Trustee duty of care and powers of investment

Significant reforms to the law in relation to trustee powers and duties were enacted in the Isle of Man by the Trustee Act 2001 (the Trustee Act) which can be found in full at http://www.gov.im/lib/docs/infocentre/acts/ta2001.pdf

The Trustee Act established powers which, unless modified or excluded, include a:

• statutory duty of care for trustees when carrying out their duties under a trust; and a
• wider general power of investment which replaces the limited investment powers previously found under the Trustee Investment Act 1961 (the Investment Act).

Trustees have always been subject to a general duty to make sure that they act with the best interests of the trusts’ beneficiaries in mind. However, the Trustee Act introduced a statutory duty of care which ensures that there is a consistent measure of the standard of competence and behaviour expected of trustees, whether they are professional or lay trustees.
 
A 'lay trustee' is a person who does not act in a professional capacity as a trustee, for example a family member.

Trustees are required to exercise reasonable skill and care in all circumstances having regard to any special knowledge or experience that the trustee has or holds themselves as having.

It is reasonable to expect a higher standard of care from a professional trustee for the services they provide than that of a family member acting as a trustee, who does not have the specialist knowledge or experience as a trustee.

The standard of care only applies to trustees when carrying out certain functions which include, but are not limited to:

• exercising a power or investment;
• reviewing investments;
• insuring trust property.

The law governing trustee investment powers was previously found in the Investment Act which divided assets permitted to be held as an asset of a trust into two groups; ‘narrower range’ and ‘wider range’. The Investment Act was considered to be quite restrictive as it did not cater for assets which, in modern times, trustees like to invest in.

For example, life assurance policies, which are non-income producing assets, were not permitted investments within the narrower or wider definition of the Investment Act. Trustees were only permitted to invest through these life assurance contracts where the trust expressly allowed for it.

The Trustee Act provides a general power of investment. In particular it:

• extends and replaces the investment powers given to trustees;
• allows trustees to make an investment as if they were absolutely entitled to the assets. 

Care is needed because the trustees must at all times act in the best interest of the beneficiaries whilst exercising the general power of investment.

For example, where a beneficiary has a right to an income stream from the trust, but the trustee is an 'aggressive investor' whose investment decisions could conflict with the rights of the beneficiary.

It is a requirement for trustees to have regard to and apply standard investment criteria when exercising investment powers and reviewing the assets of the trust. It is therefore necessary for trustees to consider the:

• suitability of the investments;
• need for diversification.

In particular, the trustees must have regard to the:

• trust provisions and consider whether the trust restricts the types of assets they can invest in;
• the overall objective of the trust, for example, the level of returns that are needed over a specific period of time in order to provide income to the beneficiary, or to ensure capital growth meets a certain expectation;
• risk profile of the trust; and
• the cash amount available for investment/re-investment of assets within the trust, for example, if the sole trust asset of a will trust is a house for the benefit of the deceased’s spouse or civil partner to live in during their lifetime, there would be little or no scope for the trustees to consider diversifying the trust asset

Before trust assets are varied or the power to invest is exercised by the trustees, they must obtain and consider proper advice about the way in which these powers should be exercised. The one exception to this is when the trustees conclude, taking into consideration all the circumstances, that it is unnecessary or inappropriate to seek advice. 

For example, where the trustees are professional or corporate trustees and possess the skill and knowledge necessary to make an informed decision, then this would be considered as an exception. However, the cost of the service could be disproportionate to the value of the trust fund.

Proper advice

As defined in Section 5 (4) Isle of Man Trustee Act 2001:

‘the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters, relating to the proposed investment.’

Most trusts created today are likely to contain wide powers of investment. The general power of investment is available to all trusts, except pension trusts, authorised units trusts and some charitable trusts that do not include an express restriction or exclusion within the trust provisions.

For example, if a trust includes an express power of investment and allows investment in ‘only life assurance policies’, the general power of investment within the Trustee Act can not be applied.
Where a trust states an asset which the trustees cannot invest in then the general power of investment can be applied and the trustees can invest in any asset provided it is not the excluded asset.

For example, where a trust expressly includes a clause that does not allow trustees to invest in shares in ABC Company Limited, the trustees can invest in any asset except for shares in ABC Company Limited.

In England and Wales, the Trustee Act 2000 came into force on 1 February 2001 and replaced the provisions of the Trustee Investment Act 1961 and some parts the Trustee Act 1925. The Trustee Act (Northern Ireland) Act 2001 and The Charities and Trustee Investment (Scotland) Act 2005 have also been enacted with similar provisions.

The provisions of the Trustee Act 2000 are identical to those contained in the Isle of Man Trustee Act 2001, except the perpetuity period which is 150 years under Manx law.