A Trustee must preserve the value of the Trust assets and depending on the type of Trust may also have a duty to pay income to a beneficiary. Therefore investing the trust fund in appropriate investments is one of the most important aspects of administering a Trust. The duty imposed on Trustees is to use such care and skill as is reasonable and having regard to any knowledge or experience he has or holds himself out as having. The Trust fund should not be left in cash and should be invested appropriately. The Trustees will need to develop an Investment Strategy which is aligned to the objectives of the Trust Fund whilst having regard to the following legislation:
Statutory Duty of Care - (s.1 Trustee Act 2000)
The statutory duty of care applies to trustees when carrying out their function, in particular it will apply:
When exercising the general power of investment or any express power in the trust instrument (s.3 Trustee Act 2000).
To the duty to have regard to the Standard Investment criteria (s.4 Trustee Act 2000).
To the duty to obtain advice (s.5 Trustee Act 2000).
When delegating their function to an agent, nominee or custodian under s.11 Trustee Act 2000.
Trustees' Power of Investment - (s.3 Trustee Act 2000)
The general power of investment gives the Trustees wide statutory powers to make any kind of investment (excluding land which is dealt with in S.8 Trustee Act 2000 and confers separate powers to acquire freehold and leasehold land in the UK) as if he was absolutely entitled to the assets of the Trust. It is typical for modern Trust Deeds to give the Trustee power to acquire assets 'whether producing income or not', such as works of art, chattels etc.
Prudent Investment - (s.4(2) Trustee Act 2000)
The Trustees must make prudent investment decisions and so should not invest the funds in speculative assets where the risk of loss is considerable regardless of the growth potential because this is too uncertain. A Trustee must have regard to the Standard Investment criteria, which dictates the requirements as to the suitability and diversification of the investments.
Standard Investment Criteria - (s.4(3) Trustee Act 2000)
The Trustees are required to consider the asset class they intend to invest in e.g. equities, bonds or chattels and the suitability of these, depending on the size and nature of the Trust. The Trustee will need to balance the needs and the interests of the beneficiaries, such as the Life Tenant vs the Remainderman. The Trustee must diversify the investments to balance risk and return and should seek a balanced portfolio.
Advice - (s.5 Trustee Act 2000)
The Trustees are required to obtain and consider proper advice when exercising their power of investment from a "person who is reasonably believed by the trustees to be qualified to give it by his ability in and experience of financial and other matters relating to the proposed investment".
The STEP Standard Provisions
The STEP Standard Provisions - Second Edition extend these provisions to include additional powers for the Trustees. Where these STEP provisions are included within the Trust Deed the Trustees may invest Trust Property in any manner as if they were absolutely entitled to it. In particular the Trustees may invest in land on any part of the world and unsecured loans.
Most lay Trustees will lack the essential investment skills needed to enable proper investment of the Trust Fund and meeting the objectives of the Trust, including:
Type of Trust, interest in possession or discretionary
size and nature of settled funds
duration of the Trust
Time horizons, shorter if Interest in Possession and longer if Discretionary.
A Trustee may therefore seek the assistance of a professional Investment Manager and delegate his power accordingly. As a professional trustee, we are suitably qualified and experienced in building and managing investment portfolios, further information can be found here.