Investment by Trustee

This is an update of an article we published a number of years ago.  It is now, in the light of falling investment values, particularly relevant to trustees.

Under the Trustee Act a trustee has power, unless prohibited by the Trust Instrument to:

– Invest funds in any form of investment
– At any time vary an investment.

A trustee must however, in exercising a power of investment “exercise the care diligence and skill that a prudent person would exercise in managing the affairs of other persons”.

Investment by trustee

This is known as the “prudent person rule”.  Additionally, a trustee must observe any investment requirements in the trust instrument and review the investments individually and as a whole at least once a year.  The rule has different obligations for professional and non-professional trustees.  The duty for a professional trustee is higher than for a non-professional trustee.  There are other specific duties of trustees including:

– To exercise his powers in the best interests of all present and future beneficiaries.
– To invest in non-speculative investments
– To act impartially between beneficiaries and classes of beneficiaries
– To take advice.

 May 2008

Section 8 of the Act sets out a long list of matters which the Trustees must have regard to.

Included are:
– The purpose of the trust and the needs and circumstances of the beneficiaries
– The need to maintain the real value of the capital or income of the trust
– The likely income return and the timing of the income return
– The cost (including commission, fees, charges and duties payable in connection with the making of the investment)

For a trustee to fulfill the requirements of the Act will necessitate undertaking a formal and documented plan and not less than yearly reviews of that plan.  The simplest way of implementing a plan is to have a checklist of matters which require consideration and to complete that checklist.  The completed checklist should be retained well into the future because any investment decision that may be challenged in the future will probably have it’s genesis very many years earlier.

We set out hereunder the checklist we have prepared.

Trustees investment checklist

1.    Name of the trust

2.    Names of the trustees

3.    Date, time and place of meeting of trustees at which this check list is completed.

4.    Date of previous meeting of trustees (no more than 12 months ago)

5.    Investments of the trust

6.    List of beneficiaries in the trust who are to benefit from the trust.

7.    Outline the needs and circumstances of each beneficiary, taking into account the following variable:

– Age
– Health
– Dependants
– Need for Income
– Need for capital
– Financial/Debt Situation
– Residence
– Study/Education

8.    Are all trustees being impartial between beneficiaries and between different classes of beneficiaries?

9.    Are any investments speculative?

10.    Have the trustees taken advice regarding the investments?

11.    To what extent are the trustees acting on the independent and impartial advice of the person who gave the advice?

12.    What are the best interests for each beneficiary (including all present and future beneficiaries)?

13.    If any of the trustee’s profession, business or employment is or includes acting as a trustee or investing money on behalf of another person, are they exercising the care, diligence and skill that a prudent person would in that position?

14.    What is the probable duration of the trust?

15.    Outline the length of investments.

16.    What effect will any proposed investment have on the tax liability of the trust, including capital gains tax?

17.    What costs are involved in making any proposed investments (including commissions, fees, charges and duties payable)?

18.    What is the nature and risk associated with each trust investment and trust property?

19.    What is the real value of the capital and income of the trust?

20.    What is the likely income return and timing of the income return in relation to the trust investments?

21.    What is the liquidity and marketability of the proposed investment during, and on the determination of the term of the proposed investment?

22.    What are the results of a review of existing trust investments?

23.    Do any of the investments involve the following: (if so, special requirements under the Trustee Act apply)?