A Trustee's Perspective on Investment - Essay Example

Examine a trustee's duties in relation to the investment and management of trust funds (ignoring the management of real and leasehold Property). 1. Introduction: This paper seeks to examine a trustee's duties in relation to the investment and management of trust funds (ignoring the management of real and leasehold). This paper a discussion of duties under the old law and the new law as well as relevant court cases on the issue. 2. Analysis and discussion 2.1 Who is a trustee? Defining first who is a trustee would make it easier to see things in better perspective. We thus define a trustee by the nature of his or her job. Masters (2006) described the job of trustees in a nutshell as follows: “Essentially, they have the duty to administer the trust for the benefit of the beneficiaries in accordance with the wishes of the settler as expressed in the trust deed and with the principles of equity.” A trustee once appointed needs act immediately. His “primary duty is to find out what the trust property is it and to ensure that it has been transferred to him” and he must make it sure that “the trust fund is invested properly.” He must also make it sure that any documents relating to trust property (like share certificates, title deeds, etc) is in order. His familiarizing himself of the terms of the trust is paramount. Being appointed an existing trust, should move him to investigate any suspicious possible indication of a breach of trust which may occur and take the necessary remedial action if warranted. . Once he assumes as trustee and the contract and the law imposes “certain duties in the administration of the trust.” (Masters, 2006) (Paraphrasing made). 2.2 What are his duties in relation to the investment and management of trust funds under the old law and the new law? Prior to the new law on trustee, UK Trustee Act 2000, the basic legal framework as far as the duties of trustee is concerned is Article 17(1) of the Trusts (Jersey) Law 1984 (as amended) ["the TJL"] which provides: “A trustee shall in the execution of his duties and in the exercise of his powers and discretions - (a) act - (i) with due diligence; (ii) as would a prudent person: (iii) to the best of his ability and skill.” (Crill, 2006) The same article further provides: “A trustee shall - (a) subject to the terms of the trust, so far as is reasonable preserve the value of the trust property; (b) ensure that the trust property is vested in him or under his control; and (c) subject to the terms of the trust, so far as is reasonable enhance the value of the trust property.” Based on the foregoing it could be inferred that a trustee performs a duty that demands responsible decision making on investments of property under his care. Crill said that a professional trustee must exhibit ‘a higher duty of care than a lay trustee.’ He cited the application of the principle that has often been reiterated in judgments the cases of West v Lazards (18th October 1993) Jersey unreported and Federated Pension Services Ltd v Midland Bank Trust Corporation (4th August 1994) Jersey unreported. (Crill, 2006) (Paraphrasing made). In making decisions, Crill (2006) explained that the professional trustee will have to exercise a great of caution of the “many and varied traps that await him” and must show exhibit diligence, prudence, ability and skill1. In addition, “he must endeavour to not only preserve the trust fund but to enhance its value.”2 Crill in explaining prudence, cited 1887 of Learoyd v Whiteley (12 App Cas 727) where he quoted Lord Watson as stating: 'Businessmen of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and otherwise to avoid all investments of that class which are attended with hazard.' In addition to Article 17(1) of the Trusts (Jersey) Law 1984, trustees under English law, are bound by the terms of the Trustee Investment Act 1961 which must guide a trustee how to make investments in the absence to clear provision in the terms of trust and the Trustee Act 1925 (Love, 2006). 2.2.1 A trustee’s possible liability for breach The nature of trustee responsibility requiring him utmost caution in execising judgements could make him liable for breach and said breach of trust must be in respect of the trustee's investment powers and duties. Federated Pensions case referred above ha the occasion to discuss at length, involving fundamentally about the delayed transfer and subsequent investment of a pension fund valued at in the region of £12 million. The trustees were given a very wide powers to decide imaginable but the court noted that even taking this into consideration 'the caution that have been “expected from an organisation with some sixty years experience”, the Court found breach of trust. (Crill) (Paraphrasing made). To appreciate breach of trust there is need to dwell on its consequence. Will it work against interest then of the trustee? Crill explained the consequences citing Article 26 of the TJL which said: “A trustee who commits or concurs in a breach of trust shall be liable for - (a) the loss or depreciation in value of the trust property resulting from such breach; and (b) the profit, if any, which would have accrued to the trust if there had been no such breach.” Crill (2006) cited the case of West v Lazards where the Court might have calculated the loss caused by the trustee's investment decision by reference to the cash value of the loss being rolled over on a monthly basis on deposit with a bank. This means that failure to invest a fund had its opportunity cost which the court might have approximated to refer to what could have been earned from a bank deposit rolled over on a monthly basis. (Crill,2006 ) (Paraphrasing made). One could notice therefore the very easy of incurring liability for a breach of trust which would not have been there with out the trust. Would the trustee have rather rejected the trust? Not necessarily because the trustee may also some fee or benefit for being the trustee but the court just illustrate the immense responsibility of the trustee. Crill explained that all is not lost, from the trustee's perspective, if the trustee is found to be in breach of trust and the indemnity does not apply. In addition he also cited that there is provision under Article 41 of the TJL whereby the Court can relieve the trustee from personal liability under certain circumstances, chiefly if he has acted honestly and reasonably (Crill, 2006) (Paraphrasing made). 2.3 What are the amendments under the new law? The UK Trustee Act of 2000 imposes a new duty. Love (2006) mentioned about the new "duty of care" pointing to the attempt to combine the responsibilities of trustees. She explained that new law makes an important change to English trust law by with concept of a “statutory duty of care” the application of which depend in circumstances specified in the Act. She noticed though that the new duty raises some remarkable issues because the Act focuses attention on the kind of care that trustees should take, and how would this affect previous decisions and “where the standard of conduct required of trustees remains”, in other jurisdiction as in the UK before the passage of the new Act, which she found to not clearly defined by statute (Love, 2006) (Paraphrasing made). In comparing with the old law, Love (2006) said admitted that “for many years the management powers conferred on trustees by the Trustee Act 1925 (the "1925 Act") and the investment powers conferred by the Trustee Investments Act 1961 (the "1961 Act") have been too narrow and restrictive for trustees operating in today's complex global markets and wishing to take advantage of modern investment opportunities.” She thus explained that well-advised settlers have therefore included in trust deeds wider powers to in addition to the default powers as found in 1925 and 1961 Acts. (Love,2006) (Paraphrasing made). Love (2006) explained that The Report on Trustees' Powers and Duties (the "Report"), were in favour of granting powers to trustees broader than the old default powers to make investment, delegation and appointment of nominees and custodians and insuring trust property. She added however, about the concern to safeguard the position of beneficiaries. Hence the Report stated (The Report, Paragraph 3.8) that "in devising a scheme to confer wider administrative powers on trustees, an appropriate balance must be struck between extending the powers which trustees have as a matter of law, and the imposition of safeguards in an attempt to ensure that they act properly in exercising those powers." The Report contained the caution in new Act of 2000 with several safeguards relating to specific powers of trustees. Love (2006) mentioned Act liberating trustees from the investment restrictions of the 1961 Act, when it replicated provisions of that Act (ss6 (1) and (2)) by requiring trustees, when using any investment powers, to have regard to what the Act calls the "standard investment criteria" and to obtain and consider "proper advice." (The Act, ss4 and 5) . The Act goes further than the 1961 Act in expressly requiring trustees ( Section 4(2) ) to review from time to time the investments of the trust. She added that the Law Commissioners considered that these specific safeguards should be "underpinned by a general statutory duty of care." (the Report, Paragraph 3.9) This general duty is introduced in s1 of the Act and Schedule 1 sets out the circumstances in which it applies to trustees (Love, 2006) (Paraphrasing made). The duty under the Act, requires a trustee to: "... exercise such care and skill as is reasonable in the circumstances, having regard in particular- (a) to any special knowledge or experience that he has or holds himself out as having; and (b) if he acts in the course of a business or profession, to any special knowledge or experience that is reasonable to expect of a person acting in the course of that kind of business or profession”. (The Act, s1(1)). Love (2006) however emphasized unresolved issues under the Act saying that the explanatory notes issued with the Act state, obviously, that the new duty of care is "in addition to the existing fundamental duties of trustees" while the Report shows that the Law Commissioners' intended that new duty would take the place of the old common law duty to take such care as a prudent businessman would take. There was no abolition however of this common law duty which will apply when the new duty of care is not part of the term of the trust deed and when trustees are exercising powers not specified like the power to carry on a business. In noting the difference between the statutory duty of care under the Act and the common law duty to take care, Love (2006) observed that professional trustees are naturally concerned that the Act may have increased their exposure to claims by beneficiaries. (Paraphrasing made) . Thus in concluding her article, Love (2006) said “The new duty has removed some old problems. It remains to be seen whether it has also created some new problems.” (Love, 2006) (Paraphrasing made). 2.4 What are the criteria that a trustee should employ in making suitable investment decisions? Pullen, (2006) advised to look at the trust document creating the trust to ascertain what investments the trust document itself authorizes. He added after established what limitations (if any) are imposed by the trust document, He suggested to look further “as to whether there are any limitations imposed by the governing law of the trust document on trustee investment.” He illustrated that in most jurisdictions have trust legislation which specifies an appropriately conservative mix of government and top rated corporate securities, bonds and other similar "blue chip" investments and he emphasized that the latter normally only come into play if the trust document does not otherwise provide, and are often found in testamentary trusts established in wills made without professional advice (Pullen, 2006) (Paraphrasing made). As part of the criteria, Pullen (2006) suggested that the trustee must consider the respective interests of the beneficiaries as it is possible to have a trust  document having different classes of beneficiaries with different interests such as income beneficiaries and capital beneficiaries. He further suggested that to the trustee to consider the existing investments, which have been part of the original trust fund delivered to the trustees, and whether there is need to retain or resell and reinvest proceeds of those investments (Pullen, 2006) (Paraphrasing made). 2.5 Which should be prioritized by trustee, capital appreciation and maximum income? Hooper (2006) said that the investment of trust funds requires a balance to be maintained between inventory for capital appreciation and maximum income. It must be noted that some beneficiaries has need not only of the future but also of the present hence the trustee is expected to strike a balance between the two. He cannot for-example to think only on what will give the highest return which may be realized long term. He must also satisfy the present needs of the beneficiaries if such was the terms of the trust. Hooper mentioned the fact that a trustee's duties are mostly burdensome with regard to the “investment of trust funds”, so according to him, when confronted to make an investment decision, a trustee is faced with two principal questions: “a) Does the trustees have the powers to make the investment? b) Have those powers been exercised correctly, bearing in mind the suitability for the particular trust involved?” (Philip Hooper) (Paraphrasing made). 2.6 How to insure the compliance with these trustee’s duties? Since the law imposed an obligation to the trustee, how would the beneficiary or the settler ensure compliance of these duties? Clarke (2006) pointed significant of maintaining evidence for professional trustees in view of the investment provisions of UK Trustee Act 2000. In citing requirement of the new law, Clarke explained that Section 1 requires the trustee to exercise "such care and skill as is reasonable in the circumstances, having regard to: (a) any special knowledge or experience that he has or holds himself out as having; and (b) if he acts in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect a person acting in the course of that kind of business or profession." Closely related with the power of investment is found in Section 4 of the Act to have regard to "standard investment criteria" and “to review the investments from time to time with these criteria in mind.” (Clarke, 2006). The criteria cited by author are (a) the suitability of particular kinds of investment for the trust; and (b) the need for diversification of the trust investments (Clarke, 2006). 3. Conclusion To be a trustee is a function of responsibility. Under the old and past jurisprudence on the matter, the responsibilities of a trustee demands decision making on the part of the trustee. He must preserve the value of the trust while trying to enhance its value subject to the terms of the trust. Settlers make create trust because they intend beneficiaries to benefit from it not the trustees. If the trustee will therefore understand that the purpose o the trust is to provide for the need of the beneficiaries under the trust agreement, it should not be difficult for the trustee to understand their roles and functions which are governed by trust law which could demand from the trustee accountability. Trust includes the duty to invest, to distribute and not to profit from the trust, hence it could not be that trustee will just sit on his options. Investing presupposes choices of which the trusted is expected under the law to exercise due care in attaining the purpose of the trust. The new law may have created a statutory duty, however it may have created also a problem of failing to make it clear to whom due care is owed and whether it could have amended or abandoned previously decided cases the nature of care in trusts transactions. References: 1. Clarke, B. (2006) Evidence and the Prudent trustee (pma/956), www document} URL http://www.trusts-and-trustees.com/pma/956, Accessed February 16,2007-02-17 2. Crill, J. (2006) A trustee's perspective on investment, Volume 1, Issue 10, {www document} URL http://www.trusts-and-trustees.com/pma/130, Accessed February 16,2007-02-17 3. Federated Pension Services Ltd v Midland Bank Trust Corporation (4th August 1994) Jersey unreported. 4. Hooper, P. (2006) Investing Trust Funds b- A Bankers View ,Volume 2, Issue 4, www document} URL http://www.trusts-and-trustees.com/pma/158, Accessed February 16,2007-02-17 5. Learoyd v Whiteley (12 App Cas 727) (1887) 6. Love, V. (2006) Caution Required on the Duty of Care in the UK Trustee Act 2000, Volume 8, Issue 2., www document} URL http://www.trusts-and-trustees.com/pma/214, Accessed February 16,2007-02-17 7. Masters, C. (2006) The Powers and Duties of Trustees under English Law, Volume 2 Issue 1, {www document} URL http://www.trusts-and-trustees.com/pma/141, Accessed February 16,2007-02-17 8. Pullen, D. (2006) Trustees and the Investment of Trust Assets , Volume 4 Issue 2, www document} URL http://www.trusts-and-trustees.com/pma/991, Accessed February 16,2007-02-17 9. Report on Trustees' Powers and Duties (the "Report"), The Law Commission and the Scottish Law Commission, Law Com No 260, Scot Law Com No 172., Paragraphs. 3.8 and 3.9 10. The 1961 Trustee Investment Act, (The 1961 Act), ss6 (1) and (2) 11. The UK Trustee Act 2000 (The “Act”) , See ss4 and 5 , and Section 4(2)West v Lazards (18th October 1993) Jersey unreported 12. Trusts (Jersey) Law 1984, Article Nos. 17(1) and Article 26 Read More