PR 07240.042 Pennsylvania
A. PR 01-225 Investment of Conserved Funds
DATE: August 3, 2001
The District of Columbia and the States of Virginia and West Virginia have adopted The Uniform Prudent Investor Act (UPIA) within their laws. The States of Delaware, Maryland and Pennsylvania follow “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.
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.
In Pennsylvania and Virginia, a parent is the guardian of his or her child and, therefore, is bound by the same investment rules as trustees. The statutes and case laws in Delaware, the District of Columbia, Maryland, and West Virginia do not address what standard a “non-guardian” parent must follow when investing the property of his or her minor children.
You asked us to provide an opinion examining the law of each state and district within our region with respect to the following three questions:
Which types of investments are considered appropriate under the "prudent man" rule?
What are the rules governing trustees regarding the investment of funds with which they are entrusted?
Under state law, are parent payees permitted to invest the finds belonging to their minor children differently than other types of payees?
INVESTMENTS UNDER THE "PRUDENT MAN" RULE
The Programs Operations Manual System (POMS) provides that representative payees must invest benefits "in accordance with the rules applying to the investments of trust estates by trustees." POMS GN 00603.040(A). If a state applies a "prudent man" rule to investments by fiduciaries, representative payees must invest benefits in a manner that complies with this rule. POMS GN 00603.040(B). Accordingly, we looked at state law in each of our five states and our one district in order to determine what investments are appropriate under the "prudent man" law as applied in that state or district.
Pennsylvania has adopted a "prudent investor" rule, which requires a trustee to invest trust assets as a "prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust." 20 Pa. Cons. Stat. § 7203(a) (1999). A trustee must exercise "reasonable care, skill and caution in making and implementing investment" decisions. 20 Pa. Cons. Stat. § 7212 (1999). In making investment decisions, a trustee shall consider, among other things:
(1) the size of the trust;
(2) the nature and estimated duration of the fiduciary relationship;
(3) the liquidity and distribution requirements of the trust;
(4) the expected tax consequences of investment decisions or strategies and of distributions of income and principal;
(5) the role that each investment or course of action plays in the overall investment strategy;
(6) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries;
(7) to the extent reasonably known to the trustee, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument; and
(8) to the extent reasonably known to the trustee, the income and resources of the beneficiaries and related trusts.
20 Pa. Cons. Stat. § 7203(c) (1999).
A trustee may invest in "every kind of property and type of investment, including, but not limited to mutual funds." 20 Pa. Cons. Stat. § 7203(b) (1999). In particular, a trustee may "acquire or retain a contract of life insurance upon the life of the settlor or the settlor's spouse, or both, without liability for a loss arising from the trustee's failure" to determine whether the contract is a proper investment, investigate the financial strength of the insurance company, or diversify the contract. 20 Pa. Cons. Stat. § 7208 (1999). In addition, a trustee may invest in a mutual fund "if the portfolio of the mutual fund consists substantially of investments not prohibited by the governing instrument." 20 Pa. Cons. Stat. § 7209 (1999).
RULES GOVERNING TRUSTEES REGARDING INVESTMENT
Conserved funds must be invested in accordance with the "rules followed by trustees." 20 C.F.R. § 2045(a) (2000). These rules are determined by reference to state law. POMS GN 00603.040. Accordingly, we looked at the rules followed by trustees in each state and district within our region to determine what rules representative payees should follow in investing conserved funds.
In addition to the "prudent investor" rule, Pennsylvania law describes two additional rules that trustees must follow in investing trust assets. First, a fiduciary "shall reasonably diversify investments, unless the fiduciary reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes, terms and other circumstances of the trust" and the requirements of the "prudent investor" rule. 20 Pa. Cons. Stat. § 7204 (1999). Second, a trustee who represents that he has "special investment skills" shall exercise those skills. 20 Pa. Cons. Stat. § 7212 (1999).
PARENTS AS PAYEES
Pennsylvania law provides that a guardian may invest property as provided by Chapter 72, relating to the prudent investor rule. 20 Pa. Cons. Stat. § 5145 (1999). A "guardian" is
a fiduciary who has the care and management of the estate or person of a minor or an incapacitated person. 20 Pa. Cons. Stat. § 102 (1999). Because a parent has the care and management of at least the person of his or her minor children, a parent is a guardian pursuant to Pennsylvania law and is governed by the prudent investor rule. See 20 Pa. Cons. Stat. § 5102 (1999) (providing that a court may appoint a parent, as natural guardian of his or her child, to manage a small estate).