The unique feature of trusts is the separation of ownership of the trust assets. The trustees are the legal owners, while the beneficiaries have beneficial rights of enjoyment.
Certain overseas territories may not recognise this separation, but in the UK, trustees having legal ownership means they should adhere to statutory powers and duties not forgetting their common law responsibilities.
Consider investment powers. Trustee investment powers are a crucial aspect of trust management. These powers ensure that trustees can effectively manage and grow the assets held within a trust.
The Trustee Act 2000 permits a trustee to “make any kind of investment that he could make if he were absolutely entitled to the assets of the trust”.
This power permits trustees to invest in assets that may be expected to produce either an income or capital return. A non-income producing insurance bond offers the prospect of a capital return.
Trustee investment powers are a crucial aspect of trust management
The only investments that are denied to trustees are those confined to private individuals such as Individual Savings Accounts.
Note, incidentally, that if the trust deed imposed a restriction – i.e. “my trustees may not invest in XYZ” – then the trustees would need to adhere to that. However, such restrictions are extremely rare.
Trustee investment powers are therefore prescribed by statute, by wording of the trust deed, or by a combination of the two.
When it comes to common law responsibilities, the trustees have various duties such as the duty to monitor investments, the duty to take account of tax considerations and so on. One particular duty that is of interest is the trustees’ duty to ensure fairness between beneficiaries.
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Trustees must hold the balance fairly between different categories of beneficiary. For example, if a trust provides that one class of beneficiary (the life tenant) is to receive income from the trust fund during their life and a second class (the remaindermen) is to receive capital on the death of the life tenant, then it would be unfair to the life tenant if the trustees were to invest in assets that produced little or no income, but offered the prospect of greater-than-usual capital growth.
Equally, it would be unfair to the remaindermen if the trustees were to make investments that offered a high income but little or no capital growth or which led to the value of the capital being eroded.
The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another.
In the words of Justice Hoffmann in the High Court (per the Times Law Report, 1990):
“The trustees have in my judgement a wide discretion. They are, for example, entitled to take into account the income needs of the tenant for life or the fact that the tenant for life was a person known to the settlor and a primary object of the trust whereas the remainderman is a remoter relative or a stranger.
“Of course, these cannot be allowed to become the over-riding considerations but the concept of fairness between classes of beneficiaries does not require them to be excluded. It would be an inhuman law which required trustees to adhere to some mechanical rule for preserving the real value of the capital when the tenant for life was the testator’s widow who had fallen upon hard times and the remainderman was young and well off.”
One particular duty that is of interest is the trustees’ duty to ensure fairness between beneficiaries
In a nutshell, what Justice Hoffmann is telling us is that trustees should act fairly between the life tenant and the remaindermen but it’s not a set of scales where known quantities are balanced equally – instead, and as alluded to above, the situation is more nuanced than that.
Finally, consider the situation concerning a will trust where the surviving spouse is entitled to income, with children then entitled to capital upon death of the income beneficiary. That typically indicates an investment into income producing assets such as OEICs.
But if the surviving spouse (who may be a trustee) makes it clear to the trustees that no income is needed, that potentially opens the door for an investment into a bond. If the trust gives the trustees power to pay capital to that income beneficiary, then the surviving spouse potentially has access to the trust fund when required.
Graeme Robb is senior technical manager at Prudential
