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Part 2: The Whats of trustee investment

Author Image The Technical Team
5 minutes read
Last updated on 11th Jun 2020

Overview

In the first chunk of this trustee series I considered the first two whats. 

What type of trust is it? And what can the trustees invest in?

Now we know the type of trust and what the trustees can invest in, this chunk will cover the next crucial part of advising trustees

What are trustees investment duties?

This could be a thesis in itself.  The overarching point is that trustees use their powers and perform their duties in the best interests of current and future beneficiaries.

There are statutory duties and duties arising through common law and they are broadly similar. 

Statutory duties fall into 4 broad areas.

Skill & Care

They must exercise reasonable skill and care. Higher standards are expected of investment professionals, acting in their capacity as such, than of lay persons.

Standard Investment Criteria

They must ensure the suitability to the trust of investments and consider the need for the trust assets to be diversified.

Monitor and Review investments

A bit like any investor, trustees must from time to time review the trust investments against the standard investment criteria to consider if they are still suitable to meet the needs of the trust. If not, action should be taken to vary those investments.

Advice

Trustees may  have the skills, knowledge and experience to make their own investment decisions. Where they do not, which will often be the case with lay trustees,  before exercising any power of investment a trustee must obtain and consider proper advice. That is,  “the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment.

Trustees common law duties are similar to their statutory duties but give us a bit more insight to guide trustees.

Ensure investments are suitable

We mentioned earlier that trust deeds usually stated that trustees could invest trust monies as if they were the absolute owners.  That’s not quite right!

Re Whiteley (1886) 33 ChD 347 expands on that “The duty of the trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty is rather to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.”

Take account of settlor’s wishes

Trustees get the scope of their investment powers from the deed / statute, but a settlor may sometimes write a side letter to the trustees, containing an expression of wishes. This would not be binding on the trustees but would stand alongside the trust document and provide guidance to the trustees as to the way in which the settlor would like them to carry out their duties. It may relate to investments.

Ensure fairness between beneficiaries

Different types of trusts may have different classes of beneficiaries, for example there could be an income beneficiary and capital beneficiaries. Trustees are not required to treat all beneficiaries equally but the fact there can be different classes of beneficiary imposes a duty on the trustees. Mr Justice Hoffman, commenting on Nestlé v NatWest [1993] 1 WLR 1260, stated “The trustee must act fairly in making investment decisions which may have different consequences for different classes of beneficiaries.”

As an example, unless there were some exceptional circumstances, it wouldn’t be fair to buy a non-income producing asset for a trust where there was a beneficiary only entitled to income. Or, it wouldn’t be fair to invest in high income yielding assets if it endangered capital growth. 

The exact circumstances of the different beneficiaries, the terms of the trust and any settlor wishes will dictate fairness. Take a spouse who is an income beneficiary and the capital then falling to distant relatives, it may be entirely fair to concentrate on income producing assets at the expense of capital. Conversely, where the spouse is reasonably well off and the capital then falling to close family, perhaps the children from the settlor’s first marriage, a weighting to capital could be fair.

Fairness is the key not equality. 

Monitor investments

A given! And mirrors that statutory duty.

Do not sit on cash

Trustees must invest the trust fund. Assets must be acquired (or retained) to produce a financial return for the trust.

“Trustees are under a duty to make the trust fund productive for their beneficiaries by investing it” (Stone v Stone (1869) 5 Ch App 74).

It has been held in Court that investment involves… “…seeking to obtain the maximum return by way of income or capital growth which is consistent with commercial prudence.”

Take account of tax considerations

When choosing between alternative types of investment, trustees must take account of characteristics impacting tax and cost efficiency. 

Trustees should look at current and future beneficiaries individual tax status’. What they invest in and their actions will have an impact on some beneficiaries individual tax positions.   

As part of the ongoing monitoring of investments changes to tax rules should also be taken into consideration.

Trustees have many investment duties and responsibilities to consider, including taxation. 

So in part 3 I’ll take a look at the tax treatment of investment bonds and OEICs held in trust.

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