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.

QUESTION

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.

ANSWER

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.

SUMMARY

HAWAII:

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 (e).

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.