#14755 - Investment And Delegation - GDL Equity and Trusts

Topic 12 – Investment and Delegation

• Trustees (legal owners of the trust property) = bear all the rights and powers to deal with the property. Must exercise powers for the benefit of the beneficiaries

• Duty of investment = choosing investments the trustee must bear in mind:

  • 1. Act prudently to ensure that the funds are invested profitably, whilst preserving the fund from undue risk.

  • 2. Act even-handedly between different classes of beneficiary and balance the interests of present and future beneficiaries.

• First place trustee look for ‘powers of investment’ = the trust instrument itself.

  • = If silent over trustee powers – look to provisions in Trustee Act 2000.

  • Section 3 - gives trustee the power to make any kind of investment he could make if he were absolutely entitled to the property.

  • When exercising this power, the trustee must comply with the duty of care set out in section 1 of the Act, must have regard to the standard investment criteria (section 4) and must take proper advice (section 5).

• Statutory duties coexist with common law duties - to act even-handedly between the beneficiaries and in the best financial interests of the beneficiaries.

• Trustees can delegate their duties to another party – so long as trust is administered to the required standard of a ‘prudent man of business’. The Trustee Act 2000 - statutory regime of delegation.

Duty to Invest

• Positive duty – On trustee to invest trust property. Cannot just sit back and allow trust property to stagnate, limited growth or worse deteriorate in value. Duty to grow it and mature it, and keep it safe.

• Power of investment varies – Trust Deeds will include ‘investment powers’ (express provisions) = outline what trustee can/cannot do, specific types of investments to be made. Only if well drafted.

  • Informal trust deeds or small trusts –will not include any trust powers. Statutory investment powers will come into force (TA 2000).

  • E.g. ‘to A for life, remainder to B’ = problem, as one of trustee duties is to act even-handedly, so you can’t benefit 1 beneficiary over another, unless trust deed allows you to do it = life tenant receives the income generated from the trust property, when A dies, the trust property will be transferred to B as capital. Problem with investment, how do you balance out the two – keeping capital in tact for remainder-man but also grow and generate income in it for A.

• Express Powers:

• Common Investment Clause = ‘trustees may make any kind of investment that they could make if they were absolutely entitled’. I.e. trustees can invest in whatever they want to. IF included will govern what the trustee can invest in.

• NB – land often included expressly, as traditionally considered a separate investment. Re Power – traditionally not an investment as doesn’t produce any income (i.e. buying land)

  • However – Trustee Act 2000 = land mentioned as investment for trustees:

    • Freehold or leasehold in UK, S8

    • It is an Investment

    • Includes when Occupation by Beneficiary

    • And for any other reason as well

  • NB – within statute, cannot invest in land overseas.

• Diversify the range of investments – Trustee Investment Act 1961 – extend authorised range of investments

Powers under Trustee Act 2000

• Specifically aimed at expanding investment powers – allows trustees to operate with more freedom, more indicative of a modern commercial world.

  • Gives effect to Modern Portfolio Theory = Nestle v Nat West Bank – don’t look at investments individually, look at them as a whole (not 1 that loses and 1 that gains).

  • TA 2000 – ‘enables but does not require trustees to follow modern portfolio theory’ (Law Commission No 315). Mostly follow it though as it spreads risks, and much more favourable to the trustees than older individualistic approach that prevailed.

• Section 1/2 = Duty of care, codifies common law duty of care (Re Whiteley’s)

  • Section 1 = ‘prudent man of business’ test (Speight v Gaunt; Re Whiteley’s)

  • Trustees must exercise care/skill as is reasonable. Subjective element you must take account of all the circumstances as well:

    • Duty of Care for Professional – people who are trustees as their job, held to a higher standard, higher duty as they experience/knowledge.

    • Duty of Care for Lay trustee –

  • Duty of Care applies to investments but also (sch1):

    • Exercise of statutory/express power of investment

    • SIC
      Obtain/consider proper advice

    • Power to acquire land

    • Delegations – ability to delegate particular functions to other parties.

    • Section 11 – delegations

    • Allowed trustees to delegate some functions to other parties.

    • Just says what powers may NOT be delegated (so limited number of non-delegable that not allowed to delegated).

    • S11(2) – 4 different functions of private trust that may not be delegated

    • Non-delegable functions

      • Ability to distribute property – power to distribute

      • Ability to choose payments out of income/capital

      • Power to appoint a person to be a trustee

      • Or any other power that permits trustee to delegate their function or appoint a person as a nominee.

      • NB – can make provisions expressly that allow trustee to do it

    • NOTE – investment powers are not on list of non-delegable functions, which means you can delegate powers of investment to another = want to employ an agent (someone to invest for you). Must use the duty of care when choosing that particular agent, exercising reasonable care and skill in all circumstances, and even when you’ve chosen an agent. Job as trustee not finished. Agent must apply SIC (picking investments) and trustee has responsibility to review the agent’s activities on regular basis. Thus agent under statutory responsibility to apply the SIC, to review investment but trustee in addition needs to review investments as well (to make sure agent isn’t doing something untoward, i.e/ stealing trust property or allowing the investments to decline/stagnate).

    • Advice also needs to be taken by the agent S13(2) TA unless it is unreasonable or inappropriate.

• Section 3 TA 2000 [power of investment]

  • Scope of trustee investment powers. Now general power of investment (can invest in anything they want) – some limitations:

    • Land overseas

    • Equitable interests in land

  • Retrospective – statutory powers apply to trusts created before statute came into force, now governed by ‘general power of investment’ Section 7 – applies to trusts whenever they were created.

  • Specific sections may be restricted/excluded under Section 6 – i.e. can exclude ‘unethical investments’, or settlor is twitchey about particular market so can exclude particular type of investment they are wary about (can include this as an express provision which will override the general power under S3).

  • Also invest in Legal Mortgages S3(3) and S3(4)

• Section 4 TA 2000 [SIC]

  • Sets out ‘standard investment criteria’ – must be applied whenever trustee exercises statutory/express powers of investment.

  • S4(1) Standard investment criteria WILL apply whether or not your power of investment arises by statute (S3) or whether expressly created (via trust instrument) – doesn’t matter where power comes from, SIC will always apply.

  • SIC – focuses on financial matters, how financially suitable is a particular investment

    • Investment type compared to others – suitable i.e. is the rate of return comparable or greater than another type of investment.

    • Diversification is vital – never defined in TA = Trust fund must be ‘suitably’ diverse i.e. not all in 1 investment, need to spread risk and take advantage of different markets/types of investments.

    • Small trust fund (modest sum) – diversification doesn’t make any sense, if diversify you will actually limit the amount of return you make.

    • = Diversification trustees must pay attention to under S4 SIC, will change depending on nature of the fund, how much money/profit you have to invest. Spreading risk/reward not putting everything in 1 area.

  • S4(2) = responsibility to review investments from time to time, so even if investment is authorised under S3/S8, even if applied SIC when making investment – NOT allowed to let investment to continue without...