The UK's Trustee Act 2000 has been good news for advisers. In general, it places trustees under...
The UK's Trustee Act 2000 has been good news for advisers. In general, it places trustees under a statutory obligation to seek professional advice on investment matters and this has resulted in significant business opportunities for advisers who operate in the trustee investment market.
Apart from the Trustee Investment Act 1961 (TIA), the new act is the first major legislative change to the law concerning trustee investments since the Trustee Act 1925. It came into force on 1 February 2001 and applies to any trust subject to the law of England and Wales.
Before the act, trusts without specific powers of investment were subject to the restrictions of the TIA (as amended). This prescribed that not less than 25% of the fund had to be invested in 'narrower range' investments, comprising mainly of gilts, cash deposits and debentures, and not more than 75% in a prescribed list of 'wider range' investments. This excluded life assurance policies such as single premium investment bonds.
Obviously, well-drafted modern trusts will normally give the trustees wide-ranging investment powers and these restrictions only applied to trusts without such wide investment powers and statutory trusts such as intestacy. Happily for these trusts, the restrictions of the TIA have been replaced under the act by a new 'general power of investment.' This permits trustees to invest in assets, which may produce either income or capital growth, as if they were absolutely entitled to the assets of the trust. However, this is subject to any restriction or exclusion included in the trust deed.
The act introduces a number of safeguards to ensure the general power of investment is exercised responsibly by trustees.
• It is important to remember trustees are still bound to act in the best interests of present and future beneficiaries, to comply with the terms of the trust, and to avoid any conflict between their duty as trustees and personal interests.
• Under Section 1, trustees now have a statutory duty of care when exercising powers under the act. They must exercise such 'care and skill' as is reasonable in the circumstances. What is 'reasonable' is an objective test and takes account of any special knowledge or experience they have or hold themselves out as having. Obviously for professional trustees, the standards will be higher than for those of the lay person.
• Section 4 requires trustees must have regard to the 'standard investment criteria.' This means they must give consideration to the suitability to the trust of the investment and to consider the extent there is a need for diversification of the trust's investments. This responsibility is not dissimilar to that which an IFA must demonstrate under the normal best advice process, for example, consideration should be given to: the features of the investment, tax treatment, size of the investment, risk profile and the required balance between income and capital growth. As an example, consider a simple will trust where the life tenant is entitled to income and on death the capital passes to the remaindermen.
• In addition, Section 4(2) of the act requires trustees to keep investments under review and to consider whether, in light of the standard investment criteria, they should be varied. This reflects the Nestle vs NatWest Bank case that a trustee with a power of investment must undertake periodic reviews of the investments held by the trust.
• Most importantly, Section 5 of the act requires trustees when they are considering making an investment or reviewing an existing investment, to obtain and consider proper advice to ensure the 'standard investment criteria' described above are fully adhered to. The advice should be from somebody the trustees reasonably believe to be qualified to give advice by their ability in and practical experience of financial and other matters relating to the proposed investment, unless the trustees conclude it is unnecessary or inappropriate to do so. Examples of this would be where the cost of the advice is disproportionate to the size of the proposed investment or the trustees themselves possess relevant investment skills and knowledge.
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