PR 07240.048 Texas
A. PR 01-225 Investment of Conserved Funds
DATE: August 3, 2001
In the Dallas Region, the States of Arkansas, Louisiana, New Mexico and Oklahoma have each adopted The Uniform Prudent Investor Act (UPIA) within their laws. While the State of Texas has not formally adopted the UPIA, it follows the “prudent investor” rules which are very similar to the UPIA.
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.
On the issue of whether parent payees are permitted to invest the funds belonging to their minor children differently than other types of payees, Oklahoma State law is silent and the States of Arkansas, New Mexico, and Texas make no special provisions. While Louisiana State law generally provides parents with usufruct (i.e., enjoyment of their children's property until the child's majority or emancipation), Social Security regulations require that the child's benefits be used only for the child's current maintenance or conserved or invested on the child's behalf. In each State it appears that parents must follow the same rules that apply to all other types of trustees.
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).