Legal Definitions - legal investments

Legal investments refer to specific types of financial assets or instruments that certain individuals or entities, acting in a fiduciary capacity (meaning they manage money or property for someone else), are legally permitted or required to invest in. These restrictions are typically designed to protect the principal and ensure the safety and prudence of the investment, rather than maximizing returns through higher-risk ventures.

The permissible investments are often defined by statutes, court orders, or the terms of a governing document (like a trust agreement). Historically, some jurisdictions maintained a "legal list" of approved investments, while modern approaches often rely on a "prudent investor rule," which requires fiduciaries to invest as a prudent person would, considering the overall portfolio and the specific circumstances.

• Example 1: A Trustee Managing a Child's Inheritance

  A grandparent establishes a trust fund for their grandchild, stipulating that the trustee must invest the funds only in "legal investments" until the grandchild turns 25. The trustee, bound by this instruction and state law, might choose to invest in U.S. Treasury bonds, highly-rated municipal bonds, or certificates of deposit (CDs) from federally insured banks. These are generally considered safe, low-risk options that preserve capital, aligning with the concept of legal investments designed to protect the beneficiary's future.

• Example 2: A Court-Appointed Guardian for an Incapacitated Adult

  When an elderly individual becomes incapacitated, a court appoints a guardian to manage their financial affairs. The court order specifies that the guardian must invest the individual's savings only in "legal investments" to ensure the funds are available for their care and living expenses without undue risk. The guardian might place a significant portion of the funds in money market accounts, government-backed securities, or conservative mutual funds that meet the state's criteria for prudent investments for fiduciaries. This ensures the principal is protected for the incapacitated person's ongoing needs.

• Example 3: A State Treasurer Investing Public Pension Funds

  A state treasurer is responsible for investing the state's public employee pension fund. State statutes often dictate a strict framework for what constitutes "legal investments" for such funds, balancing the need for growth with the paramount duty to protect the retirement savings of public servants. While these rules can be broader than for individual trusts, they still typically exclude highly speculative assets. The treasurer might invest in a diversified portfolio including investment-grade corporate bonds, real estate, and publicly traded equities, provided these investments fall within the statutory guidelines for prudence and safety established for public funds. This ensures the long-term stability of the pension system while adhering to legal requirements.