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.
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.
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.