The role of a trustee is one that should not be entered into lightly, as it carries risks and responsibilities. Whether appointed as a trustee under a will or standing as a trustee of a trust established during an individual’s lifetime, there are specific duties that trustees must comply with.
In this article, we will consider those duties and responsibilities in more detail and specific requirements in respect of trust investments.
In the case of will trusts, unless otherwise stated in the will, the executors of the will also act as trustee of any trusts that are established by the will. In other trust matters, such as where funds are set aside for a child under the age of 18 via a trust investment or insurance policy, then parents, close family or trusted friends are often invited to stand as a trustee. It is recommended that there are at least two trustees appointed, although in the case of land, a maximum of four trustees can stand. All trustees need to act unanimously in their decision making, and therefore the greater the number of trustees, the greater the possibility of disagreement.
The primary responsibility of a trustee is that he or she owes duties of honesty, integrity, loyalty, and good faith to the beneficiaries of the trust.
To comply with legislation, trustees must understand and observe the terms of the trust. These are set out in the trust deed, which is often a will, or other trust instrument, such as an insurance company deed, and establish who the beneficiaries are, what assets are to be held within the trust, and any other instructions that the trustees need to follow. The trust deed may confer powers on the trustees to carry out actions, which are also defined by law.
Whilst following the terms of the trust, trustees need to show impartiality towards beneficiaries and cannot allow a beneficiary to suffer at the expense of another. This is particularly relevant where an individual beneficiary receives income from trust assets, and other beneficiaries receive capital.
It is important that trustees keep good records of decisions made and accurate and up to date accounts, so that beneficiaries can be provided with relevant information when it is requested.
The Trustee Act 2000 introduced updated default rules for investments made by trustees. Unless the powers conferred by the Act are over-ridden within the trust deed, the Act provides significantly wider investment powers than were previously in place, and gives trustees the power to invest the trust capital as if they were the absolute owners themselves.
A statutory duty of care applies to all trustees, whereby he or she must exercise such care and skill as ‘is reasonable in the circumstances’. A trustee acting in a professional capacity, or having special knowledge and experience, would be subject to a higher duty of care. This statutory duty applies to decisions taken when investments are made or reviewed, property or land is purchased, managed or insured, or a decision taken to appoint a third party to assist in the investment process.
The standard investment criteria set out in the Trustee Act 2000 stipulate three key elements that must be adhered to. Firstly, trustees need to ensure that the investments selected are suitable for the trust in question. Factors that trustees need to consider here is the objective of the trust and requirements of beneficiaries, the time horizon for investment, and the level of risk to which trust investments are exposed.
Secondly, investments need to show sufficient diversification, as appropriate to the trust in question. For the majority of cases, this means that the investment strategy needs to allocate funds across different assets (such as equities, fixed interest securities, property and cash) geographies and sectors. The precise level of diversification will need to pay due consideration to the terms of the trust. For example, in the case of a trust holding £5,000 for the benefit of a child who will be 18 in a year’s time, it is highly likely that a cash deposit would be appropriate and the need for diversification would be low. Conversely, a large trust fund providing income to a beneficiary and capital to residual beneficiaries in the future, would be expected to invest in an adequately diversified portfolio.
Thirdly, trustees need to keep investments under regular review. This is often overlooked by trustees, and the importance of this requirement cannot be overstated. In today’s rapidly changing investment landscape, arranging an investment portfolio and not reviewing the suitability and performance on a regular basis could lead to significant underperformance, and invite criticism from beneficiaries.
The Trustee Act requires trustees obtain qualified investment advice when considering exercising the power of investment or reviewing existing trust investments. The only exclusion to this requirement is where trustees reasonably consider obtaining advice to be an unnecessary step, for example, where a trustee possesses the relevant skills to reach a decision. Given the potential risk of criticism or litigation from beneficiaries, we wouldn’t expect to see many trustees make decisions themselves without seeking appropriate advice.
To assist with the regular review of trust investments, trustees are able to delegate certain functions, for example, ongoing management of trust investments, to an agent, who acts on the trustees’ behalf. When delegating this responsibility to a professional, there needs to be firm agreement in place as to the objectives of the trust investments, the level of risk and any other guidance, such as the need to produce income, that is relevant.
Many trustees look to appoint an adviser who can manage funds on a discretionary basis, so that the trust portfolio is kept under close review and changes are made to the investment portfolio as appropriate. Our Concepts discretionary managed service is an ideal solution for trustees to consider.
If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.
This content is for information purposes only. It does not constitute investment advice or financial advice.