PR 07240.036 North Carolina
A. PR 01-225 Investment of Conserved Funds
Date: August 13, 2001
All eight States in the Atlanta Region follow slightly different interpretations of the “prudent” person (investor) rule. Each State provides some degree of discretion to fiduciaries, including representative payees, when making decisions regarding investments. Only Georgia and Kentucky specify what investments are acceptable. Alabama and Mississippi allow greater latitude regarding what investments are appropriate. The States of Florida, North Carolina, South Carolina, and Tennessee allow for every kind of investment.
In all States, no special provisions were found for parents to follow when investing funds belonging to their minor children. All fiduciaries, including the parents of minor children, are required to follow the same general rules.
Trustees are required to 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.
You asked us to research, for the eight states in the Atlanta Region, the laws concerning a representative payee's responsibilities for conserving and investing benefit payments. The specific questions concern the types of investments considered appropriate; whether parent-payees are permitted to invest differently than other types of payees; and what rules are followed by trustees. Our responses to the questions, by state, are as follows:
What types of investments are considered appropriate under the "prudent man" rule?
North Carolina General Statutes provide that in acquiring, investing, retaining, selling and managing property for the benefit of another a fiduciary shall observe the standard of judgment and care which an ordinary prudent person of discretion and intelligence would observe. Within this standard, a fiduciary is authorized to acquire and retain every kind of property and every kind of investment, including but not limited to:
Bonds, debentures, and other corporate or governmental obligations; stocks, preferred or common; real estate mortgages; shares in building and loan associations or savings and loan associations; annual premium or single premium life, endowment, or annuity contracts; and securities of any management type investment company or investment trust registered under the Federal Investment Company Act of 1940, as from time to time amended.
N.C. Gen. Stat. § 36A-2 (2000)
Under state law, are parent-payees permitted to invest the funds belonging to their minor children differently than other types of payees?
We found no special provisions for parents of minor children.
What are the rules followed by trustees regarding the investment of funds with which they are entrusted?
A trustee owes a duty to the beneficiaries of the trust to invest and manage trust assets as a prudent investor would, considering the purposes, terms, distribution requirements, and other circumstances of the trust. See N.C. Gen. Stat. § 36A-161 (2000). The code further provides that "[a] trustee may invest in any kind of property or type of investment consistent with the standards of this Article." N.C. Gen. Stat. § 36A-162(e) (2000). The Official Comment accompanying this section clarifies that no particular kind of property or type of investment is inherently imprudent, and that while some states' legislation created so-called "legal lists" of approved trust investments, "[t]he universe of investment products changes incessantly." Section 36A-162(e), in accordance with the Restatement of Trusts 3d: Prudent Investor Rule, abrogates categoric restrictions based on the premise that trust beneficiaries are better protected by emphasis on close attention to risk/return objectives than by attempts to identify categories of investment that are per se prudent or imprudent.
This is a relatively new statute and there are no reported cases interpreting it. The comments to the statute note that Congress has imposed a comparable prudence standard for the administration of pension and employee benefit trusts in the Employee Retirement Income Security Act (ERISA), enacted in 1974. Section 404(a)(1)(B) of ERISA provides that:
a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims . . . .
29 U.S.C. § 1104(a)(1)(B).
The "prudent man" standard is not, however, new to North Carolina. Older cases describe the prudent man standard as allowing the "custodian, without regard to statutes restricting investments by fiduciaries, to invest and reinvest the custodial property as would a prudent man of discretion and intelligence seeking a reasonable income and preservation of capital. He may retain any security given." Korschun v. Clayton, 185 S.E. 2d 417 (N.C. 1971). Additionally, "Good