Acting as a trustee during a pandemic - Part II

Trustees' statutory duties

The key principles of trustee investment and the duties imposed on trustees are governed in England and Wales by the Trustee Act 2000 (TA). Of these the most important are:

(i)  Duty to have regard to the need for diversification and suitability of investments to the trust - these are known as the "standard investment criteria" (Section 4 TA).

Diversification

The requirement is to consider/have regard to the need for diversification – there is no actual duty to diversify all trust funds. Where it is appropriate, to diversify the trust fund means that the trustees should use a spread of investments.

Suitability

"Suitability" relates both to the kind of investment proposed and to the particular investment as an investment of that kind. It includes considerations as to the size and risk of the investments and the need to strike an appropriate balance between income and capital growth to meet the needs of the trust. It also includes any relevant ethical considerations as to the kind of investment that is appropriate for the trust.

Most importantly there is a further requirement for the trustees to keep the investments of the trust under review and to consider whether, in light of the "standard investment criteria", they should be varied.

(ii) Duty to obtain and consider proper advice 

The following provisions in the TA govern the need for trustees to obtain advice (Section 5 TA):-

• before exercising any power of investment, the trustees must obtain and consider proper advice about the way in which that power should be exercised, having regard to the need for diversification of investments of the trust and the suitability to the trust of the proposed investment;

• when reviewing the investments of the trust, the trustees must obtain and consider proper advice about whether, having regard to the "standard investment criteria", the investments should be varied.

The requirement to obtain advice does not apply if the trustees reasonably conclude that in all the circumstances it is unnecessary or inappropriate to do so.  This may cover a case where, for example, the trust fund is small and the cost of advice would outweigh the benefit of it; or if the trustees are suitably qualified and can provide this advice at reasonable cost.

For these purposes, proper advice would be the advice of a person who the trustees reasonably believe to be qualified to give it by his ability in, and practical experience of, financial and other matters relating to the proposed investment.

It should be noted that the duties to take advice in making/retaining investments and in relation to the standard investment criteria apply to all trusts (i.e. not just those where the statutory power of investment under the TA applies) and are non-excludable, that is, they cannot be excluded by an express provision in a trust document.

The challenges posed by the pandemic  

For trustees who have to manage investments and assets and care for their beneficiaries, the present situation gives rise to some unique challenges. Apart from the health and welfare problems caused by COVID-19, we have seen some very volatile stock market behaviour as well as some significant drops in value of many investment funds.

Trustees will no doubt be anxious about investments they hold and their performance, and they may also be receiving requests for distributions and other financial support requiring liquidity. There is also talk of increases in the CGT rates. Needless to say, this is where their duty to obtain and consider proper advice will be paramount.

Trustees should take the opportunity to check the terms and conditions of their investment management agreements, and the scope of their duties under the trust deed itself. It may well be appropriate for them to request investment valuation statements,  review investment performance, discuss investment strategy with fund managers and satisfy themselves that those managers are acting prudently.

Depending on the assets that are held, the possibility of a  reduction in income or even reduced value of capital needs to be considered and beneficiaries’ expectations may need to be managed. As ever, good communication with the beneficiaries is essential.

In difficult situations, and especially when values of trust assets are potentially under threat, there may be scope for disagreement between the trustees and (perhaps disgruntled) beneficiaries. In some cases, the trustees may decide on a particular course of action for the benefit of the beneficiaries only to find that the trust deed does not give them sufficient powers to do what they want, or that they need to have agreement from the beneficiaries before they can proceed. Sometimes an application to the Court may be necessary before proceeding.

We have recently had two cases which are of interest. The first concerns self-dealing by a trustee and the second involves the Court granting extended powers to trustees.

Self-dealing

The case of Caldicott v Richards, 2020 EWHC 767 Ch is a valuable reminder to trustees to take care when self-dealing. This term is used if a trustee or trustees sell trust assets to themselves. The rule is that in such a case the entire sale is voidable by any beneficiary, however fair the transaction unless the trustee can show that the transaction was entered into with the fully informed consent of the trust’s beneficiaries.

In this case, a sale of shares in a family company by the trustees of a discretionary trust to one of the trustees was rescinded because it had not been shown that the beneficiaries had given their fully informed consent to the transaction.

In fact, as the trustee in question was also a beneficiary and the trust was discretionary, the trustees could have exercised their dispositive powers in her favour under the terms of the trust. Unfortunately, this was not what they sought to do.  Consents had in fact also been obtained from the other beneficiaries but they were not fully informed and, according to the judge, there were no exceptional circumstances worthy of justifying the non-application of the rule.

However, when it came to determining whether the trustees should be replaced,  the judge decided that it was not required in all the circumstances. As ever, everything turns on the facts of the case and going to Court should only ever be the last resort.

The Court grants trustees extra powers for "expediency" reasons

In Cotterell v Allendale, 2020 EWHC 2234 Ch the England and Wales High Court has agreed to grant trustees additional powers under the expediency provisions in s.57(1) of the Trustee Act 1925 (the Act), the first time such an order has been made.

The application was brought by the trustees of the Allendale 1949 Settlement, the defendants being the current Viscount Allendale and his son, both beneficiaries under the settlement. Its primary purpose was to seek powers for the trustees to reappropriate assets, in order to allow them to be more easily moved between the various family sub-trusts. At the same time, the trustees sought further powers designed to enhance the management and administration of the trust property in the future. As the main trust was created more than 70 years ago, it lacked some of the provisions that modern trusts now have as standard.

Section 57 of the Act allows the Court to grant additional powers of management or administration if it considers it 'expedient' to do so. However, there has previously been disagreement over its scope, with one view holding that the power could only be exercised where the trustees had a specific transaction in mind, the other holding that s.57 is not so restricted.

Interestingly, in this case, the trustees did not have any specific transaction in mind but sought the additional powers to enhance the smooth running of the trusts in the future. The trustees argued that the power to reappropriate assets was necessary so that they could reorganise them to be held in a tax-efficient manner.

The trustees also sought a power to pay assets to a minor; appoint investment advisers; delegate the management of investments and requested a limited authorisation to carry out self-dealing transactions.

The Court accepted the argument that s.57 allows it to grant general powers, not just in relation to contemplated transactions, provided that the powers involve or are linked to a ‘potential’ transaction. It agreed that the enhanced powers were 'expedient' and granted them, though the self-dealing power was granted subject to the protection that at least one of the trustees must not have any personal interest in any proposed transaction. Such a proviso is indeed common in most modern trusts.

Protecting from the effects of cybercrime

Finally, perhaps an unexpected problem for trustees, also exacerbated by the pandemic. The UK’s top law enforcement agencies have warned of increased cybercrime and fraud as a result of the COVID-19 pandemic. Indeed, the National Economic Crime Centre has seen a surge in fraud, primarily driven by cybercrime, and cautioned that criminals were seeking to exploit the crisis to target businesses, investors and their customers.

Although the warnings were specifically targeted at businesses and companies, trustees should also take this warning seriously. Given the amount of wealth managed by trustees or trust companies, they would almost certainly be a popular target for fraudsters.

Trustees should therefore be alert to any suspicious activities – any unusual payment requests by beneficiaries should be thoroughly investigated. Now more than ever perhaps, trustees should be mindful of their duty to exercise reasonable care and skill, throughout the pandemic and beyond.

Conclusion

Clearly, the task facing a trustee is likely to be even more onerous during the pandemic and trustees need to be even more careful when exercising their discretions and investing trust funds. Generally, trustees should try to be proactive and monitor the effects of the current economic situation as well as the possible changes to taxation which have been mooted, in particular the possible increase in the CGT rates. It may be that some assets with substantial gains may be best realised while the CGT rates are still relatively low.