Investing Trust Funds

The manner in which trust assets can be invested has always been controlled. In most modern trusts there are few restrictions and Trustees have most of the powers of a beneficial owner. In the absence of such provisions however, trustees are limited to the powers granted by law and the law is essentially conservative, accordingly limiting them to low risk investments.

It has been the practise of governments to update the law from time to time and permit trustees to choose from the greater selection of investment options available. The United Kingdom updated its Trustee Act in 2000 and was followed by the Isle of Man in 2001. In both jurisdictions the new Act goes beyond merely extending investment powers, it introduces, for the first time a statutory duty of care and a new, wider, general power of investment. Following the modern trend, more formality is introduced into the whole topic of investment and in future trustees will have to satisfy themselves that agents they appoint, as custodians or as investment advisors, are properly qualified for the roles they are to perform, that the appointments are fully documented and that their agreements with those agents conform to the requirements of the Act.

Trustees will be required to prepare an investment policy statement and ensure that the investment manager confirms in writing that it will comply with the statement and future revisions. They must regularly review the investment manager and ensure compliance with the policy statement and assess performance against a suitable benchmark reflecting the investment objectives and risk levels of the trust. All these actions must be documented.

The investment strategy, risk profile and asset allocation policy of the trust need to be regularly reviewed and updated and one of the purposes of the new requirements must be to ensure that these matters are not overlooked once the trust is established. In many cases the settlor of a trust already has an investment advisor, whose services he would like the trustees to use and it is not uncommon for investment advisors to introduce their clients to trust service providers for the purpose of setting up trusts. Situations such as these will need to be treated with some sensitivity as the trustee will have to satisfy himself that the proposed advisor qualifies for the appointment independently of the settlor’s wish.

Many trusts are set up for more limited purposes, for example to hold the shares in a business, to own a property or a policy of insurance and it may be no part of the settlor’s intention that the trustees sell such assets and diversify. In these cases the trust deed needs to be drawn to ensure that the trustee has the necessary powers. Fortunately, in the Isle of Man, which of the two jurisdictions, is that which most directly affects Chesterfield clients, it is possible for the trust deed to exclude the general power of investment.

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