PR 07240.023 Maryland

A. PR 01-225 Investment of Conserved Funds

DATE: August 3, 2001

1. SYLLABUS

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.

2. OPINION

QUESTIONS PRESENTED

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:

  1. Which types of investments are considered appropriate under the "prudent man" rule?

  2. What are the rules governing trustees regarding the investment of funds with which they are entrusted?

  3. 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.

Maryland

Maryland's "prudent investor" rule applies to a trustee only if the trustee "files with the Commissioner of Financial Regulation a statement that the person elects to have this section apply to all fiduciary assets controlled by the person." Md. Code Ann. Est. & Trusts § 15-114 (1996). If the trustee so elects, then he must invest the trust assets "as a prudent investor would, considering the purposes, terms, distribution requirements, and other circumstances of the governing instrument and the nature of the fiduciary appointment." Md. Code Ann. Est. & Trusts § 15-114(b) (1996). In addition, the trustee must "exercise reasonable care, skill, and caution regarding the anticipated effect on the fiduciary assets as a whole under the facts and circumstances prevailing at the time of" his or her investment. Id. In making investment decisions, a trustee may consider:

(1) General economic conditions;

(2) The possible effect of inflation;

(3) The expected tax consequences of investment decisions or strategies;

(4) The role each investment or course of action plays within the investment of the portfolio of fiduciary assets as a whole;

(5) The expected total return of the investment including both income yield and appreciation of capital;

(6) The reasonableness of any costs associated with the investment; and

(7) The status of related assets of beneficiaries.

Md. Code Ann. Est. & Trusts § 15-114(b) (1996).

Under the terms of Md. Code Ann. Est. & Trusts § 15-114(c)(1), "no specific investment or course of action is, taken alone, prudent or imprudent."

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 wit