TRUSTS LAW: THE INVESTMENT OF TRUSTS (TERM 2 WEEKS 1 &2)

Overview:

 Sources of trustees’ duties when investing trust fund  (1) Trust instrument itself, (2) TA
2000 terms to extent not excluded by Trust Instrument, (3) Case Law, used to interpret (1) &
(2)

 TA 2000  sets out statutory code relating to investment of trust funds & delegation of
trustees’ duties to agents, custodians, nominees

 Particular significance  duty to act with skill & care, act reasonably, take proper advice,
observe standard investment criteria that one must both invest suitably & in an
appropriately diversified manner.

 Brief summary of trustee’s general duties of investment  (a) act prudently & safely, (b) act
fairly between beneficiaries and do what is best for them.

 Meaning of best interests? Financial interests 

 Non finncial considerations must NOT be taken into account when deciding what to invest in.
except in exceptional circumstances where all actual OR poential beneficiaries are adults
with strict moral views on paticular matters.

Points to Note:

TA 2000 s3 – General Power of Investment – general power 

Some duty imposed on trustee either by statue or by case law
Principle of general law of trust that liabilities of trustees may be excluded for all breaches of trust
(Armitage v Nurse) , which do not amount to dishonesty (Walker v Stones)

Trustees just need to consider how to deal with trust property:

 Money – how to invest for benefit of beneficiaries

 Land and Buildings remted out to tenants to secure income stream for beneficiaries via
collection of rent
 Or take other necessary steps  enforce beneficiary’s rights on land, insure land (?)

Life Tenant Remainder beneficiary situation  E.g. Life tenant to have income of trust and
beneficiaries in remainder  whose interest is in capital of fund….

Trustee cannot just focus on short term investment income generation for life tenant, detriment to
remainder beneficiaries who are going to be LEFT.

Trustees’ duties with relation to investment:

E.g. Trustee has duty to ensure trust property not harmed.

Duty  active obligations imposed on trustee to consider beneficiaries best interests and consider
MOST APPROPRIATE WAY of maximizing utility or value of property.

Property – investment capital => obligations of trustees to make more profitable investments (Cowan
v Scargill) commensurate with type of trust in question, (Nestle v NatWest Bank)

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Use of Trust as Investment Vehicles/ Investment Schemes:

Q: Why are we focusing so much on INVESTMENTS in the trusts topic?

A: Shed light on.

1) Duties of Trustees
2) Rights of Beneficiaries to control trustees & recover any loss in the event that trustees
breach their duties, and the rights of beneficiaries.

Discussion made with reference to TA 2000.

Introduction to Trustee Act 2000:

 Principles governing trusts investment: Modernize powers of trustees when making

investment decisions and reorient obligations around standard of “reasonableness” instead
of prudence ….

 We just need trustees to invest reasonably. The current legal standard is not cautiousness,
not prudence.  TA 2000 s1

 Why is there such a shift in standard of care for trustees? Because, TA 2000 wants to liberate
trustees from overriding objective to be prudent in their investment activities to exclusion of
all else and permit trustees to go and take appropriate risks – whatever level of risk
reasonable in context of their trust!

 Rationale was to illustrate perception of general trusts law not sufficient to protect
beneficiaries from misfeasance of trustees & purpose of TA 2000 was to protect beneficiaries
from misfeasance of trustees (CRF to Term 2 Week 1 chapter  the practical effect VS
theoretical purpose)

 The Settlor has freedom to create whatever arrangements they wish w/o interference of
mandatory, legal rules that might prohibit certain forms of action.
 (TA 2000 Sch 1 Para 7)

 TA 2000’s role is also to supply trust provisions when there is a gap in the trusts instruments
(But please note trusts instrument can also

 How exactly trustee invests => Depends on the NATURE OF TRUST.

 NOTE  Nature of fiduciary duties on trustees is strict. So, this means beneficiaries CAN SUE
the trustees for breach of trust.

 The trustees can be specialists in the sort of investments that the trust intends to make.

How to handle Investment of Trusts PQ:

(1) Look through sources of rules relating to trustee’s investment duties and consider whether any
issues arise under each sources of law 1 by 1….
(2) LOOK AT SOMETHING IN TRUST INSTRUMENT CAN AFFECT. DOES THE TRUST PROVISION
CONTAIN ANYTHING ABOUT INVESTMENT OF TRUST? IF YES, HAS TRUSTEE BROKEN THEM
SUCH THAT THERE HAS BEEN A BREACH OF TRUST?
(3) IF INSTRUMENT SILENT ON INVESTMENT, LOOK AT TRUSTEE ACT 2000 TO TELL YOU WHAT
TRUSTEES’ DUTIES ARE. CONSIDERE TA 2000 PROVISIONS. IF TA 2000 OBLIGATIONS HAVE BEEN
BREACHED, THERE IS A BREACH OF TRUST.

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(4) FIRST LOOK AT GENERAL DUTY, STANDARD INVESTMENT CRITERIA (TA 2000 s4), THEN
SUITABILITY, DIVERSIFICATION, THEN PROPER ADVICE….
(5) CONSIDER THE CASE LAW PRINCIPLES AS AIDS TO INTERPRETATION OF TA 2000. ANY BREACH
OF CASE LAW OBLIGATIONS WILL CONSTITUTE AS A BREACH OF TRUST.
(6) ARGUE WHETHER YOU THINK THERE IS A BREACH OF DUTY OR NOT.

(7) AFTER CONSIDERING IF THERE IS A BREACH OF TRUST UNDER TRUSTS INSTRUMENT, TA 2000
OR CASE LAW, NEXT CONSIDER WHETHER OR NOT TRUSTEES HAVE BREACHED ANY OT THESE
OBLIGATIONS SUCH THAT THEY CAN BE LIABLE FOR BREACH OF TRUST.WHAT’S THE SCOPE OF
LIABILITY FOR BREACH OF TRUSY?

*when looking at specific cases, you see HOW THEY HELP YOU INTERPRET THINGS.

General Power of Investment in Trustee Act 2000:

(A) Scope of General Power of Investment

 Trustee “may make any kind of investment that he could make if he were absolutely entitled
to the assets of the trust”. – TA 2000 s3(1)
 Trustee not constrained as to Investments which can be made by trust in general terms.
 Trust instrument may impose restrictions on trustees’ powers to make investments &
financial regulation in effect preclude certain types of investment by persons who are
considered to be insufficiently expert to make them (FSMA 2000 Part 1)
 There are restrictions on powers of trustees to make investments in land UNLESS by way
loans secured on land (e.g. mortgages) – TA 2000 s3(3)
 General Power of Investment is both in addition to anything set out in trust instrument but
also capable of being excluded by any such trust instrument – TA 2000 s6(1)
 Trustee presumed to be free to make any suitable investments in absence of any express
provision that prohibits trustee from doing so – TA 2000 s7(3)

3 General power of investment.

(1)Subject to the provisions of this Part, a trustee may make any kind of investment that he could
make if he were absolutely entitled to the assets of the trust.

(2)In this Act the power under subsection (1) is called “the general power of investment”.

(3)The general power of investment does not permit a trustee to make investments in land other than
in loans secured on land (but see also section 8).

(4)A person invests in a loan secured on land if he has rights under any contract under which—

(a)one person provides another with credit, and

(b)the obligation of the borrower to repay is secured on land.

(5)“Credit” includes any cash loan or other financial accommodation.

(6)“Cash” includes money in any form.

6 Restriction or exclusion of this Part etc.

(1)The general power of investment is—

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(a)in addition to powers conferred on trustees otherwise than by this Act, but

(b)subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any
provision of subordinate legislation.

7 Existing trusts.

(1)This Part applies in relation to trusts whether created before or after its commencement.

(2)No provision relating to the powers of a trustee contained in a trust instrument made before 3rd
August 1961 is to be treated (for the purposes of section 6(1)(b)) as restricting or excluding the
general power of investment.

(3)A provision contained in a trust instrument made before the commencement of this Part which—

(a)has effect under section 3(2) of the M1Trustee Investments Act 1961 as a power to invest under
that Act, or

(b)confers power to invest under that Act,

is to be treated as conferring the general power of investment on a trustee.

(B) The Meaning of “Investment”

 Not defined in for TA 2000 s3 purposes.

 Meaning of “Investment” in general law  transformed from simply a consideration of

income yield (Re Wragg, Re Somerset) into broader notion of enhancement of capital value
in parallel with increase in income (Cowan v Scargill, Harries v Church Commissioners) & also
desirability of diversity of investment risk by means of portfolio strategies.

The Trustees’ Standard of Care when Making Investments - Trustee Act 2000:

 This “duty of care” is relative to the CONTEXT in which trustee is acting. Courts NOT limited
to matters set out in Para(1)(a) and (1)(b) when deciding extent of trustee’s liabilities.

 Where trustee has or holds herself out as having any particular “special knowledge or
experience”, then trustee’s duty of care will be inferred in light og those factors – TA 2000
s1(1)(a)

 Trustee pretends to have experience she doesn’t have? Then the law will hold her to the
standard in which she pretended she had.

 Duties of trustees are performed “in the course of a business or profession”, then the duty
of care is applied in context of any special knowledge or experience which such a
professional could be expected to have. – TA s1(1)(b)

 Possible meanings of “reasonable care” in this context. TA 2000 requires trustees to act
reasonably so standard of care is whatever is “reasonable” in the context.

 Precise phrasing of s1(1) TA 2000 is important as it requires that a trustee “exercise such
care and skill as is reasonable in the circumstances” => What this means is trustee must

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 first exercise skill and care, then exercise skill and care reasonably , and lastlu do so in a
way that is appropriate for circumstances.

 RATIONALE FOR PHRASING IN TA 2000 s1  IF REQUIREMENT WAS FOR ABSOLUTE

CAUTION, THEN IF TRUSTEE TOOK ANY HAZARDOUS RISK AT ALL SHE WILL BE LIABLE FOR
BREACH OF TRUST IF A LOSS RESULTED. BUT IF TRUSTEE PERMITTED TO ACT REASONABLY
THEN SHE MAY BE EXCUSED LIABILITY FOR BREACH OF TRUST IF THE RISK SHE TOOK WAS
REASONABLE IN CIRCUMSTANCES. => this extreme example illustrates a point. What law
wants to do is to achieve some kind of BALANCE.

 Practical reality – difficulty comes in, in relation to non-professional trustees! (The MOST
difficult) Courts reluctant to hold trustees to account if they have acted as other trustees
would have acted in circumstances, EVEN IF it resulted in poor investment return for
beneficiaries – Nestle v NatWest

 In relation to inexpert trustees, it will be difficult to adduce evidence of what other trustees
would have done in same context because such information would not be so readily
available as it would be in relation to professional investment managers. => it’s just the
context!

1 The duty of care.

(1)Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill
as is reasonable in the circumstances, having regard in particular—

(a)to any special knowledge or experience that he has or holds himself out as having, and

(b)if he acts as trustee in the course of a business or profession, 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.

(2)In this Act the duty under subsection (1) is called “the duty of care”.

Process of Making Investment Decisions:

Overview:-

 Statutory duty of care  applies in relation to general power of investment OR obligations to

review fund’s investments. (TA 2000 Schedule 1 Para 1(b))
 Q: What are the statutory principles governing mechanism by which trustees make
investment decisions?!
 Trustees’ liability for any malfeasance OR loss occasioned through their investment decisions
will fall to be assessed in accordance with duty of care & with principles of breach of trust
under general law of trust!

Standard Investment Criteria:

 When trustees exercise investment powers, be it making new investments OR considering

existing investments (TA 2000 s4(2)), they must take regard the STANDARD INVESTMENT
CRITERIA “SIC” (TA 2000 s4(1))
 SIC has 2 principles 1. Need to make “suitable” investments & 2. Need to maintain diverse
portfolio of investments to spread the fund’s investment risk, spread investments across a
portfolio.

4 Standard investment criteria.

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(1)In exercising any power of investment, whether arising under this Part or otherwise, a trustee must
have regard to the standard investment criteria.

(2)A trustee must from time to time review the investments of the trus t and consider whether,
having regard to the standard investment criteria, they should be varied .

(3)The standard investment criteria, in relation to a trust, are—

(a)the suitability to the trust of investments of the same kind as any particular investment proposed to
be made or retained and of that particular investment as an investment of that kind, and

(b)the need for diversification of investments of the trust, in so far as is appropriate to the
circumstances of the trust.

(1) Suitability of Trust’s Investments

Trustee will be liable for breach of trust when an unsuitable investment was made which caused LOSS
to the trust – Target Holdings v Redferns

Whether trustee was making an investment would be dealing in a suitable manner or not is going to
depend on the very nature of the trust.

(2) Diversification of trust’s portfolio of Investments

 Portfolio theory says invest in a variety of markets instead of 1 only so in event when one
market fails, at least investor is PROTECTED from risk of any individual market as gains in
other markets will outweigh losses in one market.

 Diversification means acquiring shares in a number of companies from different markters. It

also requires investment in a number of different kinds of investment – bonds, securities,
derivatives, foreign exchange, commodities, shares. Again, same logic, when one type of
investment risk materialize, at least investor is PROTECTED.

 Modern portfolio theory – to insulate trust against fall in any individual market or investment
 Nestle v NatWest Bank (2000)

 Amount of diversification needed is dependent on nature of trust, size of trust.

 Sometimes, settlor could have made trust for a specific purpose. However, he couldn't have
envisioned changes in future such that his specific purpose for trust not valid anymore..
Trustee might have excuse to commit technical breach of trust to better protect trust fund!!!
=> Then trustee should ideally seek Variation under Variation of Trusts Act 1958 OR s57
Trustee Act 1925

E.g. 1  Trust needing trustee to hold single house on trust for occupation of named beneficiary
doesn't require that trustees make a range of investments, rather trustees are IMPLIEDLY precluded
from making range of investment.

E.g.2  If trust instrument specifys that some investment types cannot be made and trustees went to
invest in prohibited types => BREACH OF TRUST.

E.g. 3  Trust with small amount of capital cannot buy huge number of investments.

33 Protective trusts.

(1)Where any income, including an annuity or other periodical income payment, is directed to be held
on protective trusts for the benefit of any person (in this section called “the principal beneficiary”) for

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the period of his life or for any less period, then, during that period (in this section called the “trust
period”) the said income shall, without prejudice to any prior interest, be held on the following trusts,
namely:—

(i)Upon trust for the principal beneficiary during the trust period or until he, whether before or after
the termination of any prior interest, does or attempts to do or suffers any act or thing, or until any
event happens, other than an advance under any statutory or express power, whereby, if the said
income were payable during the trust period to the principal beneficiary absolutely during that
period, he would be deprived of the right to receive the same or any part thereof, in any of which
cases, as well as on the termination of the trust period, whichever first happens, this trust of the said
income shall fail or determine;

(ii)If the trust aforesaid fails or determines during the subsistence of the trust period, then, during the
residue of that period, the said income shall be held upon trust for the application thereof for the
maintenance or support, or otherwise for the benefit, of all or any one or more exclusively of the
other or others of the following persons (that is to say)—

(a)the principal beneficiary and his or her [F1spouse or civil partner], if any, and his or her children or
more remote issue, if any; or

(b)if there is no [F2spouse or civil partner] or issue of the principal beneficiary in existence, the
principal beneficiary and the persons who would, if he were actually dead, be entitled to the trust
property or the income thereof or to the annuity fund, if any, or arrears of the annuity, as the case
may be;

as the trustees in their absolute discretion, without being liable to account for the exercise of such
discretion, think fit.

(2)This section does not apply to trusts coming into operation before the commencement of this Act,
and has effect subject to any variation of the implied trusts aforesaid contained in the instrument
creating the trust.

(3)Nothing in this section operates to validate any trust which would, if contained in the instrument
creating the trust, be liable to be set aside.

[F3(4)In relation to the dispositions mentioned in section 19(1) of the Family Law Reform Act 1987,
this section shall have effect as if any reference (however expressed) to any relationship between two
persons were construed in accordance with section 1 of that Act.]