PR 07240.047 Tennessee
A. PR 01-225 Investment of Conserved Funds
Date: August 13, 2001
All eight States in the Atlanta Region follow slightly different interpretations of the “prudent” person (investor) rule. Each State provides some degree of discretion to fiduciaries, including representative payees, when making decisions regarding investments. Only Georgia and Kentucky specify what investments are acceptable. Alabama and Mississippi allow greater latitude regarding what investments are appropriate. The States of Florida, North Carolina, South Carolina, and Tennessee allow for every kind of investment.
In all States, no special provisions were found for parents to follow when investing funds belonging to their minor children. All fiduciaries, including the parents of minor children, are required to follow the same general rules.
Trustees are required to 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.
You asked us to research, for the eight states in the Atlanta Region, the laws concerning a representative payee's responsibilities for conserving and investing benefit payments. The specific questions concern the types of investments considered appropriate; whether parent-payees are permitted to invest differently than other types of payees; and what rules are followed by trustees. Our responses to the questions, by state, are as follows:
What types of investments are considered appropriate under the "prudent man" rule?
Subject to the standard of care, skill, prudence and diligence that a prudent person acting in a like capacity would use given the prevailing circumstances that specifically included the general economic conditions, the anticipated tax consequences of an investment, the anticipated duration of the trust, the anticipated needs of the trust and its beneficiaries, etc., "a fiduciary is authorized to acquire and retain every kind of property (real, personal or mixed, and including life insurance, endowment and annuity contracts) and every kind of investment when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing property;" however, a fiduciary shall not act in regard to speculation. Tenn. Code Ann. § 35-3-117(b) (2000) (emphasis added).
The Tennessee statute explicitly allows a fiduciary to continue to hold investments, either invested at the inception or subsequently, in capital stock in the corporate fiduciary and stock in any corporation controlling, controlled by or under common control with such fiduciary, subject to the exercise of good faith and reasonable prudence, discretion, and intelligence and in the best interest of the trust and its beneficiaries. Also, the fiduciary may acquire additional shares of such stock by stock dividends, stock splits, exchanges and conversions for other stock or debentures and exercise of rights to acquire stock of the corporation or another corporation acquiring the stock of the corporation by merger, consolidation or reorganization. Tenn. Code Ann. § 35-3-117(c) (2000). Moreover, in the absence of express provisions otherwise, a deposit of trust funds "at interest in any bank, savings and loan association or other financial institution (including the fiduciary and affiliated depository institution) shall be qualified investment" to the extent the deposit is insured under United States law. See Tenn. Code Ann. § 35-3-117(d) (2000).
Under state law, are parent-payees permitted to invest the funds belonging to their minor children differently than other types of payees?
No. Parent-payees are not permitted to invest funds belonging to their children differently than other payees. The statute makes no distinction as to whether the fiduciary making investments under the prudent person rule is a "trustee, guardian [or] other fiduciary." See Tenn. Code Ann. § 35-3-117 (2000). Since parents are the "joint and equal natural guardians of minors.," Tenn. Code Ann. § 34-11-102(a) (2000), and the definition of fiduciary includes guardians, Tenn. Code Ann. §§ 34-11-101(8), 35-2-102(a)(2) (2000), it appears that parents would likewise be subject to the prudent person fiduciary rule and would have to prudently invest funds with due care, skill, prudence, and diligence under the circumstances then prevailing, specifically including the general economic conditions, the anticipated tax consequences of an investment, the anticipated duration of the trust, and the anticipated needs of the trust and its beneficiaries.
Moreover, a guardian fiduciary is specifically "limited in its investments to the investments permitted by" section 35-3-117 of the Tennessee Code, as noted above. However, all funds held by a guardian fiduciary shall be invested within forty-five days unless otherwise allowed by court; and the fiduciary must file a "proposed property management plan" with the court and obtain approval for investment, except for property that does not exceed $25,000, unless the court otherwise determines that a plan is in the best interest of minor or disabled person. See Tenn. Code Ann . § 34-11-115(b), (c), (e)(1) (2000). A "disabled person" for purposes of this action is defined as a person under age 18 or person deemed in need of partial or full supervision by reason of mental or physical illness, developmental disability, or other mental or physical incapacity. See Tenn. Code Ann. § 34-11-101(7) (2000). The authority of a guardian to invest funds is strictly statutory. See Carroll v. Eblen, 178 Tenn. 146, 156 S.W.2d 412 (1941). However, a financial institution fiduciary is excepted from seeking court approval to change investments, but no such exception is indicated for parent guardian fiduciary. Tenn. Code Ann. § 34-11-115(d) (2000).
What are the rules followed by trustees regarding the investment of funds with which they are entrusted?
With regard to the investment of trust funds generally, the fiduciary has discretion within the prudent person standard to invest funds with care, skill, prudence and diligence under the circumstances then prevailing, specifically including the anticipated tax consequences of an investment, the anticipated duration of the trust, and the anticipated needs of the trust and its beneficiaries. See Tenn . Code Ann. § 35-3-117 (2000), amended by 2001 Tenn. Pub. Acts Ch. 57 (H.B. 798). Court approved management plans for parent/guardian fiduciaries are likewise subject to the same discretionary prudent person standard but such parent/guardian fiduciaries must also present an outline of the proposed property management plan at the hearing for the appointment of the fiduciary if the property amount exceeds $25,000 or as otherwise determined by the court for the best interest of the minor or disabled person. See Tenn. Code Ann. § 34-11-115 (2000).
Each of the states within the Atlanta Region provides significant discretion to fiduciaries making decisions regarding investments. Although each state may have a slightly different definition of "prudent" man or person, only Georgia and Kentucky specifically delineate what investments are acceptable, Alabama and Mississippi allow great latitude in what investments are appropriate, and Florida, Georgia, North Carolina, South Carolina, and Tennessee allow for investment of every kind and in every kind of property.