Where a Trustee has a duty to invest, there are certain legal requirements placed on them. Interestingly, it is not too uncommon to find that a Trustee is not fully aware of their obligations to invest or alternatively are unsure what they can invest in.
THE DUTY TO INVEST
In Adamson v Reid (1880) 6 VLR (E) 164 at 167 per Molesworth J, it was held that Trustees are obliged to invest trust money, even where there is no discretion in the trust instrument to this effect. As a result, investment is categorised as a duty, noting that a Trustee is vested with discretion as to how this is to be carried out. The duty is hence restricted in the way authorised by the Trust Deed, statute or court [1].
INVESTMENTS AUTHORISED BY THE TRUST INSTRUMENT
A Trust Deed will typically prescribe the kinds of investments a Trustee may contemplate when exercising the duty to invest. As way of example, a Trust Deed giving a Trustee the power to “invest funds for the benefit of the Trust” is conferring investment discretion. Despite this, it is still important that the trustee “honestly think it is a desirable investment for the investment of moneys” [2] as the discretion is subject to the ordinary prudent person standard of care, which functions to avoid vague speculation by the trustee [3]. There is also a further duty under fiduciary principles aimed at preventing a Trustee investing in conflict or profiteering situations [4].
It should also be noted that the Courts have typically interpreted the meaning of ‘investment’ in Trust Deeds in a manner that is restrictive so as to limit it to property capable of being treated as an investment, as against acquisition merely for the use of enjoyment. Hence, this depicts the intention that expenditure should be aimed at obtaining a return by way of income or profit for the beneficiaries benefit [5].
INVESTMENT AUTHORISED BY STATUE
Section 21, ss 29-30C of the Trustee Act 1973 (Qld) (“the Act”) allows a trustee to invest funds in any form of investment at any material time, subject to the qualification that it is not expressly prohibited by the Trust Deed. The limitations on this power is set out under s 22(1)(b), 22(2) and 22(3) of the Act. Essentially it is equivalent to the common law standard of care that “a trustee exercising any power of investment shall exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others”. A Trustee must also exercise the power of investment, comply with the Trust Deed and must, at least once a year, review, individually and as a whole, the Trust investments.
In Queensland, there are prescribed matters to which a Trustee must have regard to when exercising the power of investment. The relevant provision is s 24(1) of the Act, which provides (without limitation on the power) that a Trustee must have regard to certain matters;
- The purposes of the Trust/needs and circumstances of beneficiaries;
- Desirability of diversifying investments;
- The nature/risks with investment;
- The need to maintain the value of capital or income and considering the risks of capital or income loss including potential of capital appreciation;
- The length of the investment and duration of the Trust;
- Liquidity/marketability of investment during/at the end of the investment;
- The value of the Trust estate;
- The effect of the investment relating to tax;
- The likelihood of inflation affecting the investment;
- The costs to make the investment and the results of a review of the existing trust investments.
Section 24(2) of the Act also permits a Trustee to obtain and consider independent and impartial advice that is reasonably required and must pay out of the trust funds, the costs associated with the advice.
Notwithstanding the above, in the event of proceedings against a Trustee for breach of trust in respect of the duty and powers of investment, a court will have regard to a number of factors as set out under s 30B of the Act. These matters range from considering the nature of the trust, whether the Trustee has had regard to statutory matters, whether the investment was made based on strategy and the extent the trustee acted on the independent and impartial advice that they may have obtained [6]. Perhaps then it should be obvious that the legislation is requiring, or at the very least encouraging, a Trustee to adopt a ‘model portfolio theory’ to invest funds [7].
Note that there are circumstances that allow the Courts to set-off all or even part of loss resulting from an investment against all or part of the gain resulting from any investment whether there is a breach of trust or not as set out in s 30C(1) of the Act. This is particularly so the common law prohibition on setting off losses and gains can be distinguished from breaches of trust and allows the court discretion as to what is fair and just in all the circumstances of the case [8].
INVESTMENT AUTHORISED BY THE COURT
It should not be surprising that the Courts can authorise investment of trust funds in a way that is not prescribed in the Trust Deed or legislature. This relates to the Courts ‘expediency’ jurisdiction. Obviously the Court rarely exercises this jurisdiction although it is possible given the statutory discretion, which vests with a Trustee [9].
INVESTMENT FOR FINANCIAL ADVANTAGE OF THE TRUST
If you are not already aware, the Trustee MUST be concerned with the financial advantage of the trust [10].
Interestingly, in Cowan v Scargill [1985] Ch 270 at 286-287 per Megarry VC, the starting point is the paramount duty of a Trustee to exercise powers in the best interest of the present and future beneficiaries. The Trustee is hence required to obey the law and must put the interests of the beneficiary first. In relation to the power of investment, Megarry VC indicated that the power must be
exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investment in question.
Accordingly, Mergarry VC stated that requirement is said to mean that a Trustee must
put to one side their own personal interests and views.
CONSIDERING BENEFICIARY, SOCIAL, ETHICAL AND ENVIRONMENTAL OPINIONS
It should come with no surprise whatsoever that a Trustee can seek opinions of certain individuals or groups in the community, however, this cannot justify the investment strategy which can reduce financial advantage to the Trust [11].
CONCLUSION
It is not uncommon for a Trustee to be appointed under a Will or otherwise that has a lack of investment experience. It is for that reason that independent advice should be sought. This is especially so in light of the fact that a Trustee’s failure to adopt appropriate investment strategies or not exercising the necessary standard of an ordinary prudent business person means that can be liable to the Trust fund [12].
If you are a Trustee or have someone appointed as a Trustee for you and you are concerned about the duty to invest, you should reach out to an Australian Legal Practitioner that is experienced in the area.
