PR 07240.044 Rhode Island

A. PR 01-225 Investment of Conserved Funds

Date: July 31, 2001

1. SYLLABUS

All six States in the Boston Region have adopted The Uniform Prudent Investor Act (UPIA) within their laws.

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.

In each State, 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.

State laws in Connecticut, Maine, Massachusetts, and Vermont are silent on the issue of whether parent payees are permitted to invest funds belonging to their minor children differently than other types of payees. New Hampshire and Rhode Island do not make any specific rules on trusts for parents. It appears, however, that parents must follow the same rules which apply to all other types of trustees.

2. OPINION

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.

RHODE ISLAND

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 15.

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 required.

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.

CONCLUSION

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