You asked us to research a representative payee's responsibilities for the conservation
and investment of benefit payments. You asked that we consider this issue with respect
to the laws of the six states in Region I. The specific questions presented by you
concern which types of investments are considered appropriate for a trustee under
the "prudent man" rule; whether parental-payees are permitted to invest differently
than other types of payees; and what rules trustees must follow in making investments
with funds that are held in trust. We herein provide answers to these questions with
respect to each New England state.
Which types of investments are considered appropriate under the “prudent man” rule?
The Uniform Prudent Investor Act has been adopted as the Rhode Island Uniform Prudent
Investor Act. General Laws of Rhode Island 1956 (Reenacted 2000) Title 18, Chapter
Rhode Island, like all other jurisdictions that have adopted the Uniform Prudent investor
Act, has not established any specific types of investments in which a trustee is required
to invest or from which investment is precluded. No specific investment or course
of action is, taken alone, prudent or imprudent. The trustee shall reasonably diversify
the investments of the trust unless it is prudent not to do so under the circumstances.
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
Rhode Island does not distinguish between a duty owned by a parent-trustee to a minor
child and the general duty owed by a trustee to any beneficiary of a trust. There
is, however, in all cases 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 situations more carefully. On the other hand, a general assumption that a parent
will look out for the interests of his/her child may suggest that less scrutiny is
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. The trustee should
diversify unless it is in the best interest of the beneficiary not to diversify. The
trustee should have a management strategy for the funds in the trust. The trustee
must use reasonableness, prudence, and diligence and maintain impartiality and avoid
conflicts of interest in making investment decisions with respect to the trust.
All six of our states have incorporated the Prudent Investor Act within their laws.
We believe that a fair reading of the laws in each of these states would require that
a representative payee use reasonable care, skill, and caution with the interest of
the beneficiary as the key element. We believe that the facts and circumstances of
each case determine whether the representative payee has acted with the required care,
skill and caution and that the test is a test of conduct and not of results. We would
note that the Uniform Prudent Investor Act generally specifies that this rule may
be "expanded, restricted, eliminated, or otherwise altered by the provisions of the
trust." Thus, if SSA were to decide to restrict the types of investments that representative
payees were to make with Social Security or Supplemental Security Income funds, the
payee would be bound by those limitations and could not make other investments based
on reliance upon the Uniform Prudent Investor Act. In addition, the Uniform Prudent
Investor Act generally permits a trustee to delegate investment and management functions,
and SSA might wish to consider placing some limitations or restriction on this right.