You asked us, in response to the Agency's request, to research the laws of the States
in Region VI as those laws affect a representative payee's responsibilities for the
conservation and investment of benefit payments. The regulations provide that, after
a representative has used benefit payments for the current maintenance of the beneficiary,
any remaining amounts are to be conserved or invested on the beneficiary's behalf.
See 20 C.F.R. § 404.2045. Any such "[c]onserved funds should be invested in accordance
with the rules followed by trustees." Id. We look to state law to determine how trustees should invest funds. See POMS GN 00603.040A. Generally, states tend to follow a "prudent investor" rule.
You have asked that we examine the laws of the states in our region to determine:
(1) What investments are considered appropriate under the "prudent investor rule?"
(2) Does state law permit parent payees to invest funds belonging to their minor children
differently than other types of payees? and
(3) What rules do trustees follow when investing funds?
Our specific responses for each State are set out below.
What types of investments are considered appropriate under the “prudent man” rule?
Generally, no specific types of investments are considered appropriate or inappropriate.
Rather, trustees are permitted to acquire any type of investments or property that
persons of ordinary prudence, discretion, or intelligence acquire or retain for their
own account. Tex. Prop. Code Ann. § 113.056 (b) (Vernon 1995).
A specified investment in the Texas statute regarding the duties of trustees pertains
to investments in obligations of the United States government. The statute provides
that these investments may be made directly. Alternatively, they may be made through
interests in open-end management companies or investment trusts registered under the
Investment Company Act of 1940 or authorized for the collective investment of trust
funds pursuant to Part 9, Title 12 of the Code of Federal Regulations. These investments,
like all others, must conform to the standard of prudence. Tex. Prop. Code Ann. §
113.056 (d) (Vernon 1995). Also, a variety of debt instruments issued under the provisions
of the 1934 National Housing Act or the Farm Credit Act of 1971 are specifically identified
as lawful investments for all fiduciary and trust funds in Texas. Tex. Civ. St. Ann.
Art. 842a (Vernon 1964).
Are parent payees permitted to invest the funds belonging to their minor children
differently than other types of payees?
No special provisions apply to investments by parent payees of minor children.
What are the rules followed by trustees regarding the investment of funds with which
they are entrusted?
Texas trustees must “exercise the judgment and care under the circumstances then prevailing that persons
of ordinary prudence, discretion, and intelligence exercise in the management of
their own affairs, not in regard to speculation but in regard to the permanent disposition
of their funds.” They are to consider the probable income from as well as the probable increase in
value and the safety of their capital. Determinations of whether trustees have exercised
prudence are made taking into consideration all of the assets of the trust over which
the trustee had management and control, rather than a single investment. Within these
limits, a trustee “may acquire and retain every kind of property and every kind of investment that persons
of ordinary prudence, discretion, and intelligence acquire or retain for their own
account.” Tex. Prop. Code Ann. § 113.056 (a), (b) (Vernon 1995).
A trustee has a duty to distribute the risk of loss by a reasonable diversification
of investments, unless it is not prudent to do so under the circumstances. Jewett v. Capital National Bank of Austin, 618 S.W.2d 109, 112 (Tex.App.—Waco, 1981). Texas has adopted the Uniform Common
Trust Funds Act, which facilitates diversification for multiple trusts operated by
the same trustee (generally a bank or trust company rather than an individual trustee).
Tex. Prop. Code Ann. §§ 113.171, 113.172 (Vernon 1997).
Trustees may delegate investment decisions, but remain responsible for those decisions.
Trustees may avoid responsibility for those decisions if they: 1) exercise the judgment
and care under the circumstances then prevailing that persons of ordinary prudence,
discretion, and intelligence would exercise in selecting agents to invest their own
funds and establishing the scope and terms of the delegation, 2) investigate the credentials
of the agent, (3) ensure that the agent is subject to the jurisdiction of Texas courts,
4) periodically review the investment decisions of the agent to ensure that they comply
with the investment strategy prescribed by the trustee, and 5) provide written notice
to the beneficiary of the delegation. Tex. Prop. Code Ann. § 113.060 (Vernon 1999).