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Are you a trustee to a trust fund? You may be aware that trustees have many duties to the trust fund and the trust’s beneficiaries. One of these duties is a duty to invest the trust property. To help you understand your legal obligations, this article will provide and overview of a trustee’s duty to invest and explain some of the practical implications.
Investment Duties
Most trust property is cash or cash equivalents like shares or money in banks. Ultimately, the goal of all trusts is for the trustees to manage trust property on behalf of the beneficiaries. So, it is in the beneficiaries’ interest for this trust property to grow.
That is why the law places importance on the trustees to invest the property. Notably, trustees have wide powers to invest the trust property, subject to the terms of the trust instrument.
Importantly, you have the power to invest the trust property as if you were “absolutely entitled” to the trust property. In plain language, the law gives you the power to invest the property as if it were your own. This is because the law wants to ensure the trustees of all trusts can maximise the growth of the trust property.
Duty of Care
In addition to the general duty of care a trustee owes to the trust and its beneficiaries, a separate duty of care applies to the duty to invest. This duty states that you must exercise the care and skill that is reasonable in the circumstances.
Practically, this means that if you have professional skills related to investment, such as if you are an FCA licensed investment adviser, the law will hold you to a higher standard of care.
Two Limitations
Though the law gives you broad powers of investment, there are two limits the law places on these powers:
- you can only invest in land in limited circumstances; and
- you must invest according to the statutory duty of care the law imposes on you. This requires you to keep the interests of the beneficiaries in mind for each investment.
Investing in Land
You are free to acquire land such as houses and flats outright. This includes both freeholds and leaseholds. However, the land must be in the United Kingdom. You cannot acquire land outside the UK unless the trust instrument specifically endorses this.
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Additional Duties
There are two additional duties the law imposes on your power of investment:
- a duty to obtain proper advice; and
- a duty to consider the investment method in the context of the interests of the trust’s beneficiaries.
Obtaining Proper Advice
The law says you must obtain proper advice when exercising your duties, which means receiving advice from someone you reasonably believe to be qualified to give you such advice.
In practice, you might simply be a lay trustee without any professional investing experience. So, if you seek advice from a qualified financial adviser licensed by the Financial Conduct Authority, this would be sufficient. Provided that you exercised reasonable care and skill in ensuring the financial adviser was appropriately qualified, you will not be liable for any wrongdoing by the financial adviser.
However, if you are a professional adviser yourself, this requirement will not apply to you. Instead, the law will hold you to a higher care standard than a lay trustee.
Considering the Method of Investment
Your duty to consider the method of investment involves three elements. When investing the trust property, always consider:
- whether the investments are appropriate for the circumstances of the trust;
- if the investments are sufficiently diversified; and
- that you regularly review the trusts.
Appropriateness of the Investment
You must also ensure that the investments you have selected are appropriate for the trust. So, when choosing how to invest the trust property, ensure you ask yourself:
- what are the needs of beneficiaries; and
- when will they become entitled to the trust property?
To give an example, suppose your beneficiaries will become absolutely entitled to the trust property in a year. Therefore, investing the full-sum in speculative tech shares may fall below the standard of care. A more appropriate investment may be a combination of value stocks and low-risk fixed-income bonds.
Diversification
Your duty of diversification broadly aligns with the contemporary ‘portfolio theory’ that underlies most investment strategies. You do not want all of the trusts’ eggs in a single basket because there is the risk that if you have invested the majority of the property in a single asset and something happens to the investment, the bulk of the trust property would be wiped out.
Instead, where appropriate, you should diversify the property across several different asset classes, like:
- real estate;
- shares; and
- fixed income bonds.
Reviewing the Investments
Additionally, you must also review the appropriateness of the investments from time to time. This means it is not sufficient for you to just invest the money at the point you become a trustee and then dust your hands off and call it a day.
Indeed, you must regularly keep an eye on the performance of the investments. Likewise, ensure that you act to maximise the returns as appropriate depending on if the performance changes.
Other Considerations
As a trustee investing the trust property, you should not let your personal persuasions get in the way of how you invest the trust property. This means that if you have a particular objection to certain kinds of investments, like investments in the tobacco or alcohol industry, this alone is not sufficient for you to refuse to invest the trust property in such opportunities.
That said, if you can achieve the same returns by investing elsewhere, this will rarely make a practical difference.
Key Takeaways
If you are a lay trustee, you should be aware that one of your duties is to invest the trust property. From a practical perspective, you should obtain the advice of a qualified financial adviser to ensure that you are appropriately investing trust money. Indeed, the law grants you the right to permit a financial adviser to invest the money on the trusts’ behalf. That said, it is still good to familiarise yourself with the obligations the law places on your duty to invest.
If you need help understanding your duty to invest trust property, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If you are a trustee, you will, along with the other trustees, have a duty to put the money to work by investing it. The exact investing strategy you use will depend on if you are a qualified financial advisor or a layperson. It will also depend on the circumstances of the trust, such as when the beneficiaries will become entitled to the trust property.
The law permits you to deal with the trust property as if you had the absolute right to invest it as your own property. However, you must ensure that you exercise the appropriate standard of care, which will depend on if you are a professional or not. In addition, there are further restrictions on how you may invest the trust property in land.
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