Introduction
You have asked us to research the laws of the four states in Region X as those laws
concern a representative payee's responsibilities for the conservation and investment
of benefit payments. The specific questions asked are:
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What types of investments are considered appropriate under the “Prudent Man” rule (if applicable);
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Are parent-payees are permitted to invest differently than other types of payees;
and,
What rules must be followed by trustees in their investment decisions.
As discussed on our teleconference meeting, our answers are set out below, by state.
The following general observations can be made about this area of law in our region.
All four states have adopted the Uniform Prudent Investor Act, or, in the case of
Washington, a Trust Act which is substantially similar (though Washington's Trust
Act does have some variations, noted below). There is relatively little case law considering,
in great detail, which investments are proper and which are improper. This is particularly
true in Idaho and Alaska, where our research has led to the conclusion that case law
in these areas is almost nonexistent. The courts in this region in general seem inclined
to adopt common law or hornbook understandings of the duties of a trustee to a beneficiary.
Because of this lack of particularity, it is useful to cite as a starting point the
“prudent man rule” set out in 1830 in the Harvard College case, which has served as a model for the Uniform Prudent Investor Act: “All that can be required of a trustee to invest, is, that he shall conduct himself
faithfully and exercise a sound discretion. He is to observe how men of prudence,
discretion, and intelligence manage their own affairs, not in regard to speculation,
but in regard to the permanent disposition of their funds, considering the probable
income, as well as the probable safety of the capital to be invested.” Harvard College v. Amory , 26 Mass. (9 Pick.) 446, 460-61 (1830). As one Court of Appeals in Washington has
observed, in Harvard College, the court recognized that trust assets could never be fully protected from the uncertainties
of the market place; thus, the prudent investor standard was necessarily flexible.
See Estate of Cooper , 81 Wash.App. 79, 88-89, 913 P.2d 393, 398 (Wash.App. 1996).
Washington
Which types of investments are considered appropriate under the “prudent man” rule?
The prudent investor rule is found at R.C.W.A. § 11.100.020.
No specific types of investments are required or restricted. No specific investment
or course of action is, taken alone, prudent or imprudent. The trustee may invest
in every kind of property and type of investment, subject to the prudent investor
rule.
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
Washington law is silent on this issue. However, there is an assumption that the prudent
investor be impartial and with no conflict of interest. To the extent that a family
relationship may be a barrier to such impartiality and may create a conflict of interest,
one may need to scrutinize these funds more carefully. The standard, however, appears
to be identical.
What are the rules followed by trustees regarding the investment of funds with which
they are entrusted?
Washington's Trust Act provides as follows:
(1) A fiduciary is authorized to acquire and retain every kind of property. In acquiring,
investing, reinvesting, exchanging, selling and managing property for the benefit
of another, a fiduciary, in determining the prudence of a particular investment, shall
give due consideration to the role that the proposed investment or investment course
of action plays within the overall portfolio of assets. In applying such total asset
management approach, a fiduciary shall exercise the judgment and care under the circumstances
then prevailing, which persons of 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, and if the fiduciary has special skills
or is named trustee on the basis of representations of special skills or expertise,
the fiduciary is under a duty to use those skills.
(2) Except as may be provided to the contrary in the instrument, the following are
among the factors that should be considered by a fiduciary in applying this total
asset management approach:
(a) The probable income as well as the probable safety of their capital;
(b) Marketability of investments;
(c) General economic conditions;
(d) Length of the term of the investments;
(e) Duration of the trust;
(f) Liquidity needs;
(g) Requirements of the beneficiary or beneficiaries;
(h) Other assets of the beneficiary or beneficiaries, including earning capacity;
and
(i) Effect of investments in increasing or diminishing liability for taxes.
(3) Within the limitations of the foregoing standard, and subject to any express provisions
or limitations contained in any particular trust instrument, a fiduciary is authorized
to acquire and retain every kind of property, real, personal, or mixed, and every
kind of investment specifically including but not by way of limitation, debentures
and other corporate obligations, and stocks, preferred or common, which persons of
prudence, discretion, and intelligence acquire for their own account. R.C.W.A. § 11.100.020.
Other provisions of Washington law clarify the duties imposed on fiduciaries under
this rule. Interestingly, Washington specifically provides for certain types of investments
by fiduciaries. In Washington, for example, a fiduciary is authorized to invest in
new, unproven, untried, or other enterprises with a potential for significant growth
whether producing a current return, either by investing directly therein or by investing
as a limited partner or otherwise in one or more commingled funds which in turn invest
primarily in such enterprises. The aggregate amount of investments held by a fiduciary
under the authority of this section valued at cost shall not exceed ten percent of
the net fair market value of the trust corpus. See R.C.W.A. § 11.100.023. Also, any fiduciary may hold and retain any real or personal
property received into or acquired by the trust from any source, and is not liable
for any loss incurred with respect to any such investment, “if that investment was permitted when received or when the investment was made by
the fiduciary, and if the fiduciary exercises due care and prudence in the disposition
or retention of any such investment” R.C.W.A. § 11.100.060.
A duty against self-dealing is codified in Washington. See R.C.W.A. § 11.100.090. A Washington fiduciary is specifically authorized by law to
use trust funds to acquire life insurance upon the life of any beneficiary or upon
the life of another in whose life such beneficiary has an insurable interest. See R.C.W.A. § 11.100.120.
Washington also provides for the duty to the beneficiaries, the duty of impartiality
and the duty to diversify in terms substantially identical to those of the Uniform
Prudent Investor Act. See R.C.W.A. §§ 11.100.045, 11.100.047.
Finally, and most importantly for our purposes, fiduciaries in Washington are prohibited
from entering into certain “significant nonroutine transactions” without providing written notice to the trustor. “Significant nonroutine transactions” include:
(a) Any sale, option, lease, or other agreement, binding for a period of ten years
or more, dealing with any interest in real estate other than real estate purchased
by the trustee or a vendor's interest in a real estate contract, the value of which
constitutes twenty-five percent or more of the net fair market value of trust principal
at the time of the transaction; or
(b) The sale of any item or items of tangible personal property, including a sale
of precious metals or investment gems other than precious metals or investment gems
purchased by the trustee, the value of which constitutes twenty-five percent or more
of the net fair market value of trust principal at the time of the transaction; or
(c) The sale of shares of stock in a corporation whose stock is not traded on the
open market, if the stock in question constitutes more than twenty-five percent of
the corporation's outstanding shares; or
(d) The sale of shares of stock in any corporation where the stock to be sold constitutes
a controlling interest, or would cause the trust to no longer own a controlling interest,
in the corporation. R.C.W.A. § 11.100.140.
The best discussion of the Prudent Investor Rule in Washington jurisprudence has been
in the case of Estate of Cooper. According to that court, overall trust performance is a factor in evaluating the
performance of the trustee, but it is not by itself controlling. The court's focus
in applying the Prudent Investor standard is conduct, not the end result. The prudent
investor standard is necessarily flexible. Two principles, the court noted, can be
observed: First, whether an investment is prudent or not is a question of fact. Second,
the prudent investor standard requires that the fiduciary maintain a balance between
the rights of income beneficiaries with those of the remainderman. Washington's version
of the rule also requires that the trustee consider income as well as the safety of
the capital and the requirements of the beneficiaries. The focus is on the trustee's
performance, not simply on the net gain or loss to the trust corpus. See Estate of Cooper, 81 Wash. App. 79, 913 P.2d 393 (Wash. App. 1996), citing Harvard College v. Amory , 26 Mass. (9 Pick.) 446, 460-61 (1830); In re Lincoln First Bank, N.A. , 165 Misc.2d 743, 630 N.Y.S.2d 472 (Sup.Ct.1995).
In Allard v. Pacific National Bank, 99 Wash.2d 394, 663 P.2d 104 (Wash. 1983), the Washington Supreme Court discussed
a trustee's duty to inform a beneficiary of all material facts in connection with
a nonroutine transaction. According to the Allard court, the trustee's fiduciary duty includes the responsibility to inform the beneficiaries
fully of all facts which would aid them in protecting their interests. That the settlor
has created a trust, and thus required the beneficiaries to enjoy their property interests
indirectly, does not imply the beneficiaries are to be kept in ignorance of the trust,
the nature of the trust property, and the details of its administration. If the beneficiaries
are able to hold the trustee to proper standards of care and honesty and procure the
benefits to which they are entitled, they must know of what the trust property consists
and how it is being managed. Thus, the trustee must inform beneficiaries of all material
facts in connection with a nonroutine transaction which significantly affects the
trust estate and the interests of the beneficiaries prior to the transaction taking
place. See Allard v. Pacific National Bank, 99 Wash.2d 394, 404-405, 663 P.2d 104, 110 (Wash. 1983). A trustee must determine
the best possible price for trust property either by obtaining an independent appraisal
of the property or by "testing the market" to determine what a willing buyer would
pay. Id. at 406.
With regard to the duty to diversify investments, the Washington rule is that a trustee
has a general obligation to diversify, unless there is either (1) an express provision
by the settler relieving the trustee of the duty to diversify, or (2) the circumstances
dictate that it is not prudent to diversify. See Baker Boyer National Bank v. Garver, 43 Wash.App. 673, 679-680, 719 P.2d 583, 588 (Wash.App. 1986). Obviously, this “rule” is none too helpful for future guidance, since it amounts to saying that there is
a duty to diversify, except where there isn't. See also Baldus v. Bank of California, 12 Wash.App. 621, 530 P.2d 1350 (Wash.App. 1975).