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
(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;
(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
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"
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).