PR 07240.034 New Mexico
A. PR 01-225 Investment of Conserved Funds
DATE: August 3, 2001
In the Dallas Region, the States of Arkansas, Louisiana, New Mexico and Oklahoma have each adopted The Uniform Prudent Investor Act (UPIA) within their laws. While the State of Texas has not formally adopted the UPIA, it follows the “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.
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.
On the issue of whether parent payees are permitted to invest the funds belonging to their minor children differently than other types of payees, Oklahoma State law is silent and the States of Arkansas, New Mexico, and Texas make no special provisions. While Louisiana State law generally provides parents with usufruct (i.e., enjoyment of their children's property until the child's majority or emancipation), Social Security regulations require that the child's benefits be used only for the child's current maintenance or conserved or invested on the child's behalf. In each State it appears that parents must follow the same rules that apply to all other types of trustees.
You asked us, in response to the Agency's request, to research the laws of the States in Region VI as those laws affect 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?
Our specific responses for each State are set out below.
What types of investments are considered appropriate under the “prudent man” rule?
Generally, no specific types of investments are considered appropriate or inappropriate. Trustees should make decisions in accord with the guidance of the Uniform Prudent Investor Act. One investment identified as appropriate is that banks or trust companies that act as fiduciaries may invest in the securities of management companies or investment trusts registered under the Federal Investment Company Act of 1940. NM STAT. ANN. 1978 § 46-2A-1 (Michie 1995).
Are parent payees permitted to invest the funds belonging to their minor children differently than other types of payees?
No special provisions apply to investments by parent payees of minor children.
What are the rules followed by trustees regarding the investment of funds with which they are entrusted?
New Mexico has adopted the Uniform Prudent Investor Act. NM STAT. ANN. 1978 §§ 45-7-601 to 45-7-0612 (Michie 1995). The Act expressly disavows restrictions against “speculative” or “risky” investments, noting the changing environment and the differences in trust purposes. Uniform Prudent Investor Act § 2 (1994). Trustees should invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust, and exercising reasonable care, skill, and caution. NM STAT. ANN. 1978 § 45-7-603A (Michie 1995). Investment decisions are evaluated in the context of the trust portfolio as a whole and as part of an overall investment strategy with risk and return objectives that are reasonably suited to the trust. NM STAT. ANN. 1978 § 45-7-603B (Michie 1995). Relevant circumstances for the trustee to consider include general economic conditions, inflation or deflation possibilities, tax consequences, the role of investments within the overall portfolio, expected income and capital appreciation, needs for liquidity, income, or growth, etc. NM STAT. ANN. 1978 § 45-7-603C (Michie 1995). Trustees must make a reasonable effort to verify relevant facts. NM STAT. ANN. 1978 § 45-7-603D (Michie 1995). Within the broad guidelines, trustees may invest in any type of investment or property that is consistent with the standards of the Act. NM STAT. ANN. 1978 § 45-7-603E (Michie 1995). Trustees having, or representing themselves to have, special skills or expertise have a duty to use those skills or that expertise. NM STAT. ANN. 1978 § 45-7-603 F (Michie 1995).
Trustees must diversify investments unless the purposes of the trust are better served without doing so. NM STAT. ANN. § 45-7-604 (Michie 1995). New Mexico has adopted the Uniform Common Trust Funds Act, which facilitates diversification for multiple trusts operated by the same trustee (generally a bank or trust company rather than an individual trustee). NM STAT. ANN. 1978 §§ 46-1-13 to 46-1-16 (Michie 1995).
Trustees may delegate investment and management functions that a prudent trustee with comparable skills could properly delegate under the circumstances, without liability for the actions of the agent to whom the functions are delegated. The trustee must exercise reasonable care, skill, and caution in selecting the agent, establishing the scope and terms of the delegation, and monitoring the agent's performance. NM STAT. ANN. § 45-7-610 (Michie 1995).