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A Guide to Investment for Trustees 2 a Guide to Investment for Trustees

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A Guide to Investment for Trustees 2 a Guide to Investment for Trustees A guide to investment for trustees 2 A guide to investment for trustees This guide is designed to highlight some of the key aspects of investment for trustees. Trusts are a complex area. For more detailed information about trusts, you should consult a financial or legal adviser. Technical terms highlighted in bold text in this document are explained in the glossary on page 18. Quilter has taken the utmost care in the creation of this document but does not accept liability for any loss resulting from action taken or refrained from being taken due to the information in this or any related document. There are many types of trusts available and this guide provides an overview of the role of the trustee and looks at the main types of trusts available. It does not consider, for example, special trusts or pension trusts. We regularly update our literature; you or your financial adviser can confirm that this February 2021 version is the latest by checking the literature library on our website platform.quilter.com Quilter 3 Contents Introduction ___________________________________________ 4 Trustee act 2000 ________________________________________ 5 Types of trust ___________________________________________ 8 Taxation of trusts ______________________________________ 10 - Bare trusts ______________________________________________________ 10 - Interest in possession (IIP) trusts ____________________________________ 11 - Discretionary trusts _______________________________________________ 13 Trustee reporting ______________________________________ 15 Trust investments ______________________________________ 16 Glossary of terms ______________________________________ 18 4 A guide to investment for trustees Introduction There are many considerations for trustees and their financial advisers when considering the investment strategy of a trust. These include: Each area needs to be considered in isolation as well as part of a the financial objectives of the trust bigger picture. the tax status of the trust and We have focused on these key areas its beneficiaries but would stress that advice is the permissible investments required in all aspects of trust available to the trustees planning and trust management, and this guide is not fully exhaustive of all the legal requirements of the the issues, risks and opportunities. trust provisions. Quilter 5 6 A guide to investment for trustees Trustee Act 2000 The Trustee Act 2000 (the Act) was introduced to improve and update the existing provisions which had become increasingly complex and out of date. The changes mean trustees are required to be more proactive in the running of the trust and seek advice where required. The Act came into force on 1 February To complement these less restrictive 2001 in England and Wales only. Since investment powers, the Act facilitates 29 July 2002 it has also become more effective trust administration. applicable in Northern Ireland. The For example, the trustees can Charities and Trustee Investment delegate certain decision-making (Scotland) Act 2005 applies in functions that do not relate to the Scotland and although there are some distribution of trust assets or the differences, the general principles are appointment/dismissal of trustees. broadly similar. Similar legislation These fiduciary powers (i.e., powers to applies in the Isle of Man under the administer the trust) include, where Trustee Act 2001. appropriate, delegating the The previous Act, the Trustee management of investments to an Investments Act 1961, imposed agent, such as a discretionary limitations on the differing types of fund manager. Such a situation investment that trustees could select. would require the trustees to give Now trustees can make an investment written guidance to the agent on how of any kind, as if they were absolutely the investment management should entitled to the trust assets. This be exercised in the best interests of power is subject to any restrictions the beneficiaries. This would include imposed in the trust deed. the desired balance between capital growth and income, any ethical The Act also introduced the need for considerations, asset allocation, risk any investment selected to satisfy the profile, investment term, use of tax standard investment criteria: this is exemptions and reliefs and easy basically a combination of suitability access to an appropriate level of cash. and diversification (see page 6). The fundamental principle for Trustees are not liable for acts or trustees to consider is whether by defaults of an agent unless they, acquiring or retaining any investment the trustees, have failed in their duty they are able to properly discharge of care in the selection of such their duties under the Act with an agent. regards to its suitability, the need for The Act also states that professional diversification and taking advice at trustees, agents, nominees, outset and at review. custodians and investment advisers can receive payment for their work even if there is no specific clause in the trust allowing this. Similarly, expenses properly incurred when acting on behalf of the trust can be reimbursed. Quilter 7 The trustees can delegate certain decision-making functions that do not relate to the distribution of trust assets or the appointment/dismissal of trustees. The statutory The ‘standard The duty to obtain duty of care investment criteria’ ‘proper advice’ In order to ensure that trustees Trustees must not only make Before making or changing an exercise the wider powers given to sure that any investment is suitable investment, trustees have a duty to them in a responsible manner, for the trust but also consider, obtain and consider proper advice a statutory duty of care was created where appropriate, the need for from somebody who they under the Act. diversification of investments. reasonably believe to be qualified and competent to give such advice The duty states that a trustee must The suitability of different types of on investment matters. The only always exercise such care and skill investments as trust assets will be exception to this requirement is as is reasonable in the gauged by numerous factors. where the trustees are certain that circumstances. In particular, As well as their individual qualities it is unnecessary (e.g., the trustees a trustee who has special in providing growth and income for possess the necessary skills and knowledge or experience is a trust, tax efficiency and low-cost knowledge) or uneconomical (e.g., expected to use it in their capacity administration are important the amount to be invested is very as trustee. A higher standard of issues, as both can enhance returns small) to take advice. care will therefore be required from to beneficiaries. Investment bonds a professional trustee. and collective investments can In most instances, trustees will often provide a suitable way to need to take advice, especially It is, however, possible for the duty invest indirectly in stocks and where there is no existing of care to be excluded or modified shares, although other assets may experience or knowledge in by the trust instrument. offer suitable alternatives. these areas. Whilst this statutory duty replaces In selecting suitable investments, any common law duty of care that the trustees will also be required to may have previously applied, consider the beneficiaries’ position trustees remain subject to the in respect of those that can benefit existing fundamental duties, such today (such as those with an as acting in the best interests of all interest in possession) versus those beneficiaries, avoiding any conflict that may benefit in the future. of interest and complying with the terms of the trust. The size of the trust fund will be relevant as far as diversification is concerned. Additionally, trustees are obliged to review the trust portfolio from time to time and consider whether the investments still satisfy the standard investment criteria, and therefore whether they should be altered in any way. 8 A guide to investment for trustees Types of trusts A trust usually comes into existence in one of two ways – either it is a settlement created by an individual during their lifetime or it is a trust created on death by a will or by intestacy rules. Intestacy is when someone dies without having made a valid will. In such cases, a statutory trust is imposed so that the rights of those entitled to benefit from the estate of the deceased person can be safeguarded. Quilter 9 Trusts are created for various reasons. Under a bare trust, assets are held by These include the control of gifted the trustees for one or more named assets, i.e., who might receive them beneficiaries, usually minors, who are and when, or to reduce potential absolutely and unconditionally entitled tax liabilities. to any income arising and the capital. The trustees usually hold the assets on Generally a trust will provide for behalf of the beneficiaries until they one of the following: are legally entitled, and able, to the beneficiaries to have an absolute receive it. right to income and capital – see bare Under an interest in possession trust on page nine trust, one or more named the beneficiaries to have an beneficiaries have an immediate right entitlement to income only to income (i.e., an interest in possession) and any income arising the beneficiaries to have a right to within the trust is taxed as their own. income but the trustees to have the Under such trusts, a beneficiary’s power to advance capital to them, or interest can sometimes be changed in the trustees to have discretion over favour of someone else, either by the whether they pay income or capital to trustees or automatically on the death any beneficiary. It is vital to of the beneficiary. understand the type of trust you are Under a discretionary trust, the a trustee of and what the trust allows payment of income and capital is at the you to do before attempting to decide complete discretion of the trustees. on an investment solution. There are often no named There are special provisions for beneficiaries.
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