You asked us to provide an opinion examining the law of each state and district within
our region with respect to the following three questions:
Which types of investments are considered appropriate under the "prudent man" rule?
What are the rules governing trustees regarding the investment of funds with which
they are entrusted?
Under state law, are parent payees permitted to invest the finds belonging to their
minor children differently than other types of payees?
QUESTION #1 PRESENTED
What types of investments are considered appropriate under the “prudent man” rule?
Under the Uniform Prudent Investor Act (“UPIA”), no investment type is appropriate or inappropriate. The UPIA is proposed legislation
which once enacted, is a modern codification of the “prudent man rule.” At least forty-five states have enacted this legislation, including New York (effective
January 1, 1995) and New Jersey (effective June 5, 1997). It has not been enacted
by the U.S. Virgin Islands or Puerto Rico. The Virgin Islands retains the “prudent man” rule, but there are no reported cases interpreting that section of the Virgin Islands
code. Puerto Rico's Civil Code does not include an express standard of conduct for
fiduciaries. However, both the Virgin Islands and Puerto Rico will look to Anglo-American
common law in situations where there is no case law on a specific statute, or when
the statutes are silent on the matter.
I. The Uniform Prudent Investor Act, In General
The UPIA is a standard of conduct for trustees to follow when making investment decisions
over the property in their control. The Act explicitly states that any type of investment
is permitted. “A trustee may invest in any kind of property or type of investment consistent with
the standards of this [act].” U.P.I.A. §2(d). Thus, as long as any given investment decision comports with the
standard of conduct contained in the act, the trustee will not be found liable merely
because of the type of investment.
The standard itself is based on prudence, as was the “prudent man” rule. Under the UPIA however, the trustee must invest as a “prudent investor would by considering the purposes, terms distribution requirements,
and other circumstances of the trust.” Id . at §2(a). In doing so, he must exercise “reasonable care, skill and caution.” Id . The UPIA eliminates the traditional requirement that trustees act as intelligent
and discrete men would, when managing the disposition of their own funds in regard
to the probable income as well as the probable safety of their capital.
Whether an investment decision complies with the UPIA standard will be determined
by examining the totality of the circumstances at the time the decision or investment
event occurred. Decisions will be judged “not in isolation, but in the context of the trust portfolio as a whole and as a part
of an overall investment strategy having risk and return objectives reasonably suited
to the trust.” Id. at §2(b). Thus, no investment is inappropriate in its essence, but may be inappropriate
in light of the factors existing at the time of the decision.
The drafters of the UPIA based the Act on section 227 of the Restatement of Trusts
(Third). See Uniform Laws Annotated, “Uniform Prudent Investor Act” §2, Comment (1994). Both the UPIA and section 227 of the Restatement disavow the
categoric restrictions on types of investments that had developed in some jurisdictions
under the old “prudent man” rule. Rather than measuring prudence by investment outcome, the new rule encourages
management of risk. Id.
Specific investments or techniques are not per se prudent or imprudent. The riskiness
of a specific property, and thus the propriety of its inclusion in the trust estate,
is not judged in the abstract but in terms of its anticipated effect on the particular
Restatement of Trusts (Third) §227, Comment f, at 24 (1992). Investment decisions
made by trustees, or payees, in New York and New Jersey, and to a lesser extent Puerto Rico and the Virgin Islands, see infra, will be judged on this standard.
United States Virgin Islands
In the Virgin Islands, the standard of conduct applied to investment decisions by
persons holding property of another _1/ is based on the pre-UPIA, traditional “prudent man” rule. It states:
In acquiring, investing, reinvesting, exchanging, retaining, selling and managing
property for the benefit of another, fiduciaries shall exercise the judgment and care
under the circumstances then prevailing, which men of prudence, discretion and intelligence
exercise in the management of their affairs, not in regard to speculation but in regard
to the permanent disposition of their funds, considering the probable income as well
as the probably safety of their capital.
15 V.I. Code Ann. §1002 (1996). The code further states that any investment is appropriate
so long as prudent men of “discretion and intelligence” would invest in it with their own funds. Id.
There are no cases reported by local courts in the Virgin Islands interpreting this
section. However, the code does provide direction to courts in situations where there
are no cases to refer to.
The rules of the common law, as expressed in the restatements of the law approved
by the American Law Institute, and to the extent not so expressed, as generally understood
and applied in the United States, shall be the rules of decision in the courts of
the Virgin Islands in cases to which they apply, in the absence of local laws to the
1 V.I. Code Ann. §4 (1996).
Accordingly, a number of federal and Virgin Island courts have applied the law of
the Restatement of Trusts to decide matters in trust law. See In the Matter of the Estate of Margarita Ziri Savian, 2000 WL 1310662 (D. Virgin Islands) (Restatement of Trusts applied to determine validity
of trust); Smith v. Williams, 698 F.2d 611 (3d Cir. 1983) (affirming lower court ruling that applied Restatement
of Trusts to find validity of express trust); Wallace v. Kilbride, 319 F.2d 760 (3rd Cir. 1963) (rules of Restatement of Trusts applied to determine
resulting trust); In re Tutu Water Wells Contamination Litigation, 157 F.R.D. 367 (D. Virgin Islands, 1994) (applying Restatement of Trusts to hold
trustee not required to identify himself in pleadings). Likewise, the Social Security
Administration and representative payees making investment decisions in the Virgin
Islands may be able to consider the more modern investment concepts reflected in the
Third Restatement of Trusts and UPIA.
In addition, since lawsuits involving United States federal law and the law of the
Virgin Islands are adjudicated by the U.S. District Court of the Virgin Islands and
appealed to the Third Circuit Court of Appeals, the law of the states of New Jersey,
Pennsylvania and Delaware may offer further guidance. New Jersey and Pennsylvania
have enacted the UPIA.
QUESTION #2 PRESENTED
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
The law in all states and jurisdictions is silent on whether parents, as natural guardians,
are permitted to invest funds belonging to their minor children differently than other
In general, parents manage the property of their minor children. However, parents
are frequently appointed legal guardian over their own children when large sums are
involved. Where investing of funds is permitted, a parent-guardian's investment decisions
will be subject to the same standards as other fiduciaries. It should be noted that
New Jersey and Puerto Rico have statutory maximums for funds which parents may manage
without a guardian being appointed. Case law in New York suggests that when large
amounts are involved, a guardian will be appointed.
Statutes and case law in the Virgin Islands are entirely silent on the question of
whether parents may invest the property of their children differently than other payees.
QUESTION #3 PRESENTED
What are the rules followed by trustees?
In all jurisdictions, trustees must first follow the terms and directions of the trust.
Beyond that, trustees in New York and New Jersey will be subject to the standards
of conduct found in each state's prudent investor act. Trustees in the Virgin Islands
will be subject to the “prudent man” rule and where local law is silent, trustees may look to the Restatement of Trusts
for further guidance. Trustees in Puerto Rico will be subject to its statutes creating
and regulating trusts, and where Puerto Rican law is insufficient to resolve the matter,
Puerto Rican statutes permit trustees to be further guided by concepts and principles
of common law. The Restatement of Trusts embodies the common law, and the foundation
for the UPIA.
Virgin Islands Trustee Rules
Trustees in the Virgin Islands must follow the terms and provisions of the governing
instrument or oral instructions of the settlor regarding whether and how to invest
funds. The statutes provide a series of miscellaneous rules which regulate express
trusts and trustees. 15 V.I. Code Ann. §1091 (1996). Such trusts can be created orally
or in writing, and the settlor has broad powers to relieve the trustee from, or to
alter, or to add on to the duties, restrictions, and liabilities of the law. Id . at §1107. A trustee cannot mingle the funds of two or more trusts in a brokerage
account or other investment and make withdrawals for his own or an unknown benefit.
Id. at §1105. A trustee cannot buy or sell any property of the trust to himself. Id . at §1097.
The standard of conduct for trustees in the Virgin Islands is the traditional “prudent man” rule. See 15 V.I. Code Ann. §1002 (1996). The statute states that trustees may “acquire and retain ... every kind of investment, specifically including but not by
way of limitation, bonds, debentures and other corporate obligations, and stocks,
preferred or common...” so long as such action complies with the standard. Id. However, the express terms and provisions of the governing instrument will take
precedence over the statutes. Id . at §1003.
Thus, in the Virgin Islands, a trust is created when a settlor gives oral or written
instructions to a trustee permitting him to oversee property for the benefit of a
third person. Likewise, a trust can be created by oral or written instructions to
a representative payee permitting him or her to oversee the property of the beneficiary
of social security benefits. The instructions on whether and how investments may be
made of those funds can be expressly determined by the settlor, i.e. the Social Security
Administration. In those instructions, the rules trustees in the Virgin Islands must
follow can be expanded, restricted, or eliminated.
_1/ Provisions of this chapter, titled “Investments of Fiduciaries,” apply to “trustees, guardians and other fiduciaries ... acting under wills, agreements, court
orders and other instruments now existing or hereafter made.” 15 V.I. Code Ann. § 1001 (1996).