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Trustee Act 2000
The purpose of this document is to provide a summary of some of the key areas of reform brought about by the Trustee Act 2000 (“the Act”) and to outline the key implications these areas of reform have had for professional and personal trustees.
The Act came into effect on the 1st February 2001 and the main areas of reform over previous legislation (Trustee Act 1925 and the Trustee Investment Act 1961) were in the following areas:
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Duty of care
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Investment
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Acquisition of land
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Agents/nominees/custodians
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Remuneration
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Powers to insure.
Duty of care
Under the new act, a trustee must “….exercise such care and skill as is reasonable in the circumstances…having regard in particular to any special knowledge or experience that the trustee has”. This duty of care had not previously been written in legislation and therefore carries much more weight, placing greater obligation on trustees. Duty of care extends also to any exercise of powers to invest trust property. The Act also specifies that a higher standard of care is expected from a professional trustee than from a private individual.
Investment powers
The Act gives trustees default powers. The default powers allow the trustee to “…make any kind of investment that he could make if he were absolutely entitled to the assets of the trust…”. It should be noted however that the legislation does not actually define an “investment”. The default powers also extend to both new and existing trusts, capture trusts created on intestacy and extend to personal representatives.
The effect of this is to do away with the old split between “narrow range” and “wider range” investments. It allows for trustees to invest trust assets in a range of new instruments which would not previously have been allowed - for example, insurance bonds and property – without the need for a specific dispensation under the trust deed. The ability to invest in this wider range of instruments is a considerable advantage over the earlier provisions, which were widely regarded as overly cautious, administratively burdensome and so restrictive as to potentially be to the detriment of overall performance.
Due regard for relevant principles
The Act takes the “duty of care” ethos one step further in that it requires that the trustee gives due regard to certain investment principles: the suitability of the investments selected, and the need for diversification where appropriate. Under suitability of investment the trustee should ensure the product's features meet the trust's operational requirements, that the investment objectives of the chosen solution are defined and consistent with those of the trust, that the tax planning of the investment is effective, and the trustee should consider the standing and track record of the provider, undertaking due diligence on all counterparties.
In addition to this, the trustees are also obliged to: invest prudently, diversify the assets of the trust, to review the situation periodically and to observe a reasonable balance between risk incurred and the potential reward.
Advice
In terms of advice the Act requires that trustees must, in the exercise of their investment powers, obtain and consider proper investment advice, from an appropriately qualified person such as an IFA, unless they are reasonably of the view that to do so would be unnecessary or inappropriate. There are two scenarios where trustees do not have to take investment advice. Firstly, where the investment is so small that the costs of obtaining such advice would outweigh the benefits of so doing, or where the trustees themselves have sufficient expertise to make decisions of this nature. This would be the case, for example, where one of them was an IFA.
This requirement to take advice is not a one-off obligation – it is ongoing, and there should therefore be periodic reviews. This ties in with a trustees' ongoing obligations not to neglect the trust's investments.
Agents, Nominees and Custodians
In the absence of any specific provision in the trust deed or under other applicable legislation, trustees are given wide powers of delegation. For example, they now no longer need specific dispensation in order to appoint a discretionary investment manager to look after the trust's assets. There are limits on these powers of delegation – for example, they may not delegate those relating to the distribution of the trust's assets, they must keep delegated functions under review and the trustees remain liable for the delegated functions. Where trustees do appoint an agent, such appointment must be agreed or evidenced in writing and supported by a policy statement on the part of the trustees to guide the agent in their activities.
Remuneration issues
The general principle is that trustees should not profit from their position, aside from their properly agreed trustee fees. Trust deeds can and do sometimes empower trustees to retain commissions on investments for instance. This is an area for some care, however: where a trustee retains commissions there is always the danger that his actions may be challenged by a beneficiary at a later date. Accordingly many trustees may prefer to be cautious in this regard. In so doing, they may also be best to choose those products or services which allow them to strip out and rebate commissions, or to specify their fees in accordance with the agreed trust remuneration provisions. In any event transparency and flexibility are key.
Key implications for trustees
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All trustees MUST review both new and existing trusts in light of the new Act – inaction could incur liability.
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All trustees MUST seek investment advice on an ongoing basis in respect of both new and existing trust investment unless they are appropriately qualified themselves.
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All trustees MUST document all meetings with advisers and clients, recording the rationale for what decisions have been taken on an ongoing basis.
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All trustees MUST review investment performance and asset allocation on an ongoing basis.
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All trustees MUST remain aware of any tax changes that may impact new and existing trusts and review a trust's investments if necessary as a result.
There is greater OPPORTUNITY for trustees to assist their clients as a result of the Act, but CARE is also a necessity.