The instability of the UK and Global economy over the last few years has been well-documented and at the time of writing, we continue to grapple with increasing inflation, the fallout from the failure of specialist banks in America and the takeover of Credit Suisse. All of which has implications for those with investments and a significant part of our work is advising Trusts and their Trustees and in these circumstances, many may be wondering what steps, if any could be taken to protect the Trust fund and fulfil the ongoing duties to beneficiaries.
This article will briefly explore the duties of Trustees and what advice Trustees should be taking in order to meet their obligations.
Trustees have a range of duties and responsibilities towards the Trust and its beneficiaries. These duties are “fiduciary”, which essentially means that the Trustees must act in the best interests of the Trust’s beneficiaries at all times. When making investment decisions, the Trustees must always act honestly, with ordinary prudence and judge the suitability of the investments, having regard to the best interests of all the beneficiaries of the Trust.
Every Trust is different and what is regarded as a suitable investment for one Trust, may not be appropriate for another. For example, if the purpose of the Trust is to provide a capital sum to a young child on his/her 21st birthday, investments with long-term growth are likely to be most appropriate. On the other hand, if the purpose of the Trust is to provide a beneficiary with an income, it may be more appropriate to gear the portfolio towards a higher income yield (whilst also being mindful of the interest of any beneficiaries entitled to the underlying capital in due course by not sacrificing longer term growth).
As a Trustee, you have a duty to exercise reasonable care in the management of the Trust fund and a high standard of care is expected of Trustees. It is therefore prudent for Trustees to take a cautious, relatively low risk, approach to investments. Trustees are usually required to diversify their investments and consider investing any large cash balances unless the cash is required in the near future. They are also under a duty to be mindful of tax considerations and to balance the requirements of different beneficiaries.
Most Trustees do not have specialist knowledge of the investment market and will be expected to take expert advice where appropriate. Indeed, there is a specific duty to do so where the Trustees do not have the necessary experience and knowledge to manage the investments themselves. Trustees should employ an investment manager where “a person of reasonable prudence dealing with their own affairs would consider such employment appropriate”. The exception is if the Trustees reasonably conclude that in all the circumstances it is unnecessary or inappropriate to obtain such advice; this may be the case if the value of the Trust fund does not justify the cost of professional advice.
So, if the Trust portfolio is being professionally managed, can the Trustees feel satisfied that their duties are being discharged? Trustees have a duty of care which means that they should ensure any agent they appoint is suitable for the role and task at hand. Trustees are also under an obligation to supervise their agent as appropriate.
If Trustees fail to invest the Trust fund appropriately then they could be personally liable to beneficiaries for any loss that they have caused to the Trust fund. However, if the Trustees have appointed a suitably qualified professional to manage the Trust’s investments and continue to exercise regular supervision, it is unlikely that a Trustee would be found personally liable for any of the agent’s errors, provided that the agent acted within the scope of his/her expertise.
Our advice for Trustees
We therefore recommend that:
- Trustees take the time to review the Trust’s assets and consider whether they remain suitable and appropriately diversified. If, as a result of economic volatility, the Trust’s investments have become too hazardous the Trustees should consider changing them. The Trustees should take professional advice on these points and, ideally, get this advice in writing.
- Any existing professional appointments should be reviewed on a regular basis. This should include consideration of any reports that are prepared by the investment manager. This should also include a review of the terms of the agreement under which they were appointed to make sure that it remains relevant. For example, it is prudent to allow an investment manager to act on a discretionary basis. This allows him/her to use their expertise to react quickly to buy and sell shares on behalf of the Trustees in reaction to the current investment climate.
- The portfolio’s risk profile should be monitored by the Trustees to ensure that it continues to be appropriate for the specific circumstances of the Trust.
- Decisions of the Trustees regarding the Trust fund and the appointment of agents to manage it should be documented as this will demonstrate that the Trustees considered the appointment carefully. All Trustees should be given the opportunity to express their views on these matters.
If you have any questions or concerns regarding the content of this article, please get in touch with a member of our team.