PR 07240.039 Ohio
A. PR 01-225 Investment of Conserved Funds
DATE: August 2, 2001
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.
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 Ohio Revised Code (O.R.C.) 1339.52. Ohio sets out a number of investments that are considered prudent. See O.R.C. § 2109.37 and O.R.C. § 2109.371. If an investor wants to invest in an “unusual” type of investment, he may do so only with the approval of the court.
Below is a summary of the list of those investments considered prudent. More details can be found in the Ohio law.
Federal and State bonds
Secured mortgage notes
Life, endowment or annuity contracts of legal reserve life insurance companies
Certificates of deposit
Railroad notes, bonds, and debentures
Securities of an investment company
Short-term commercial paper
Stock, bonds, debentures, notes, or other debt obligations of corporations incorporated within the United States.
Under State law, are parent payees permitted to invest the funds belonging to their minor children differently than other types of payees?
Ohio law does not directly address this issue. However, Minnesota requires that a trustee who has special skills or expertise has a duty to use those special skills or expertise, suggesting that there may be a heightened duty for certain trustees such as, for example, investment bankers. O.R.C. § 1339.53(C). 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 provide reasonable care, skill and caution. O.R.C. § 1339.53 (A). A trustee should diversify investments, unless it is in the best interest of the beneficiary not to diversify. O.R.C. § 1339.54(B). A trustee should review the funds reasonably soon after taking over the funds. O.R.C. § 1339.56. A trustee should have a strategy and consider the fund as a whole. O.R.C. § 1339.53 (D). A trustee must be impartial with no conflict of interest. O.R.C. § 1339.55. A trustee may delegate investment decisions, provided that the trustee uses reasonable care, skill, and caution in selecting an agent. O.R.C. § 1339.59(A). Compliance with Ohio law is determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight. O.R.C. § 1339.58.
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.