PR 07240.051 Virgin Islands

A. PR 01-225 Investment of Conserved Funds

DATE: August 15, 2001

1. SYLLABUS

In the New York Region, both New Jersey and New York 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.

The UPIA has not been enacted by Puerto Rico or the U.S. Virgin Islands. Puerto Rico's Civil Code does not include an express standard of conduct for fiduciaries. The U.S. Virgin Islands retains the “prudent man” rule, but there are no reported cases interpreting that section of the U.S. Virgin Islands Code. However, both Puerto Rico and the U.S. Virgin Islands 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.

The law in both States and jurisdictions is silent on whether parents, as natural guardians, are permitted to invest funds belonging to their minor children differently than other payees.

In both New Jersey and New York, 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.

2. OPINION

QUESTIONS PRESENTED

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:

  1. Which types of investments are considered appropriate under the "prudent man" rule?

  2. What are the rules governing trustees regarding the investment of funds with which they are entrusted?

  3. 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?

ANSWER

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 trust's portfolio.

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 contrary.

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?

ANSWER

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 payees.

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.

Virgin Islands

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?

ANSWER

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 othe