PR 07240.017 Indiana

A. PR 04-244 Uniform Gifts To Minors Act - Andrea N. S~ (A/N ~)

DATE: February 9, 1996

1. SYLLABUS

A beneficiary’s own funds cannot be used to establish a Uniform Transfer to Minors Account (UTMA) account. The representative payee may instead invest the beneficiary’s funds in another type of account or investment which meets the standards of the Uniform Prudent Investor Act.

2. OPINION

This is with reference to your inquiry as to whether a minor, or someone acting on the minor's behalf, can transfer the minor's own funds to the minor under Indiana's Uniform Gifts to Minors Act (UGMA) provisions. The representative payee in the instant matter, Andrea's mother, apparently established an UGMA account for Andrea, an SSI recipient, using Andrea's Z~ funds.

Many states, including Indiana, substantially revised their versions of the UGMA following its enactment in order to expand the kinds of property that could be made the subject of a gift under the Act. Indiana repealed its UGMA in 1989 with P.L. 267-1989 and enacted its Uniform Transfers to Minors Act (UTMA), Ind. Code Ann. §§ 30-2-8.5-1 to 30-2-8.5-40 (West 1994 & Supp. 1995).

The establishment of an account for Andrea using her own funds would not appear to qualify the account as a UTMA account. The UTMA pertains to transfers from a transferor in favor of a custodian for the benefit of a minor of an interest in property or the income from and proceeds of that interest in property. See, e.g. Ind. Code Ann. § 30-2-8.5-19 (West 1994).

Andrea's mother receives benefits on behalf of Andrea. See 20 C.F.R. § 416.601(a) ("A representative payee will be selected if we believe that the interest of a beneficiary will be served by representative payment rather than direct payment of benefits."). However, Andrea always retains the interest in these benefits. Cf. 20 C.F.R. § 416.641 ("Our obligation to the beneficiary is completely discharged when we make a correct payment to a representative payee on behalf of the beneficiary. The payee personally, and not SSA, may be liable if the payee misuses the beneficiary's benefits.").

Because a representative payee holds funds on behalf of the beneficiary, Andrea's mother, in opening an account for Andrea with the Z~ funds, cannot transfer to Andrea any interest in property that she does not already have. Thus, the representative payee could not create a UTMA account./

Andrea's mother may not effect any transfer of property that would compromise Andrea's interests. A representative payee may use benefits for the beneficiary's current maintenance, including costs incurred in obtaining food, shelter, clothing, medical care, and personal comfort items. 20 C.F.R. § 416.640(a). If not needed for "the beneficiary's current maintenance or reasonably foreseeable needs," a representative payee must take steps to ensure that benefits "shall be conserved or invested on behalf of the beneficiary." 20 C.F.R. § 416.645(a).

Furthermore, representative payees owe additional responsibilities to the agency, which may not be transferred, including notifying the agency of any event that would affect the amount of benefits the beneficiary receives or the right of the beneficiary to receive benefits; submit to the agency, upon request, a written report accounting for the benefits received; and notify the agency of any change in circumstances that could affect his or her performance of payee responsibilities. 20 C.F.R. 416.635; see Corr for Corr v. Sullivan, 725 F.Supp. 413 (N.D. Ind. 1989) (a representative payee who received child's insurance benefits on her daughter's behalf was found to be not "without fault" because she failed to report her daughter's excess earnings).

For the foregoing reasons, although Andrea's mother may wish to set up a custodial account, she may not create a UTMA account with Andrea's own funds.

Sincerely,
Thomas W. C~
Chief Counsel, Region V

By:
Marc M~
Assistant Regional Counsel

B. PR 01-225 Investment of Conserved Funds

DATE: August 2, 2001

1. SYLLABUS

Five of the six States in the Chicago Region, with Wisconsin as the exception, have adopted The Uniform Prudent Investor Act (UPIA) within their laws.

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. Although Wisconsin has not adopted the UPIA, much of its law parallels the Act.

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.

State law in Illinois is silent and the other five States in the region do not directly address the issue of whether parent payees are permitted to invest funds belonging to their minor children differently than other types of payees. However, the standards stated above appear to be the same for parents and for other types of trustees.

2. OPINION

You asked us to research the laws of the six states in Region V as those laws impact a representative payee's responsibilities for the conservation and investment of benefit payments. The regulations provide that, after a representative has used benefit payments for the current maintenance of the beneficiary, any remaining amounts are to be conserved or invested on the beneficiary's behalf. See 20 C.F.R. § 404.2045. Any such "[c]onserved funds should be invested in accordance with the rules followed by trustees." Id. We look to state law to determine how trustees should invest funds. See POMS GN 00603.040A. Generally, states tend to follow a "prudent investor" rule.

You have asked that we examine the laws of the states in our region to determine:

(1) What investments are considered appropriate under the "prudent investor rule?"

(2) Does state law permit parent payees to invest funds belonging to their minor children differently than other types of payees? and

(3) What rules do trustees follow when investing funds?

The laws of the states within our region require trustees to use reasonable care, skill and caution with the interest of the beneficiary as the key element. Our specific state answers are set out below.

Indiana

What investments are considered appropriate under the “prudent investor” rule?

The prudent investor rule is found at Indiana Code (IC) 30-4-3.5. No specific types of investments are required or restricted. No specific investment or course of action is, taken alone, prudent or imprudent. The trustee may invest in every kind of property and type of investment, subject to the prudent investor rule. IC 30-4.3-5-2(e).

Indiana case law does not provide much guidance in this area. However, we located one case that discussed transactions in stocks generally. In Malachowski v. Bank One, Indianapolis , 590 N.E. 2d 599 (Ind. 1992), the court discussed whether the sale of Eli Lilly stock breached the trustee's fiduciary duty, and found that it did not.

Under State law, are parent payees permitted to invest the funds belonging to their minor children differently than other types of payees?

Indiana law does not directly address this issue. However, Indiana provides that a trustee who has special skills or expertise has a duty to use that special skill or expertise. IC 30-4-3.5-2(8)(f). This suggests a heightened duty for certain types of investors, such as investment bankers. Parents who do not have such special skill or expertise would not be held to this higher standard. However, there is an assumption that the prudent investor be impartial and with no conflict of interest. If the parent's investment suggests a conflict of interest, based on the family relationship, the investment should be investigated.

What are the rules followed by trustees regarding the investment of funds with which they are entrusted?

A trustee considers the purposes, terms, distribution requirements, and other circumstances of the trust. A trustee exercises reasonable care, skill, and caution. IC 30-4-3.5-2 (a). The decisions must be evaluated, not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. IC 30-4-3.5-2(b). Funds should be diversified, unless it is in the best interest of the beneficiary not to diversify. IC 30-4-3.5-3; see also Malachowski v. Bank One, Indianapolis , 590 N.E. 2d 559, 564 (Ind. 1992). A trustee should review the funds reasonably soon after taking over the funds. IC 30-4-3.5-4. A trustee must use reasonableness, prudence, and diligence and must be impartial with no conflict of interest. IC 30-4-3.5-6. A trustee may delegate investment decisions, provided that the trustee exercises reasonable care, skill, and caution in selecting an agent. IC 30-4-3.5-9. Thus, investment in a managed fund, such as a mutual fund, would be appropriate, if otherwise reasonable. 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. IC 30-4-3.5-8.

CONCLUSION

Five of our six states, with Wisconsin as an exception, have incorporated the Prudent Investor Act within their laws. Wisconsin has incorporated most of the theory behind the Prudent Investor Act. Ohio is the only state that sets out guidelines by individual types of investments that are considered prudent as a matter of law. In other states, there is some guidance in the case law, other parts of the state statutes, (in Michigan) in repealed statutes.

In each state, a representative payee must use reasonable care, skill and caution with the interest of the beneficiary as the key element.


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PR 07240.017 - Indiana - 11/18/2008
Batch run: 01/27/2009
Rev:11/18/2008