PR 07240.026 Minnesota

A. PR 04-241 Investment of Conserved Benefits in Mutual Funds, Michael & Adam S~, ~ C1, C2

DATE: January 18, 1995

1. SYLLABUS

Under Minnesota State law, conserved Social Security benefits may be invested in mutual funds and other types of investments which meet the standards of the Prudent Investor Act.

2. OPINION

You have requested an opinion as to whether social security earnings may be invested in mutual funds or investment vehicles other than U.S. Savings bonds. For the reasons discussed below, it is our opinion that social security earnings can be invested in mutual funds subject to a standard of prudence.

Statement of Facts

Sharon S~ is the representative payee for her two sons, Michael and Adam. Sharon filed a representative payee report at the end of 1992, stating that she had saved $8,000 for each child. Some of the funds were invested in the mutual fund, Vanguard Windsor II./

Applicable Law and Analysis

A representative payee is obligated to use funds for the "best interests of the beneficiary," 20 C.F.R. § 404.2035(c). If there are funds left over after benefits are disbursed in accordance with federal regulations, the remaining amounts are to be "conserved or invested on behalf of the beneficiary" in accordance with rules followed by trustees, 20 C.F.R. § 404.2045(a). The regulations express a preference for investments in U.S. Savings Bonds and deposits in interest or dividend paying accounts in a bank, trust company, credit union, or savings and loan association insured under federal or state law. 20 C.F.R. § 404.2045(b).

The POMS at GN 00603.001 and 030B.2 state that:

Benefits which are not needed for the immediate or reasonably foreseeable curmaintenance needs of the beneficiary must be conserved or invested with minimum risk,except as they may otherwise be properly used. All investments must be in a form which shows that the payee holds the property in trust for the beneficiary. Preferred investments are U.S. Savings Bonds. Benefits may also be invested in accordance with State law governing the investment of trust estates by trustees.

POMS GN 00603.001 A. The POMS suggests referral to the Regional Attorney to ascertain whether investments are proper under state law setting forth rules for trustee behavior. The POMS further state that it will evaluate investments under a"prudent man" rule. Under that standard, a prudent man would exercise a degree of judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs.

Minnesota law permits trustees to invest trust assets in "bonds, debentures, secured or unsecured notes, preferred or common stocks of corporations, mutual funds, real estate or real estate improvements or interests..." See Minn. Stat. Ann. § 501B.81. Subd. 5 (West 1990). A trustee can invest in every kind of real and personal property or investment "that a prudent person would invest in having in mind the preservation of the trust estate and the amount and regularity of the income derived." Minn. Stat. Ann. § 501B.10 Subd. 1 (a) (1992). This "permission" includes mutual funds. Id. The statute provides that:

In considering an investment, a trustee shall exercise the care, skill and judgment under the circumstances then prevailing that a person of ordinary prudence would exercise in the management of the person's own property and shall consider the role that the investment plays within the trust's overall portfolio of assets.

Id. To determine whether an investment is prudent, a trustee should consider the safety of the investment, the probable income, diversification of the portfolio, liquidity of the investment as well as tax consequences. Minn. Stat. Ann. § 501B.10 Subd. 1 (b) (1992). See Matter of Trusts Created by Hormel, 504 N.W. 2d 505, 511 (Minn. App. 1993) (Standard for evaluating trustee's actions is whether trustee prudently managed trust assets in light of settlor's intent and beneficiary's interests); State Bank and Trust Co. of New Elm v. Melzark (In re: Trust of Kemske, 305 N.W. 2d 755, 761 (Minn. 1981). In an analogous situation, the powers and duties of a guardian of a minor include exercising "due care" for conserved excess assets. See Minn. Stat. Ann. § 525.619 (West 1995).

Investment in mutual funds is proper under Minnestoa Law as long as the investment comports with the prudent investor rule. / The Restatement (Third) of Trusts § 227 comments h and m (1992), explain that investment in a suitable mutual fund is generally proper under the prudent investor rule because it offers the trustee a means of obtaining greater diversification at lower cost. Unduly conservative investments fail to fully exploit the investment potential of the trust and that the trust becomes eroded by inflation.

Whether a particular fund is prudent requires a case by case analysis. Our opinion of the representative payee's investments is as follows:

The Vanguard Windsor II fund

Vanguard Windsor II is a growth and income fund which invests heavily in stocks which are good companies at low valuations (called value investing). According to Lipper Analytical Services, the fund has $8.3 billion assets and lost 1.2% in 1994 (compared to a 1.6% drop in the Standard and Poor 500 and a 4.14 loss in the average growth and income fund), but gained 13.6% in 1993, 12% in 1992 and 28.7% in 1991. The fund gained 45.7% over a five year period. The fund had 217% growth since June 30, 1985 compared with 183% for the typical Growth and Income fund. The fund is relatively diversified. Morningstarreports that its portfolio is 14 % less volatile than the market as a whole.

The representative payee is under a continuing obligation to assess the risk and stability of the investments she makes. Her portfolio indicates a reasoned approach to investing her sons' funds and should be permitted.

I am returning the claims folder to you.

Donna M. W~
Chief Counsel, Region V

By:
Frances L. P~
Assistant Regional Counsel

FLP:dfEnclosure: (claims folder:

SSN: ~

Michigan law permits a trustee to invest in numerous holdings including common and preferred stocks, notes, debentures, securities and bonds. See Mich. Comp. Laws Ann. § 555.201(1). A trustee is required to act as an "ordinarily prudent person of intelligence and integrity who is a trustee of the money of others, would purchase in the exercise of reasonable care, judgment and diligence, under the conditions existing at the time of the purchase, having due regard for the management, reputation, and stability of the issuer and the character of the particular securities." Mich. Comp. Laws Ann. § 555.201(1). In Michigan, trustees do not have unlimited authority to make investments with their own funds but must act as an ordinarily prudent man who is dealing with another's property. See Mich. Comp. Laws Ann. § 555.201(1); § 700.813. See also In re Buhl's Estate, 211 Mich. 124, 173 N.W. 651, 654 (1920). A trustee always assumes the risk of a searching scrutiny in a court of equity Id.

The Vanguard Windsor II fund

Vanguard Windsor II is a growth and income fund which invests heavily in stocks which are good companies at low valuations (called value investing). According to Lipper Analytical Services, the fund has $8.3 billion assets and lost 1.2% in 1994 (compared to a 1.6% drop in the Standard and Poor 500 and a 4.14 loss in the average growth and income fund), but gained 13.6% in 1993, 12% in 1992 and 28.7% in 1991. The fund gained 45.7% over a five year period. The fund had 217% growth since June 30, 1985 compared with 183% for the typical Growth and Income fund. Tnhe fund is relatively diversified Morningstar reports that its portfolio is 14 % less volatile than the market as a whole.

1. AIM Weingarten

AIM Weingarten is a stock mutual fund which seeks long term capital growth. The fund performed spectacularly in 1990 and 1991 outpacing most growth funds. The results have been more disappointing since then. According to Lipper Analytical services, the fund had almost four billion in assets at the end of 1994. Its total return foe the year was minus 0.3, but had a 54.7 % return over a five yea period. The load is high at 5.5% of the sales price. Some forecasters (including Morningstar, an independent fund-data supplier) think the fund is undervalued and recommend it for current purchase. In any event, it is a reputable fund and we should permit investment in it subjecting the representative payee to the prudent trustee standard. The representative payee should continue to monitor the fund's performance to determine whether this is the most appropriate investment vehicle for her child.

2. Pasadena Growth Fund

Pasadena growth fund is a stock mutual growth fund. Like AIM Weingarten, Pasadena Growth did well several years ago (68% return in 1991 according to Morningstar) but has performed poorly lately. The fund, which has a 5.5 load, lost 3.1% between September 1993 and September 1994. Like AIM Weingarten, Pasadena Growth is a reputable fund and we should permit investment in it subject to the representative payee monitoring its performance to determine whether this is the most appropriate investment vehicle for her child.

Applicable Law and Analysis

Social Security policy on investment of funds is set forth in POMS GN 00603.001 and 030B.2.

Benefits which are not needed for the immediate or reasonably foreseeable current maintenance needs of the beneficiary must be conserved or invested with minimum risk, except as they may otherwise be properly used. All investments must be in a form which shows that the payee holds the property in trust for the beneficiary. Prefer red investments are U.S. Savings Bonds. Benefits may also be invested in accordance with State law governing the investment of trust estates by trustees.

POMS GN 00603.001 A. The POMS Manual suggests referral to the Regional Attorney to ascertain whether investments are proper under state law setting forth rules for trustee behavior.

The POMs further sets forth it s popratring policy as the "prudent man" rule. Under that standard, a prudent man would exercise a degree of judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs the standard case law on role of the representative payee

Since Kenneth S~ died domiciled in Indiana, it is Indiana law that will determine Mary S~ entitlement to social security benefits. See 42 U.S.C. 416 (h)(1)(A). Mary S~ claims that the Georgia decree is invalid and should not be recognized because Kenneth failed to establish residency in Georgia

In Consumer Reports ranking of mutual funds in May 1993 AIM Weingarten ranked in the middle range of growth funds. The 5.5 per cent load is high and the 5 year performance averaged close to the Standard & Poor 500. See attached

Pasedena Group Mutual Fund

Pasedena Group Mutual Fund, AIM Weingarten Mutual Equity Fund, Perigo Co. stock, Paine Webber Cash Fund and TINT TRSY interest bonds.

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.

Minnesota

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

The prudent investor rule is found at Minnesota Statutes Annotated (M.S.A.) § 501B.151. 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. M.S.A. § 501B.151(8)(d). However, in the absence of an express prohibition in the trust instrument, a trustee may acquire and retain securities of any open-end or closed-end management type investment company or investment trust registered under the Federal Investment Company Act of 1940. M.S.A. § 501B.151(11).

Minnesota case law does not provide much guidance in this area. The following is a list suggested by the case law:

Certificates of deposit: The Minnesota Supreme Court, in In re Gerschcow's Will, 261 N.W.2d 335 (Minn. 1977), noted that investments in certificates of deposit were not per se invalid trust investments.

Stocks: The Minnesota Court of Appeals, in an unpublished case, discussed the responsibility of the trustees to diversify holdings in Geo. A. Hormel & Co. stock. Trusteeship of James T. Williams, N.W.2d , 2001 WL 800003 (Minn. App.

July 9, 2001).

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

Minnesota law does not directly address this issue. However, Minnesota requires those with special skills and expertise to use those skills in expertise, suggesting that there may be a heightened duty for certain types of trustees, such as investment bankers. M.S.A. § 501B.151 (8)(e). A parent who does not have such skills 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 has a duty to use reasonable care, skill and caution. A trustee should diversify investments, unless it is in the best interest of the beneficiary not to diversify. M.S.A. § 501B.151(3). A trustee may delegate investment decisions, provided that the trustee used reasonable care, skill, and caution in selecting the agent. M.S.A. § 501B.152(a). Thus, it would be appropriate to invest in a managed fund, such as a mutual fund, 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. The prudent investor rule is a test of conduct and not of resulting performance. M.S.A. § 501B.151(6).

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 07240.026 - Minnesota - 07/26/2004
Batch run: 04/25/2016
Rev:07/26/2004