Limitations on Guardianship Investments

April 7, 2014 § 3 Comments

Prudent investment and management of a ward’s assets is a fundamental duty of a guardian or conservator.

The task is complicated by the language of MCA 93-13-17, which states:

Every guardian, before he shall have authority to act, shall, unless security be dispensed with by will or writing or as hereinafter provided, enter into bond payable to the state, in such penalty and with such sureties as the court may require; . . . .

A guardian need not enter into bond, however, as to such part of the assets of the ward’s estate as may, pursuant to an order of the court in its discretion, be deposited in any one or more banking corporations, building and loan associations or savings and loan associations in this state so long as such deposits are fully insured, such deposits there to remain until the further order of the court, and a certified copy of the order for deposit having been furnished the depository or depositories and its receipt acknowledged.

MCA 91-13-1, et seq. set out the rules for fiduciary investments, including the types of investment instruments permitted and the manner of holding and trading such investments. No matter what the investment instrument, however, bond is required by 93-13-17, unless the money is deposited into a “fully insured” account at either (a) a banking corporation located in Mississippi; or (b) a building and loan association located in Mississippi; or (c) a savings and loan association located in Mississippi; AND the institution signs acknowledgment of receipt of the court order that no funds will be expended without court authorization.

That thicket of requirements is what Natalie Deason encountered when she tried to get chancery court authorization to invest the substantial settlement proceeds that her son, Blaine, received as a result of his father’s death in the Deepwater Horizon oil rig explosion. Natalie was appointed guardian, and she proposed to remove the guardianship to Louisiana, where she had moved, and to make certain investments of the funds without bond. The chancellor appointed a guardian ad litem for Blaine.

Following a hearing, the chancellor rejected both the request to take the guardianship out of Mississippi and the investment plan, and Natalie appealed.

On appeal, the MSSC affirmed March 27, 2014, in Guardianship of Roshto: Deason v. Stinson. You can read the court’s ruling on the removal issue for yourself, as well as Justice King’s cogent dissent. As for the investment issue, Justice Coleman wrote for the majority:

¶17. The chancellor determined that, because Natalie’s proposed investment plan would not limit the funds to being placed in FDIC insured accounts from which funds could not be withdrawn without a court order, Mississippi Code Section 93-13-17 required the guardian post a bond in the full amount of the guardianship funds. The chancellor noted, and the parties had conceded, that “such a bond would be extremely difficult to find and that the annual premium would be exorbitant.” Regarding the use of a structured settlement, the chancellor expressed concern that “the minimal savings on income taxes would be offset by the cost of the bond and by the loss of potential increased earnings when the interest rates rise.” As to the proposal to put half of the money into a trust account, the chancellor held that “[a]llowing the funds to be placed outside the control of the [c]ourt, without bond, would be an abuse of the authority of the [c]ourt and neglectful of the duty to the minor.” The chancellor ordered Natalie to deposit the funds in an FDIC insured bank account in the state of Mississippi and to “avail herself of the benefits of investing through the CDARS plan to maximize protection of Blaine’s assets and minimize her record keeping.”

¶18. Natalie asserts that the trial court erred in requiring that the entirety of Blaine’s settlement funds be placed into CDs. She argues that doing so violates both the reasonably prudent investor standard that governs fiduciaries [Fn 4 See MCA 91-13-3] and the duty of a guardian to improve a ward’s estate. [Fn 5 See MCA 93-13-38]. She claims that interest rates and other considerations related to investment in CDs effectively garner a negative return on the investment. She also argues that bond requirements for the investments should be waived because, if they are not, “[Section] 93-13-17 effectively prohibits a guardian from investing in any investment other than a fully insured bank account when a ward’s assets are substantial – because either the guardian could not obtain a bond, or could not afford one.” She asserts that such a requirement conflicts with the prudent investment statute.

¶19. The plain language of the guardianship statutes unequivocally requires a bond to be posted if the ward’s estate is placed in non-insured investments … While we understand the desire to diversify Blaine’s money and the difficulties surrounding obtaining such a large bond, the plain language of the statute simply tied the chancellor’s hands. The testimony was that, for such a large amount, CDARS was the only practical manner in which the statute could be complied with – the only way that the funds could be deemed placed in Mississippi institutions and be fully insured such that the guardian’s bond could be waived. Under Section 93-13-17, the chancellor had no option but to place the investment in a fully insured program such as CDARS, or to require that Natalie post a bond. Thus, the chancellor did not err in requiring that the entire settlement be put into CDARS.

¶20. The chancellor heard extensive testimony on all the investment options, asked questions regarding the proposed investment strategies, requested additional research on various investment strategies, and issued a lengthy and detailed judgment explaining her decision on the investment of the ward’s settlement. In her order, the chancellor noted the guardian ad litem’s “serious reservations” about the proposed investment of Blaine’s funds, such as “the fluctuating stability of the economy, the recent failures of large investment companies . . . , the historically low interest rates [that] would affect the return on investment rate of any structured annuity, and the requirement that the guardianship assets be bonded for moneys not held in FDIC insured accounts.” The chancellor cited the court’s “duty to wards under its protection to ensure the proper management of the ward’s estate,” and it was evident throughout the proceedings that her primary concern was Blaine’s best interest. The record is clear that the chancellor very carefully considered all the options and made lengthy, detailed, and thorough findings of fact and conclusions of law. Even had the statute not tied the chancellor ’s hands, we would not find an abuse of discretion under such a circumstance.

CDARS is the Certificate of Deposit Account Registry Service, described earlier in the court’s opinion this way:

Through CDARS, someone with large sums of money can deposit and manage CDs through only one bank. That bank distributes the money among other banks for placement in CDs, ensuring that less than $250,000 goes to each bank. The depositor works only with the “base” bank, but his entire sum of money is FDIC insured because it is properly distributed among various financial institutions.

From time to time, lawyers present me with an investment plan that would in all likelihood benefit the ward over the long run. No matter how favorable the terms, however, we are bound by the restrictions of the statutes.

 

 

 

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§ 3 Responses to Limitations on Guardianship Investments

  • Robert T. Van Uden, III says:

    This is a great post and I can confirm that this is the required practice in guardianship matters. I have often encountered issues with large sums of money coming into a Guardianship for a minor child. I have always struggled with the extremely inflexible rules relating to the permissible investments of a Guardianship. Given the modern portfolio theory and the ability of sophisticated money managers to construct a well-diversified portfolio that will provide both income and growth over many years, I wonder what could be done to achieve this. (only by the Legislature?)

    ***Not sure if this would work or even be allowed, but could you for example encourage the attorneys settling a case to consider as part of the settlement agreement that a certain sum of money be set aside to fund a trust for the minor child. (the sole beneficiary would be the minor child). The benefits of this would be increased creditor protection, the ability to have the money professionally managed and to distribute the money to the minor child when he or she is capable of managing a large sum of money. A young male who receives $5.0 million at the age of 21 will spend $4.9 million of it by age 21 & ½.

    I guess my question is whether or not this could be done prior to setting up the Guardianship or are you required to deposit all settlement proceeds for the benefit of a minor child into a Court administered Guardianship?

    Your thoughts,
    Robert

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    • Larry says:

      Thanks for the comment.

      The rules for investment are statutory, so it is up to the legislature to come up with a way to be more flexible. I would guess that a consortium of lawyers with tax and financial skills and advice could come up with a proposal that could fly. Other states, I am sure, have come up with ways to address this. Rep. Mark Baker of Brandon is chair of Jud A and Jud En Banc, and I am sure he would welcome the input.

      As for the trust, in my opinion the court can not tie up the ward’s money beyond age 21. A trust that would dissolve at age 21 might work, if enough judicial oversight is provided for.

      I have allowed more flexibility where the ward is over 18 years, because the statute gives 18+ people power over their cash assets. But I still require a significant portion of the ward’s funds to be subject to judicial protection.

  • Bob Wolford says:

    I agree with the appellant that depositing such an amount of money into CD’s, while “safe”, actually results in a loss over time because the interest rates simply do not keep up with inflation. At some point, should the Legislature look at this and amend the statute to allow for just a little bit more flexibility in investing a ward’s funds? While traditional investments may be deemed “risky”, what little I know is that over the long-term, traditional but conservative investment strategies (such as an indexed fund) yield quite favorably OVER THE LONG RUN. And I’m not advocating turning the funds loose to a day-trader or anything like that.

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