Trustee Duties: Investment

Question 1

What forms of investment are trustees authorized to purchase under the Trustee Act 2000 (TA 2000)?

Answer 1

1. General Power of Investment (s 3 TA 2000):
   * Trustees can invest in any kind of investment as if they were absolutely entitled to the trust property.

• This includes shares, bonds, corporate securities, and pooled funds (e.g., mutual funds).

2. Land (s 8 TA 2000):
   Trustees may acquire freehold or leasehold land in the UK for:

• Investment purposes (e.g., rental property for income).
• Occupation by a beneficiary (e.g., housing a life tenant).
• Other trust-related purposes (e.g., to provide a business premises for trust operations).

3. Exclusions and Limitations:
   * Overseas property is not authorized unless explicitly permitted by the trust deed.

• Non-investments (e.g., gambling, speculative ventures, or unsecured loans) are prohibited unless expressly allowed by the trust instrument.

Examples:
* Permissible Investments: UK stocks, bonds, and rental properties in the UK.
* Prohibited Investments: Purchasing a villa in Spain breaches the statutory framework unless specifically authorized in the trust deed.

Additional Case Insight:
* Re Power’s Will Trusts [1947]: Investments must fall within the permitted categories outlined in the governing instrument or statute.

Question 2

What criteria must trustees use to assess whether to purchase specific investments?

Answer 2

Trustees must apply the Standard Investment Criteria under s 4 TA 2000:

1. Suitability:
   * Consider whether the investment aligns with the trust’s objectives, the needs of beneficiaries, and the trust’s size and duration.

• Assess risk levels, expected returns, tax implications, and beneficiary profiles.
• Example: High-risk equities may be unsuitable for a life tenant requiring regular income but appropriate for young remaindermen seeking long-term growth.

2. Diversification:
   
   • Spread investments across different asset classes, sectors, and geographical regions to reduce risk.

• Avoid excessive concentration in a single investment type or market sector.

3. Balancing Needs:
   * Ensure a fair balance between life tenants (seeking income) and remaindermen (seeking capital growth).

Practical Example:

A trust fund heavily invested in shares of one industry (e.g., oil) exposes the trust to sector-specific risks. Diversifying into bonds, real estate, and other industries is prudent.

Question 3

What process must trustees follow when making or reviewing investments?

Answer 3

Trustees must adopt a structured process to fulfill their fiduciary obligations:

1. Identify Trust Objectives:
   * Assess the trust’s purpose, beneficiaries’ needs, and whether the focus is on income, capital growth, or both.
2. Apply Standard Investment Criteria (s 4 TA 2000):

• Evaluate suitability and ensure diversification.

3. Obtain Investment Advice (s 5 TA 2000):

• Seek advice from a qualified professional unless the trustees are experts themselves.
• The advice must be well-documented and considered when making decisions.

4. Regular Reviews:
   * Regularly review investments, especially after major economic changes or trust events (e.g., a beneficiary’s death).
5. Act Prudently:
   * Make decisions based on reasonable expectations and avoid speculative or reckless investments.

Example:

If trustees managing a £1M trust fail to review poorly performing investments during a market downturn, they may breach their duty of care.

Question 4

What standard of care must trustees meet when managing trust investments?

Answer 4

Trustees must meet the statutory duty of care under s 1 TA 2000:

1.	Reasonably Prudent Businessperson Standard:
*	Trustees must act as prudent investors managing their own affairs.
2.	Professional Trustees:
*	Professional trustees (e.g., solicitors) are held to a higher standard based on their expertise.
3.	Impartiality:
*	Balance competing interests between life tenants (income) and remaindermen (capital growth).
4.	Duty to Secure the Best Return:
*	Trustees must prioritize financial returns while managing acceptable risk levels.

Case Law:
* Bartlett v Barclays Bank Trust Co Ltd [1980]: Highlighted that professional trustees are expected to exercise enhanced care and diligence.

Practical Example:

Retaining all trust funds in cash accounts earning minimal interest breaches the duty to secure appropriate returns.

Question 5

Can trustees delegate investment powers, and what is the process for doing so?

Answer 5

1. Written Agreement:
   * Trustees must formalize the delegation in writing.
2. Policy Statement:
   * Provide clear, written guidance outlining the trust’s objectives, beneficiaries’ needs, and acceptable risks.
3. Selection of Agent:
   * Choose a qualified individual or firm with relevant expertise.

• Avoid delegating to unqualified friends or family members.

4. Ongoing Supervision:
   * Regularly monitor the agent’s performance and compliance with the policy statement.

• Terminate the arrangement if the agent fails to meet expectations.

5. Trustee Liability (s 23 TA 2000):

• Trustees are not liable for the agent’s poor decisions unless they breached their duty (e.g., failing to supervise the agent).

Practical Example:

Trustees appointing a financial advisor must review quarterly reports and ensure investments align with the trust’s policy statement.

Question 6

How should trustees balance risk when investing for life tenants and remaindermen?

Answer 6

Trustees must tailor investments to the specific needs and risk profiles of beneficiaries:

1. Life Tenants:
   
   • Require stable, income-producing investments (e.g., bonds, rental properties).
   • Avoid volatile or speculative investments.
     2. Remaindermen:
   • Prioritize long-term capital growth (e.g., equities).
   • Tolerate higher risk early in the trust’s duration but reduce risk closer to maturity.
     3. Balancing Interests:
   • Trustees must ensure that income investments for life tenants do not unduly deplete the capital for remaindermen.

Practical Example:

A trust for a 60-year-old life tenant and young remaindermen may initially favor growth-oriented investments but gradually shift to lower-risk bonds as the life tenant ages.

Question 7

When can trustees consider ethical or non-financial factors in investment decisions?

Answer 7

1. Financial Returns Take Priority:
   
   • Trustees must prioritize financial performance over ethical or personal preferences.
     2. Exceptions:
   • Ethical investments offer comparable returns to traditional options.
   • The trust is charitable, and certain investments conflict with its objectives.
   • The settlor explicitly prohibits specific investments in the trust deed.

Practical Example:

A charitable trust supporting environmental causes can exclude fossil fuel investments without breaching fiduciary duties.

Question 8

What happens if trustees improperly delegate investment functions?

Answer 8

Trustees may be liable for breaches if they fail to:

1.	Properly Appoint the Agent:
*	Ensure the agent is qualified and the policy statement is clear.
2.	Supervise the Agent:
*	Regularly review the agent’s performance and terminate the arrangement if necessary.
3.	Act Prudently:
*	Avoid selecting agents based on personal connections rather than expertise.

Case Example:
* Bartlett v Barclays Bank Trust Co Ltd [1980]: Trustees must remain actively involved, even when delegating investment duties.

Practical Example:

If trustees appoint an unqualified friend who invests poorly and fail to monitor their actions, they may be liable for resulting losses.

Question 9

What are the key duties of trustees when making investment decisions or delegating investment powers?

Answer 9

Trustees Making Their Own Decisions About Investments:

1. Trustees can invest as if they were absolutely entitled, including purchasing UK land for any purpose.
2. When selecting or reviewing investments, trustees must follow the Standard Investment Criteria:

• Suitability of the investment for the trust and beneficiaries.
• Diversification to reduce risk.

3. Trustees must seek and consider proper advice from a qualified professional (unless unnecessary).
4. Trustees must review investments periodically, especially in changing circumstances.
5. Trustees must aim for the best financial return while treating all beneficiaries impartially.
6. Trustees must perform these actions with care and skill appropriate to the circumstances.

Trustees Appointing an Agent for Investment Decisions:

1. Trustees can delegate investment functions to a suitably qualified agent.
2. The agent must be appointed in writing, and a policy statement must guide their actions.
3. Trustees must regularly review the agent’s actions and ensure compliance with the policy.
4. Trustees are not liable for the agent’s decisions but may be liable for breaches in:

• Appointing an unsuitable agent.
• Failing to provide proper oversight or review.