You asked us to research the laws of the six states in Region V as those laws impact
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?
The laws of the states within our region require trustees to use reasonable care,
skill and caution with the interest of the beneficiary as the key element. Our specific
state answers are set out below.
What investments are considered appropriate under the “prudent investor” rule?
Although Wisconsin has not adopted the Uniform Prudent Investor Act, much of its law
parallels the Act. Wisconsin's prudent person rule is found at Wisconsin Statutes
Annotated (W.S.A.) 881.01.
A Wisconsin court will not interfere with a trustee's investments, provided the trustee
acts in good faith and from proper motives and within the bounds of reasonable judgment.
The court may interfere only when a trustee acts outside bounds of reasonable judgment,
a trustee is guilty of an abuse of discretion, or a trustee acts dishonestly and improperly.
In re Filzen's Estate , 31 N.W.2d 520, 522 (Wis. 1948). For example, a trustee was found not liable for
the losses due to the stock market crash in the 1930's. Welch v. Welch, 290 N.W. 758 (Wis. 1940).
At W.S.A. 881.01(1), Wisconsin provides that an investor may invest in certain types
of listed investments, although the list is not all-inclusive:
Bonds, debentures and other corporate obligations
Stocks (up to 50% of the total fund)
Shares of investment companies and investment trusts
Wisconsin case law also notes the following reasonable investments:
United States savings bonds: Kugler v. Van Rossum Estate, 330 N.W. 2d 622, 624, fn. 1 (Wis. Ct. App. 1983); see also In re Wehner's Will v. First Wisconsin Trust Co., 300 N.W. 241 (Wis. 1941).
Certificates of deposit: Kugler, 330 N.W. 2d at 624, fn. 1.
Savings accounts: Id.
Under State law, are parent payees permitted to invest the funds belonging to their
minor children differently than other types of payees?
Wisconsin law does not directly address this issue. However, Wisconsin law provides
that a custodian with special skills or expertise must use the skills or expertise.
W.S.A. 800.665. This suggests a heightened duty for certain types of investors, such
as investment bankers. A parent who does not have such special skills or expertise
would not be subject to this heightened duty. However, there is an assumption that
the prudent investor be impartial and with no conflict of interest. If the parent's
investment suggests a conflict of interest, based on the family relationship, the
investment should be investigated.
What are the rules followed by trustees regarding the investment of funds with which
they are entrusted?
The first duty of a trustee is to preserve the corpus of the trust. First Wisconsin Trust Co. v. Perkins 82 N.W.2d 331, 470 (Wis. 1957). Yet, a trustee should do more than simply preserve
the funds; he or she should invest the funds and not simply allow the funds to lie
idle. Matter of Kugler's Estate , 330 N.W. 2d 622, 626 (Wis. Ct. App. 1983). There is an assumption that the funds
to be invested are those that are not needed immediately to maintain the beneficiary—generally
six month's needs. In re Guardianship of Kueschel, 19 N.W. 2d 178, 180 (Wis. 1945).
Funds should be diversified. In re Mueller's Trust, 135 N.W. 2d 854, 864 (Wis. 1965). A trustee must be impartial with no conflict of
interest. W.S.A. 800.665 (4); W.S.A. 880.84 (4). The prudent person test concerning
investments is similar to the reasonable person test for negligence, and presents
a mixed question of fact and law. Matter of Estate of Ames, 448 N.W.2d 250, 255 (Wis. Ct. App. 1989).
Five of our six states, with Wisconsin as an exception, have incorporated the Prudent
Investor Act within their laws. Wisconsin has incorporated most of the theory behind
the Prudent Investor Act. Ohio is the only state that sets out guidelines by individual
types of investments that are considered prudent as a matter of law. In other states,
there is some guidance in the case law, other parts of the state statutes, (in Michigan)
in repealed statutes.
In each state, a representative payee must use reasonable care, skill and caution
with the interest of the beneficiary as the key element.