In this article we discuss what a client needs to consider before accepting the role of trustee - do they have the necessary skills and are they willing to take on the responsibility involved? Remember trusteeship may last for many years.
When a trust wrapper is used with an investment bond the trustees, that the settlor appoints, become the legal owner of the bond. The settlor is normally one of the trustees and can appoint any person as an additional trustee provided they are aged 18 or over and have full mental capacity.
The main role of a trustee is to take control of the trust property, hold it and administer it for the benefit of the beneficiaries in accordance with both the general law, which can vary between Scotland, Northern Ireland and England and Wales and the specific provisions of the trust document (the trust deed).
If your clients are asked to become a trustee it is important that they understand their duties and responsibilities as their actual role will vary depending on the terms of the trust.
Under a bare trust, as the settlor’s precise wishes are set out, the role of the trustee is to act as steward of the trust fund and pay it over to the chosen beneficiaries at the appropriate time (normally when they become adults). However, a discretionary trust gives the trustees considerable flexibility; for example, decisions about who should benefit and in what share, so they will have more duties to perform.
Let’s look at the main duties in more detail.
Comply with the terms of the trust
Trusts are established for many reasons so trustees should read the trust document carefully, to familiarise themselves with the terms of the trust, as they need to comply strictly with the duties and directions as set out in the trust.
A trustee cannot act outside of their powers - for example, by making or facilitating payments to a non-beneficiary.
Act impartially between the beneficiaries
Trustees are under a general duty to act in the best interests of the beneficiaries, so it is recommended that they find out why the trust has been set up. If the settlor (person who created the trust) is still alive they can talk to them or if the settlor has died, they can refer to any letters of wishes they may have left, relating to the trust. But in establishing why the trust has been set up trustees must not allow one beneficiary to suffer at the expense of another as a general duty trustees must act impartially between beneficiaries.
Duty of care
Following the Trustee Act 2000 (England & Wales), Charities & Trustee Investment (Scotland) Act 2005 (Scotland) or Trustee Act (NI) 2001 (Northern Ireland), depending on the jurisdiction of the trust, trustees must show a statutory duty of care.
Trustees must show such skill as is “reasonable” in circumstances allowing for special knowledge, experience or professional status.
But what is reasonable? – it is a subjective test applied to take account of the particular knowledge, experience and professional status of the trustee. In the case of a trustee acting in a professional capacity (for example a solicitor, accountant, stockbroker or professional adviser), the standard of care and skill should be appropriate to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. The liability of individual trustees is limited so that they will not, generally, be held liable for any loss to the trust fund provided they act in good faith. But trustees who are paid for their services are liable for their negligence.
Trustees also have a duty to act honestly and with prudence in looking after the beneficiaries’ interests. They must try to maximise the return on the trust fund and not risk the trust fund in hazardous or speculative investments. Trustees must be aware of the trust assets and realise those that have, for example, a wasting nature.
Diversification and suitability of the investments
The diversification and suitability relates to the type and features of the investment. It places emphasis on balancing risk and return across a portfolio of investments rather than looking at each investment in isolation. When considering whether investments are “suitable” trustees need to consider:
- The size and risk profile of the investment,
- Attention given to diversification as a means of risk control,
- If needed, balance between income and growth, and
- If needed, ethical considerations.
Duty to obtain and consider proper advice
Before exercising their powers of investment trustees must obtain and consider proper advice and this just isn’t at inception; this has to be done when reviewing the asset allocation. Trust assets are just like all other investments – they should be reviewed on a regular basis (how regularly may be dictated by the size of the trust fund or by the trustees/beneficiaries).
The exception to this is where the proposed investment is so small the cost of obtaining professional advice would be disproportionate or unnecessary.
Trustees should receive this advice from a person who is reasonably believed to be qualified to give it by his ability in, and practical experience of financial matters – this nicely describes financial advisers. Other professionals should be careful not to step outside of their specialist area and appear to give advice on investments they may not have the knowledge and experience of.
When reviewing the trust assets trustees should consider:
- Is the investment wrapper still applicable,
- Are the investment funds still applicable,
- Have there been any changes in tax rates,
- Have there been any changes in legislation,
- Can costs be reduced, and
- Is there a clear audit trail.
Trustees must keep records of the trust assets and investments (including payments made out of trust to beneficiaries) and be prepared to account to the beneficiaries on request and for tax purposes. For example, a trustee of a loan trust should keep a record of the loan repayments made to the settlor and ensure that not more than the amount loaned is repaid.
By keeping up to date records the trustees will be able to provide information, on request, to the beneficiaries.
Duty to consult
In general, trustees should consult beneficiaries whenever possible and give effect to their wishes. The duty to consult can be excluded by the trust instrument and only applies to settlements made after 1 January 1997.
Duty to act personally
As a general rule, trustees should act personally. However, it may sometimes be appropriate for the trustees (as a body) to delegate certain administrative functions to someone who is better qualified to carry them out (for example, by appointing a qualified adviser to invest the trust fund or by transferring the management of the trust assets to a discretionary fund management company).
Duty to distribute
The trustees are responsible for ensuring that the trust assets are distributed to the correct beneficiary and in the correct amounts. Failure to discharge this duty can result in personal liability for the trustees.
As a trustee, before distributing to a beneficiary, consideration should be given to the legal and taxation implications – in certain circumstances before distributing to a beneficiary it might be appropriate to make them the tax point.
When considering whether to take on the role of a trustee individuals should be fully aware of the implications as failing to comply with the terms of the trust or trust law means that they are ‘in breach of trust’ and may be personally liable for any financial loss suffered by the trust or a beneficiary which results from the breach. This is when the advice of a professional adviser can be valuable.
This article, written by Kim Jarvis from Canada Life's Technical Services Team, first appeared on Professional Paraplanner's website.