed by trustees regarding the investment of funds with
which they are entrusted?
In Hawaii, trustees must comply with the prudent investor rule and "prudent man" rule
and must administer the trust "expeditiously for the benefit of the beneficiaries."
HRS § 560: 7-301. According to the "prudent man rule," a trustee must observe the
standards in dealing with trust assets that would be observed by a prudent person
dealing with the property of another, and if the trustee has special skills or is
named trustee on the basis of representation of special skills or expertise, the trustee
is under a duty to use those skills. HRS § 560:7-302. A trustee shall keep the beneficiary
of a trust reasonably informed of the trust and its administration. HRS § 560:7-303.
Hawaii has adopted the Uniform Prudent Investor Act. HRS §§ 554C-1, et. seq. However,
the prudent investor rule is a "default" rule which may be expanded, restricted, eliminated
or otherwise altered by the provisions of the trust. A trustee shall not be liable
to a beneficiary to the extent that the trustee acted in reasonable reliance on the
provisions of the trust. HRS § 554C-1(b). According to the Act, a trustee shall invest
and manage assets as a prudent investor would, 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. HRS § 554C-2(a).
The trustee's investment and management decisions respecting an individual's assets
must be evaluated in the context of the portfolio as a whole and as a part of an overall
investment strategy having risk and return objectives reasonably suited to the trust.
HRS § 554C-2(b).
Within a reasonable time after accepting a trusteeship or receiving trust assets,
the trustee shall review the assets and make and implement decisions concerning the
retention and disposition of the assets. HRS § 554C-4.
A trustee shall diversify the investments of the trust unless the trustee reasonably
determines that, because of special circumstances or directives of the trust, the
purposes of the trust are better served without diversifying. HRS § 554C-3.
In investing and managing trust assets, the trustee should consider: general economic
conditions, possible effect of inflation or deflation, the expected tax consequences
of investment decisions or strategies, the role that each investment or course of
action plays within the text of the overall trust portfolio, the expected total return
from income and appreciation of capital, other resources of the beneficiary, need
for liquidity, regularity of income, and preservation or appreciation of capital,
and an asset's special relationship or value to the trust or beneficiary. HRS § 554C-2(c)(1)-(8).
The trustee shall invest and manage the assets solely in the interest of the beneficiaries. If the trust has two or more beneficiaries,
the trustee shall act impartially in investing and managing the trust assets, considering
any differing interests of the beneficiaries. HRS §§ 554C-5 and 554C-6.
The trustee must make reasonable efforts to verify facts relevant to the investment
and management of the trust assets. HRS § 554C-2(d). He may only incur costs that
are appropriate and reasonable in relation to the assets, the purpose of the trust
and the skills of the trustee. HRS § 554C-7.
A trustee may delegate investment and management functions that a prudent trustee
of comparable skills could properly delegate under the circumstances. The trustee
shall exercise reasonable care, skill, and caution in selecting an agent, establishing
the scope and terms of the delegation, consistent with the purposes and terms of the
trust, and periodically reviewing the agent's actions in order to monitor the agent's
performance and compliance with the terms of the delegation. HRS § 554C-9.
Compliance with the prudent investor rule is determined in light of the facts and
circumstances existing at the time of a trustee's decision or action and not by hindsight.
HRS § 554C-8.