Trust investment decisions

By November 23, 2023Trusts

Whether a trust is created through a will, or established through a lifetime gift, the trustees will need to take a number of important decisions when a trust commences. One of the key decisions is how the trust funds are to be invested. By way of reminder, the Trustee Act obliges trustees to seek advice at this stage, unless the trustees feel advice is not necessary (due to the value of the trust fund) or if the trustees feel they have the necessary expertise to reach the decisions themselves.

Deciding on a trust investment strategy

The trustees need to have the interests of the beneficiaries at the heart of each and every decision reached. This extends to the initial assessment of the terms of the trust, where trustees need to understand the purpose of the trust, which will help define the investment objectives. For example, trustees will need to consider whether the trust needs to provide an income to a beneficiary, or if the target is to achieve capital growth, and how long the trust is likely to be in place for.

In addition, any specific terms included within the trust deed need to be considered together with any investment limitations. A good example of such a limitation would be where a will trust leaves funds for a beneficiary upon trust, until they attain the age of 18. If the beneficiary was aged 17 at the time the trust was created, the trustees are likely to reach a different conclusion as to the most appropriate investment approach than if the beneficiary was aged just 2 at the creation of the trust, as the time horizon for investment is very different.

One of the key principles of the Trustee Act is to ensure that the investment strategy is suitable for the purposes of the trust in question. This places the onus on trustees to ensure that the level of risk adopted is sensible, and that the investments provide adequate diversification across a range of different assets.

Another important aspect that is sometimes overlooked is the need to consider the tax treatment of the investments held within the trust. Trusts generally suffer a punitive rate of Income Tax and Capital Gains Tax, and setting up an investment portfolio in a tax-efficient manner can make a substantial difference to the overall net returns received by the beneficiaries.

Reviewing trust investments

Once an investment strategy has been established, there is a statutory requirement for trustees to review the trust investments. Trustees cannot simply establish an investment portfolio for the trust and then neglect to carry out regular reviews, as this could well be seen as dereliction of duty. There are many reasons why investments need to be reviewed regularly; investment performance can vary over time, and the trustees need to make sure that the investments held by the trust perform well compared to other investments of similar risk.

Furthermore, investment market conditions change regularly, and as the last three years has demonstrated, market sentiment can swing from positive to negative quickly in response to global events. As market and economic conditions change, the trust investment strategy will need to adapt to the prevailing conditions, and arranging a regular review can help trustees make decisions to change the investment strategy if necessary.

In addition to the requirement to review investments regularly, trustees also need to make sure that they keep good records of the decisions reached for audit purposes.

Powers of delegation

Trustees cannot ask another to step into their shoes when it comes to important decisions about the distribution of trust assets, or their fiduciary duties; however, trustees can delegate the management of trust investments to a professional, who acts as an agent of the trustees. It is important that this appointment is made under a formal agreement and the boundaries of the investment management agreement need to be clearly defined.

It is often the case that trustees will appoint investment managers who act under a discretionary agreement. This is where the investments are reviewed and changed regularly by the investment manager, without approaching the trustees for their prior approval. This type of arrangement can reduce the onus on trustees to respond to recommendations made by the investment manager, and ensure that the recommended changes are made in a timely manner.

FAS Trustee Service

The FAS Trustee Service aims to provide trustees with a comprehensive advice and review service, which enables trustees to meet their obligations under the Trustee Act.

When we first meet with trustees, we discuss the trust deed in detail and look at the important considerations that the trustees need to take into account. When devising an appropriate investment strategy, we can look at a range of options open to the trustees, and provide independent advice on the asset allocation together with other considerations, such as the amount of funds trustees should retain as cash. We also can provide advice on the most tax-efficient solution, based on the precise circumstances of the trust.

Our comprehensive review service provides trustees with peace of mind, as a thorough review of the trust investments is carried out at pre-determined intervals. We meet with trustees to discuss the investment performance, and other factors relevant to the trust, which can assist trustees in their decision making. We follow-up each meeting with a detailed written report, helping trustees in their compliance with the Trustee Act.

If you are a trustee of a new trust, speak to one of our experienced advisers about the FAS Trustee Service. Likewise, if you are a trustee of an existing trust, and haven’t reviewed the trust investments for some time, then contact us to carry out an independent review of the existing arrangements.