The Need For Correct Trust Investment Advice

Over the years, trends in respect of investment and investment advice have changed. The approach now taken by investment advisers is very much based on risk and diversity, as well as paying close attention to past and ongoing performance against appropriate benchmarks.

Investment portfolio for a Trust

Typically, an investment portfolio for a Trust will be set up with a ‘cautious’ mandate and will have a number of individual investments which cover a wide range of sectors.

However, this has not been always been the case and, not unusually, investments may have been set up many years ago when a Trust was set up and not then kept under review on a regular basis.

This can cause a number of problems, not least that Trustees, especially professional Trustees, are expected to keep investments under regular review and case law has made it clear that Trustees will be liable if loss results from the lack of regular review.

Also, Trustees need to balance the interests of all beneficiaries. This is particularly true in a life interest Trust where the life tenant is entitled to receive the income and the remainder beneficiaries then receive the capital after the life tenant’s death.

It is then very important that investments are set up correctly so as to produce a mixture of income return and capital growth.

Historically, it was sometimes suggested that this balance could be achieved by setting up an investment bond. However, there are two fundamental problems with this approach:

1. The payments to the life tenant are not income but are capital and therefore the Trustees may be committing a breach of Trust by making the payments, especially if the Trust does not contain the power to advance such capital.
2. The taxation consequences of the payments after 20 years have passed (and the life tenant may of course live for longer than this) can lead to substantial losses to the Trust Fund.

Trust investment recommendations

The recommended approach therefore for Trustees and their advisers is as follows:

1. Review the investments in the Trust to see how they were originally set up.
2. Ensure that regular reviews (normally at least annually) are set up for the future.
3. With life interest Trusts, check the basis of payments that have been made to life tenants to ensure that they are income and not capital.
4. Ensure that instructions have been given to investment advisers on the approach that needs to be taken with the balance between the different beneficiaries.
5. If past breaches of Trust are discovered as a result of these reviews then the Trustees and their advisers will need to consider very carefully how the matter should be approached. All beneficiaries, both the life tenants and remainder beneficiaries, will need to be specifically advised of the position and specifically advised of their right to take independent legal advice in terms of any proposed solution.

On reflection, it seems that Trustees, both professional and lay Trustees, may in the past have been too relaxed over their approach to investments and this is something that needs to be looked at more closely and carefully in future, with the clients needing to accept that there is a cost to professional involvement both in terms of professional Trustees and advisers to lay Trustees.