Introduction
You have asked us to research the laws of the four states in Region X as those laws
concern a representative payee's responsibilities for the conservation and investment
of benefit payments. The specific questions asked are:
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What types of investments are considered appropriate under the “Prudent Man” rule (if applicable);
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Are parent-payees are permitted to invest differently than other types of payees;
and,
What rules must be followed by trustees in their investment decisions.
As discussed on our teleconference meeting, our answers are set out below, by state.
The following general observations can be made about this area of law in our region.
All four states have adopted the Uniform Prudent Investor Act, or, in the case of
Washington, a Trust Act which is substantially similar (though Washington's Trust
Act does have some variations, noted below). There is relatively little case law considering,
in great detail, which investments are proper and which are improper. This is particularly
true in Idaho and Alaska, where our research has led to the conclusion that case law
in these areas is almost nonexistent. The courts in this region in general seem inclined
to adopt common law or hornbook understandings of the duties of a trustee to a beneficiary.
Because of this lack of particularity, it is useful to cite as a starting point the
“prudent man rule” set out in 1830 in the Harvard College case, which has served as a model for the Uniform Prudent Investor Act: “All that can be required of a trustee to invest, is, that he shall conduct himself
faithfully and exercise a sound discretion. He is to observe how men of prudence,
discretion, and intelligence manage their own affairs, not in regard to speculation,
but in regard to the permanent disposition of their funds, considering the probable
income, as well as the probable safety of the capital to be invested.” Harvard College v. Amory , 26 Mass. (9 Pick.) 446, 460-61 (1830). As one Court of Appeals in Washington has
observed, in Harvard College, the court recognized that trust assets could never be fully protected from the uncertainties
of the market place; thus, the prudent investor standard was necessarily flexible.
See Estate of Cooper , 81 Wash.App. 79, 88-89, 913 P.2d 393, 398 (Wash.App. 1996).
Oregon
Which types of investments are considered appropriate under the “prudent man” rule?
The prudent investor rule is found at ORS 128.196.
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.
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
Oregon law is silent on this issue. However, there is an assumption that the prudent
investor be impartial and with no conflict of interest. To the extent that a family
relationship may be a barrier to such impartiality and may create a conflict of interest,
one may need to scrutinize these funds more carefully. The standard, however, appears
to be identical.
What are the rules followed by trustees regarding the investment of funds with which
they are entrusted?
The Oregon Prudent Investor Rule is codified as follows:
(1) A trustee shall invest and manage trust assets as a prudent investor would, by
considering the purposes, terms, distribution requirements and other circumstances
of the trust. In satisfying this standard, the trustee shall exercise reasonable care,
skill and caution.
(2) A trustee's investment and management decisions respecting individual assets must
be evaluated not in isolation but in the context of the trust portfolio as a whole
and as a part of the overall investment strategy having risk and return objectives
reasonably suited to the trust.
(3) Among circumstances that a trustee shall consider in investing and managing trust
assets are such of the following as are relevant to the trust or its beneficiaries:
(a) General economic conditions;
(b) The possible effect of inflation or deflation;
(c) The expected tax consequences of investment decisions or strategies;
(d) The role that each investment or course of action plays within an overall trust
portfolio, which may include financial assets, interests in closely held enterprises,
tangible and intangible personal property and real property;
(e) The expected total return from income and the appreciation of capital;
(f) Other resources of the beneficiaries;
(g) Needs for liquidity, regularity of income and preservation or appreciation of
capital; and
(h) An asset's special relationship or special value, if any, to the purposes of the
trust or to one or more of the beneficiaries.
(4) A trustee shall make a reasonable effort to verify facts relevant to the investment
and management of trust assets.
(5) A trustee may invest in any kind of property or type of investment consistent
with the standards of ORS 128.194 to 128.218.
(6) A trustee who has special skills or expertise, or is named trustee in
reliance upon the trustee's representation that the trustee has special skills or
expertise, has a duty to use those special skills or expertise. O.R.S. 128.196.
Other provisions of the Uniform Prudent Investor Act, as adopted in Oregon, impose
a duty to diversify unless the trustee reasonably determines that, because of special
circumstances, the purposes of the trust are better served without diversifying; a
duty to administer the trust solely in the interest of the beneficiaries; a duty of
impartiality as between beneficiaries; and a duty to incur only reasonable administrative
and investment costs. See O.R.S. §§ 128.198—128.206. The evaluation of a trustee's compliance with the Act
“is determined in light of the facts and circumstances existing at the time of the
trustee's decision or action and not by hindsight.” O.R.S. § 128-208.
Our research discovered the following case law in Oregon regarding the appropriateness
of particular investments.
An Oregon Court of Appeals case held that a trustee breached its duty by imprudently
renewing a lease of real property without first testing the market to see whether
it could obtain a more favorable lease. Jarrett v. United States National Bank of Oregon, 81 Or.App. 242, 248, 725 P.2d 384, 387 (Or.App. 1986). The same trustee also breached
its duty by failing to demand payment on a promissory note held by the trust, after
interest rates rose to the point where demanding payment on the note could have created
the opportunity for the trust to realize a greater return on its investment.
Not surprisingly, the purchase of a minibus that was allegedly used in the trustee's
wife's floral business was held an improper “investment” under the Prudent Investor Rule. Estate of Smith, 26 Or. App. 1, 6, 552 P.2d 606, 609 (Or. App. 1976).
The Supreme Court of Oregon held it improper for a trustee to use trust funds to purchase
a mortgage on property belonging to the trustee's wife and sister-in-law. Driver v. Blakeley, 165 Or. 312, 107 P.2d 524 (Or. 1940).