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17-04-2018

Anyone acting as a trustee should familiarise themselves with the powers set out in the Trustee Act 2000, after familiarising themselves with the trust papers of course! It should also be borne in mind that whilst there is no statutory definition of “investment” in this context, the notion of what constitutes investment has been considered in various cases, including Re Wragg, Wragg v Palmer [1919] 2Ch 58 in which it was held by Lawrence J that ‘Invest’ prima facie means to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income which it will yield.

A trustee is “... bound to inquire of what the property consists that is proposed to be handed over...ought also to look into the trust documents and papers to ascertain what notices appear among them of incumbrances and other matters affecting the trust”[1]

In order to fulfil their duties, a trustee must have an understanding of the assets of the trust, how they are held, the liabilities, is there sufficient proof of ownership etc

Legislative Requirements

There are certain duties a trustee must fulfil when exercising powers of investment in relation to a trust. A trustee must also understand the interaction between investment powers and duties.

A trustee must give consideration not only to any specific investment powers which are set out in any trust documents, but also to the investment powers which are set out in statute, specifically the Trustee Act 2000 (“the Act”).

Section 1 of the Act sets out the overriding duty of care as follows:

  1. Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular –
    1. to any special knowledge or experience that he has or holds himself out as having, and
    2. if he acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession
  2. In this Act the duty under subsection (1) is called “the duty of care”.

A trustee must understand that the duty of care applies:

- when exercising any general or specific power of investment, whether conferred by statute or by the trust instrument - when carrying out the duty to have regard to the standard investment criteria when considering the trust investments and when carrying out your duty to obtain and consider investment advice - when exercising powers (whether conferred under the Act or otherwise) to acquire land

Section 3 of the Trustee Act says, in part:

  1. Subject to the provisions of this Part, a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust.
  2. In this Act the power under subsection (1) is called “the general power of investment”.
  3. The general power of investment does not permit a trustee to make investments in land other than in loans secured on land (but see also section 8).

The effect of the section is a trustee may make any kind of investment on behalf of the trust as though it were the beneficial owner of the assets. Such wide powers of investment in relation to the trust assets must however be balanced against the fiduciary duty to the beneficiaries.

Whilst Section 3 allows wide powers of investment, Section 4 of the Act sets out the standard investment criteria to which a trustee must have regard when exercising those powers of investment.

The standard investment criteria are:

  • the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and
  • the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.

What this means for a trustee in practice is that when considering an investment, there is a duty to consider whether the proposed investment is suitable for the trust, and whether the proposed investment is sufficiently diversified from any investments the trust might already hold.

When considering the suitability of investments, a trustee will need to take into account the competing positions of the life tenant and the remaindermen, if applicable, and their duties to them. For example, a trustee must be careful to ensure that any investment made with a view to achieving strong capital growth does not have a detrimental impact on the income generated by the trust to which a life tenant may be entitled. This will always be a ‘balancing act’ that a trustee must undertake when considering the investments of the trust.

This difficulty was highlighted in Nestle v National Westminster Bank plc [1994] 1 All ER 118 in which Staughton LJ said “At times it will not be easy to decide what is an equitable balance. A life tenant may be anxious to receive the highest possible income, whilst the remainderman will wish the real value of the trust fund to be preserved.”

A similar sentiment was expressed in an earlier matter by Cotton LJ who said that a trustee must give consideration “...not only to the interests of those who are entitled to the income, but to the interests of those who will take in future. That is to say, it is not like a man simply investing his own money where his object may be a larger present income than he can get from a safer security; but trustees are bound to preserve the money for those entitled to the corpus in remainder, and they are bound to invest it in such a way as will produce a reasonable income for those enjoying the income for the present”[2]

As a practical measure, when considering these potentially competing interests the trustee may request information as to the life tenant’s other sources of income (if any) and financial needs so that the trustee can attempt to ensure the trust assets yield the appropriate level of income without jeopardising capital growth.

Section 4 of the Act also provides that from time to time a trustee must review the investments of the trust against the standard investment criteria and consider whether any of the investments should be varied.

A trustee should keep the following in mind:

  • consider whether the trust assets are sufficiently diversified and if they are not, determine what adjustments should be made - that there is a duty to obtain professional investment advice, unless in all the circumstances the trustee concludes that it isn’t necessary
  • that there is a duty to ensure that the investments of the trust are reviewed on a regular basis - it is good practice to create an investment strategy and to review the strategy a least on an annual basis. It may be appropriate to engage the assistance of a professional advisor for this task both in formulating the strategy and in reviewing it.

A trustee should always review the trust document in order to determine whether there are any specific provisions regarding the trust investments. It may be, for example, that the settlor has placed restrictions on the types of assets in which the trustees may invest for ethical reasons. If a trustee makes an investment that is expressly excluded by the trust document, he or she will be in breach of their duties as trustee, even if they believe the investment to be a sound one.

The duty to review the trust investments was examined in Jeffrey v Gretton and Russell. [3] Whilst the claim was dismissed on the facts, one of the findings was that the trustees had failed to review the portfolio and that such a failure was breach of their duties under Section 4 (2). In order to guard against this a trustee should ensure that the trust investments are reviewed and should keep a record of having done so. If a situation should arise in which the performance of the trust or the actions of the trustee are called into question, it is important that the trustee be able to demonstrate that he or she has taken an active role in the administration of the trust and that can demonstrate sound reasons for any actions taken.

Section 3 of the Trustee Act 2000 prohibits investment in land, subject however to the provisions of Section 8. The section provides that:

  • A trustee may acquire freehold or leasehold land in the United Kingdom –
    • as an investment,
    • for occupation by a beneficiary, or
    • for any other reason
  • “Freehold or leasehold land” means
    • in relation to England and Wales, a legal estate in land,
    • in relation to Scotland –
    • the estate or interest of the proprietor of the dominium utile, or in the cause of land not held on feudal tenure, the estate or interest of the owner, or
    • a tenancy, and
    • in relation to Northern Ireland, a legal estate in land, including land held under a fee farm grant
  • For the purpose of exercising his functions as a trustee, a trustee who acquires land under this section has all the powers of an absolute owner in relation to the land.

Administration

If the trust assets are being transferred to the trustee in specie, the trustee should ensure that they are able to correctly identify the assets (via share certificates or other proof of ownership etc). If there have been any breaches of the existing investment policy, these should be rectified as soon as possible.

When considering the investment of the trust assets, a trustee must not unduly delay your investment decisions. Whilst a trustee may of course need to take some time to consider investment advice, it is likely that the trustee would be in breach of their duties if the trust fund were to languish for months without any action being taken. There is no statutory definition of what constitutes an unreasonable delay but it was held in Cann v Cann[4] that six months was the maximum period for which income could reasonably remain un-invested.

Whilst there is no formal requirement to do so, for good practice a trustee should endeavour to ensure that any advice which they seek in relation to the trust is recorded in writing and kept with the trust records.

Investing in property

As set out above, Section 8 of the Trustee Act provides that a trustee may purchase leasehold or freehold property, as an investment or for occupation by a beneficiary, or for any other reason (provided of course that it is an appropriate exercise of power to do so).

If a property owned by the trust is to be occupied by one of the beneficiaries, a trustee must give careful consideration as to the terms on which they will occupy – what rent or expenses will they be required to pay, will there be anyone else living in the property, who will be responsible for maintenance and insurance etc.

If a trustee is to invest in property, he or she must also be careful to ascertain the appropriate purchase price for the property, that is, they must not pay above the market rate or appropriate valuation.

Standard of behaviour required

The standard of behaviour required is that of the “ordinary prudent man of business”. This was expressed in 1882 by Jessel MR who stated

“It seems to me that on general principles a trustee ought to conduct the business of the trust in the same manner than an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. In other words, a trustee is not bound because he is a trustee to conduct business in other than the ordinary and usual way in which similar business is conducted by mankind in transactions of their own. It never would be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man of business would adopt, or to conduct the business in any other way. If it were otherwise, no one would be a trustee at all.” [5]

Delegation

Whilst the role of trustee may seem at this point to be unduly onerous, it should be kept in mind that a trustee is entitled, and indeed in some circumstances under a duty, to take professional advice.

If a trustee appoints an advisor for the provision of investment advice and decisions, for example, and the trustee delegates to that advisor, then the trustee will not be liable for any act or default by that agent (unless they themselves are in breach of their duty of care)

As a matter of good practice however, a trustee should consider carefully the appointment of any professional advisor so that he or she is satisfied that they have the appropriate knowledge and experience to advise. A trustee should also assess whether their fees are appropriate and in proportion with the value of the assets and the complexity of the investments.

[1] Hallows v Lloyd (1888) 39 Ch D 686 per Kekewich J

[2] In re Whiteley (1886) 33 Ch D 347

[3] [2011] WTLR 809

[4] (1884) 51 LT 770

[5] Speight v Gaunt (1882) 2 Ch D 727

 

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