Reviewing trust investments

By | Trusts

We come across many instances where trustees of an existing trust have carefully considered an appropriate investment strategy when the trust commences, giving due consideration to the terms of the trust, and the requirements of the Trustee Act. So far, so good; however, we equally come across trusts where funds have remained in the same investment strategy for many years, without any detailed scrutiny of the investment process or investment performance.

Investment management is an evolving process. Looking back over decades, the composition of a modern investment portfolio is very different to a portfolio that would have been seen as being appropriate years ago. In recent years, investment trends have increased the focus on passive investment funds, which offer a low-cost way of accessing a particular market index. Active fund managers now pay greater attention to environmental, social and corporate governance factors when constructing portfolios. These, and other factors, can influence portfolio performance, and with an increased focus on value for money, the costs of investment funds and fund management.

Reviewing investments

Keeping the provisions of the Trustee Act in mind, trustees should seek professional advice when carrying out a review of trust investments, unless they feel competent to carry out the review themselves. Our view is that reviews should be carried out at least once a year, and possibly more frequently, depending on the trust situation. The review should, of course, consider the portfolio performance, and adopting an appropriate benchmark can help trustees measure the performance of the portfolio against wider markets.

When investments are managed on an advisory basis, trustees should seek advice as to whether the current portfolio remains suitable given the prevailing and expected market conditions, and if any of the investments should be switched. If the portfolio is managed under discretion, it would be good practice to carefully analyse the decisions reached by the discretionary manager over the review period, and to ensure that the portfolio investments remain consistent with the original investment brief agreed at the outset.

The importance of diversification

Over recent years, our experienced advisers at FAS have reviewed the trust investment strategies of a large number of trusts, which are managed by some of the biggest providers of discretionary managed services to professional and lay trustees. We have noted that many of these solutions tend to employ strategies that are focused on UK equities, and carry an underweight exposure to global equities, which may introduce additional risk, given the dominance of overseas Equities. To demonstrate, 70% of the MSCI World Index (which covers the largest 1511 global quoted companies) is weighted towards US equities, with just over 4% allocated to the UK. Whilst carrying such a small allocation to the UK is, in our opinion, a little extreme, it does underline the importance of global diversification in modern portfolio construction.

We have also noted that some discretionary managed strategies tend to offer unattractive income yields, which may not be appropriate where trustees are not only seeking capital growth, but need to produce a strong level of natural income which is paid to a life tenant. As the circumstances of a trust can differ widely depending on the position of beneficiaries, the time horizon and objectives, trust investment strategies need to be able to adapt to meet the precise requirements of the trust.

Review the trust and tax position

Other than considering the investment strategy, trustees need to regularly consider whether there is any change to a beneficiary’s requirements. For example, are minor beneficiaries close to reaching the age when they receive capital from the trust, and if so, should the trustees consider reducing investment risk. Or perhaps a life tenant’s circumstances have changed, which may mean a switch of portfolio strategy is needed.

Tax rules are also subject to frequent change, and trustees need to keep abreast of how any changes could affect their decisions. A good example of this is the reduction in the Capital Gains Tax allowance, which has more than halved in this Tax Year and will halve again from 6th April 2024. This will undoubtedly lead to more trusts being liable to Capital Gains Tax on a regular basis. Relevant Property Trusts are subject to a punitive tax regime, and by careful review of the various investment wrappers that are available, it may be possible to reduce the burden of tax on the trust. One such example is the use of an investment bond as a way of avoiding Capital Gains Tax considerations.

FAS Trustee Service

As you would expect, we regularly undertake detailed analysis of our portfolio performance and as part of this review, we consider the performance of some of the more common managed portfolio services offered by the largest providers of trust investment management services, and compare these to the performance of our CDI Discretionary Managed portfolios. We carefully monitor not only the raw performance data, but also other factors such as volatility and risk, which are important factors that trustees need to consider, together with fund charges and the management fee structure.

This regular review allows us to make comparisons of our performance against our peer group, and our analysis shows the performance of our CDI portfolios has been favourable when compared to some of the more popular discretionary managers who provide services to trustees. We have a well-defined investment process, which makes best use of our independent status. This allows us to select funds and solutions from the widest range of UK fund managers, allowing us to select the most appropriate investments without restriction.

If you are a trustee, it may be a good time to consider how your investment reviews are carried out. Speak to one of our experienced advisers, who would be pleased to carry out an independent and impartial review of the existing trust investments.

Trust investment decisions

By | Trusts

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.

The role of a trustee

By | Trusts

Trusts can be very useful vehicles that can help manage assets. Unfortunately, many people find trusts confusing and daunting, and acting as a trustee carries significant levels of responsibility.

What is a trust?

In simple terms, a trust is an arrangement where assets are held and managed by an individual or individuals (known as trustees) on behalf of another individual or individuals (known as beneficiaries).

Trusts can be created for many different reasons and to suit different purposes. Many trusts are created in a will, whereby the will instructs the trustees to look after funds for another person or group of people. Some trusts are created by an individual when they are alive, with a view to passing on assets to help reduce tax. Other trusts are established when an individual is incapacitated or too young to look after the funds themselves.

The role of a trustee

Whatever the trust arrangement that has been established, each trust needs to have at least one trustee (although it is desirable to have at least two). The trustees have legal responsibility for the funds held in trust, and have a duty to manage the assets held in trust and ensure that the trust meets its purpose and objectives.

Trustees owe a fiduciary duty to the beneficiaries, to act honestly, in good faith and with loyalty. Every decision made by a trustee needs to be made in the best interests of the beneficiaries. Trustees also need to act unanimously when reaching decisions in relation to the trust assets.

A trustee may be appointed in a will, and it is normally the case that the executors of the will automatically become trustees of any trusts created by the will. When a trust is created during an individual’s lifetime, the person creating the trust (known as the “settlor”) will need to choose the trustees who will carry out the role. Many opt to appoint family members or friends to act as trustees. This may prove beneficial as the family member or friend may well have good knowledge of the family’s circumstances; however, the individual taking up the role may not have any experience of the legal obligations placed on them, or the time that will be taken in fulfilling their duties.

An alternative to appointing a family member or friend is to appoint a professional trustee, such as a Solicitor. By appointing a professional trustee, this will ensure that an impartial, experienced individual is handling the decisions on behalf of the settlor.

Getting guidance on acting as trustee

For those who are appointed as a trustee in a will, or an individual appointed as trustee of a lifetime settlement, it is important to fully understand the purpose of the trust and seek guidance on the specific requirements, in particular in relation to assets held by the trust. These will be contained in the will (in the case of a trust created on death) or in the trust deed for a lifetime trust. This will set out the specific instructions that the trustees must follow and can cover a number of aspects, from how monies are to be held, the investment powers that the trustees have, and when funds should be paid to beneficiaries. It can also provide directions as to how income generated by assets held in the trust is to be dealt with. When a trust contains residential property, trustees may have further duties to comply with, such as ensuring that the property is adequately insured, and maintaining and repairing the property.

Trust investment powers

Most trusts provide the trustees with wide investment powers, which leaves the trustees with a decision to reach when deciding how trust funds are invested. Under the Trustee Act, trustees have a duty to obtain proper advice before making a decision, unless the trustees reach the conclusion that there are exceptional circumstances where advice is not needed. This could, for example, be where the amount of money left in trust is considered to be too small to warrant advice; however, this judgement call needs to be made by the trustees’ themselves.

FAS Trustee Service

At FAS, we have considerable experience in providing independent investment planning and advice to Trustees, through our Trustee Service.

We appreciate that the precise requirements of each trust will be different, and we therefore initially take the time to fully review the trust documentation to understand the terms of the trust and highlight the important considerations. We can manage Trust investments on an advisory or discretionary managed basis, with all investment decisions made by our experienced in-house Investment Committee. The majority of trustees choose our discretionary managed service, as this ensures that the trust investment portfolio is reviewed and rebalanced at least four times a year. This also helps reduce the amount of administration involved when making changes to the trust portfolio.

Given that the Trustee Act requires trustees to review a trust regularly, we carry out an in-depth review at pre-determined intervals. This comprehensive review covers the investment performance, matters relating to the trust and ensures that the trust portfolio can readily adapt to any change in circumstance. These regular reviews, and follow-up reports, can also assist the trustees in their audit trail to demonstrate their compliance with the requirements of the Trustee Act.

If you have been appointed as a trustee, or wish to review an existing trust, speak to one of our experienced advisers.