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?
QUESTION #1 PRESENTED
What types of investments are considered appropriate under the “prudent man” rule?
Under the Uniform Prudent Investor Act (“UPIA”), no investment type is appropriate or inappropriate. The UPIA is proposed legislation
which once enacted, is a modern codification of the “prudent man rule.” At least forty-five states have enacted this legislation, including New York (effective
January 1, 1995) and New Jersey (effective June 5, 1997). It has not been enacted
by the U.S. Virgin Islands or Puerto Rico. The Virgin Islands retains the “prudent man” rule, but there are no reported cases interpreting that section of the Virgin Islands
code. Puerto Rico's Civil Code does not include an express standard of conduct for
fiduciaries. However, both the Virgin Islands and Puerto Rico will look to Anglo-American
common law in situations where there is no case law on a specific statute, or when
the statutes are silent on the matter.
I. The Uniform Prudent Investor Act, In General
The UPIA is a standard of conduct for trustees to follow when making investment decisions
over the property in their control. The Act explicitly states that any type of investment
is permitted. “A trustee may invest in any kind of property or type of investment consistent with
the standards of this [act].” U.P.I.A. §2(d). Thus, as long as any given investment decision comports with the
standard of conduct contained in the act, the trustee will not be found liable merely
because of the type of investment.
The standard itself is based on prudence, as was the “prudent man” rule. Under the UPIA however, the trustee must invest as a “prudent investor would by considering the purposes, terms distribution requirements,
and other circumstances of the trust.” Id . at §2(a). In doing so, he must exercise “reasonable care, skill and caution.” Id . The UPIA eliminates the traditional requirement that trustees act as intelligent
and discrete men would, when managing the disposition of their own funds in regard
to the probable income as well as the probable safety of their capital.
Whether an investment decision complies with the UPIA standard will be determined
by examining the totality of the circumstances at the time the decision or investment
event occurred. Decisions will be judged “not in isolation, but in the context of the trust portfolio as a whole and as a part
of an overall investment strategy having risk and return objectives reasonably suited
to the trust.” Id. at §2(b). Thus, no investment is inappropriate in its essence, but may be inappropriate
in light of the factors existing at the time of the decision.
The drafters of the UPIA based the Act on section 227 of the Restatement of Trusts
(Third). See Uniform Laws Annotated, “Uniform Prudent Investor Act” §2, Comment (1994). Both the UPIA and section 227 of the Restatement disavow the
categoric restrictions on types of investments that had developed in some jurisdictions
under the old “prudent man” rule. Rather than measuring prudence by investment outcome, the new rule encourages
management of risk. Id.
Specific investments or techniques are not per se prudent or imprudent. The riskiness
of a specific property, and thus the propriety of its inclusion in the trust estate,
is not judged in the abstract but in terms of its anticipated effect on the particular
Restatement of Trusts (Third) §227, Comment f, at 24 (1992). Investment decisions
made by trustees, or payees, in New York and New Jersey, and to a lesser extent Puerto Rico and the Virgin Islands, see infra, will be judged on this standard.
Puerto Rico is governed by traditional principles of civil law. The division of legal
title and equitable ownership, which is the essence of trust law in Anglo-American
systems, is contrary to civil law concepts. Alvarez v. Secretary of the Treasury , 80 P.R.R. 15 (1957). _1/ However, trusts have been made part of Puerto Rico's Civil
Code. Therein, trusts are defined as:
A trust (fideicomissum) is an irrevocable mandate whereby certain property is transferred
to a person, named the trustee (fiduciario), in order that he may dispose of it as
directed by the party who transfers the property, named constituent (fideicomitente),
for his own benefit or for the benefit of a third party, named the beneficiary (cestui
que trust) or fideicomisario).
221 P.R.Laws Ann. §2541 (1993). In Puerto Rico, trusts may be made intestate or inter
vivos. Id. at §2542. A trust may be made to exist with any type of property. Id. at §2544. It may be constituted for any legal or moral purpose. Id. at §2548.
The concept of the “prudent man” in fiduciary relationships cannot be found in Puerto Rico statutes or cases. There
is no express standard of conduct of any kind in Puerto Rico's Civil Code for a fiduciary
or trustee seeking to make investment decisions. However, sections of the Code mandate
rights, powers and liabilities of trustees.
The trustee shall have all the rights and actions inherent in fee-simple ownership;
but he shall not have power to convey or encumber the trust property, unless he has
express authority therefor or unless the execution of the trust is impossible without
alienating or encumbering the property.
31 P.R. Laws Ann. §2572 (1993). And, “[t]he trustee shall be in charge of the execution of the trust from the moment he
accepts the mandate. He shall not be liable for any error of judgment, mistake of
fact or of law, or act or omission, except his own willful default or manifest negligence.” Id. at §2569. Cases which have interpreted these sections do not inform as to a standard
of conduct for fiduciaries making investment decisions.
In the absence of a statutory standard of conduct, the courts in Puerto Rico will
look to equity and the “general principles of jurisprudence” and in so doing, “accepted and established usages and customs shall be taken into consideration.” 31 P.R. Laws Ann. §7 (1993). Accordingly, where statutes are silent, equity plays
a role. See Collazo Cartagena v. Hernandez Colon, 103 P.R.Dec. 870 (1975) (where no law is applicable the court shall decide according
to equity); accord Morales v. Cruz , 34 P.R.R. 796 (1926) (when there is clear and positive statutory rule, the application
of the principles of equity is a subsidiary matter).
Courts in Puerto Rico have further ruled that common law is useful when statutory
law is silent. See Futurama Import Corp. v. Trans Caribbean, 104 P.R.Dec. 609 (1976) (the Supreme Court shall not avoid nor reject the virtues
of common law); Olmo v. Young & Rubicam of P.R., Inc., 110 P.R.Dec. 740 (1981) (courts should apply the most analogous norm where statute
is silent); Infante v. Leith, 85 P.R.R. 24 (1962) (two juridical systems of civil and common law prevail in Puerto
Rico); see also Sosa v. Morales, 58 P.R.R. 362 (1941); Porto Rico Ry., Light & Power Co. v. District Court, 38 P.R.R. 305 (1928).
In the area of trust law, common law is traditionally applied. See Davila v. Agrait , 116 P.R.Dec. 549 (1985) (trusts in Puerto Rico are special institutions governed
both by Anglo-Saxon and civil traditional principles); see generally Alvarez v. Secretary of the Treasury, 80 P.R.R. 15 (1957). Moreover, the U.S. District Court of Puerto Rico has held trustees
to traditional principles of trust law and fiduciary duty. See Detroit Bank and Trust Company of Detroit v. Trust Company of the Virgin Islands,
Ltd, 644 F.Supp. 444 (D. Puerto Rico 1985) (fiduciary duty exists in banking and trust
law); San Juan Hotel Corporation v. Rodriguez Estrada , 71 B.R. 413 (D. Puerto Rico 1987) (describing trust relationship in bankruptcy law).
Thus, in Puerto Rico, common law as embodied in the UPIA and the Restatement of Trusts
provides guidance where statutes are silent.
Furthermore, since lawsuits involving United States federal and Puerto Rican law are
adjudicated by the U.S. District Court of Puerto Rico and appealed to the First Circuit
Court of Appeals, the law of the states of Maine, Massachusetts, Rhode Island, and
New Hampshire may offer guidance. All of those states have enacted the UPIA.
QUESTION #2 PRESENTED
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
The law in all states and jurisdictions is silent on whether parents, as natural guardians,
are permitted to invest funds belonging to their minor children differently than other
In general, parents manage the property of their minor children. However, parents
are frequently appointed legal guardian over their own children when large sums are
involved. Where investing of funds is permitted, a parent-guardian's investment decisions
will be subject to the same standards as other fiduciaries. It should be noted that
New Jersey and Puerto Rico have statutory maximums for funds which parents may manage
without a guardian being appointed. Case law in New York suggests that when large
amounts are involved, a guardian will be appointed.
In Puerto Rico, statutes and case law are entirely silent on the question of whether
parents may invest the property of their children differently than other payees. However,
in Puerto Rico parents have explicit authority to manage the funds of their children.
There is a prohibition over alienation and encumbrance of property or assets valued
at over $2000. Parents as representative payees in Puerto Rico should seek prior court
approval to invest assets or property over that amount.
The law of Puerto Rico unambiguously states that parents are the administrators of
the property of their children.
In the absence of a judicial decree to the effect, the administration of the property
of children under patria potestas belongs jointly to both parents or the one who has
the minor under his or her guardianship and potestas.
31 P.R. Laws Ann. §611 (1993). However, parents cannot alienate or encumber the minor's
property in excess of $2,000 without prior approval by the court.
The exercise of the patria potestas does not authorize either of the parents to alienate
or lay any encumbrance upon real property of any kind, or personal property belonging
to the child, the value of which exceeds two thousand (2,000) dollars, ... without
the previous authorization of the Superior Court wherein the property is located ...
Id. at § 616. The section against alienation and encumbrances will be construed strictly
by local courts in Puerto Rico. Ferre v. Registrar, 109 P.R.Dec. 148 (1979). Federal courts have similarly interpreted this section.
The First Circuit has held that prior court approval is not necessary to sell assets,
here corporate stock, which are likely worth less than $2,000, not where there is doubt as to the value. Rodriguez v. Montalvo, 871 F.2d 163, 164 (1st Cir. 1989).
However, one court in Puerto Rico has held that the section is applicable to investment
of assets of a minor by her father. In Osorio v. Registrar, 113 P.R.Dec. 36 (1982), a father was seeking to invest in a mortgage lien of his
minor daughter's assets. The court denied him the ability to do so, holding that the
section applies to investment by father of sum over $2000 of minor daughter's funds,
as her share of estate division, particularly when mortgage lien execution is also
involved. Id. Likewise, parent-payees seeking to invest similarly should seek court approval.
QUESTION #3 PRESENTED
What are the rules followed by trustees?
In all jurisdictions, trustees must first follow the terms and directions of the trust.
Beyond that, trustees in New York and New Jersey will be subject to the standards
of conduct found in each state's prudent investor act. Trustees in the Virgin Islands
will be subject to the “prudent man” rule and where local law is silent, trustees may look to the Restatement of Trusts
for further guidance. Trustees in Puerto Rico will be subject to its statutes creating
and regulating trusts, and where Puerto Rican law is insufficient to resolve the matter,
Puerto Rican statutes permit trustees to be further guided by concepts and principles
of common law. The Restatement of Trusts embodies the common law, and the foundation
for the UPIA.
Puerto Rico's Trustee Rules
In Puerto Rico, trustees have few rules to follow and the statutes do not include
an express statutory standard of conduct. Trusts in Puerto Rico legally begin at the
time when the trustee accepts an irrevocable mandate to be trustee over the property
of another. 31 P.R.Laws Ann. §2556 (1993). The trustee is responsible for the execution
of the trust, except that he is not liable for any “error of judgment, mistake of fact or of law, or act or omission, except his own
willful default or manifest negligence.” Id. at § 2569. The trustee will be removed for conflict of interest, squandering funds,
or incapacitation or disqualification. Id. at §2574. The trustee has the rights and actions inherent in fee-simple ownership,
but cannot convey or encumber the trust property, unless he has express authority
to do so. Id . at § 2572.
Thus, a trustee in Puerto Rico may only invest funds if the governing instrument permit
it. In the absence of a statutory standard of conduct, courts in Puerto Rico have
applied general concepts of “fiduciary duty” as found in Anglo-American common law, to trust matters. This suggests that a trustee
should follow the common law standards for fiduciaries.
Payment of benefits by the Social Security Administration to a representative payee
for the benefit of a third person will not give rise to a trust in Puerto Rico. Intervivos
trusts must be constituted by public deed in Puerto Rico. Id. at § 2543. However, in the event that benefits are paid into an existing express
trust in Puerto Rico, the trustee may only invest those benefits if the governing
instrument authorizes the trustee to do so.
_1/ Cases by courts in Puerto Rico are reported primarily in Spanish. Any such cases
cited herein were researched only through annotations to the code of Puerto Rico which
were in English.