Trustees: appointment, duties, powers, and liabilities - Dut...

Learning Outcomes

This article examines the essential duty of trustees to invest trust assets. It details the scope of the general power of investment under the Trustee Act 2000, the requirement to follow standard investment criteria, the obligation to seek advice, and the principles governing the delegation of investment responsibilities. Understanding these elements is critical for assessing trustee compliance and potential liability in trust administration scenarios encountered in the SQE1 assessments.

SQE1 Syllabus

For SQE1, you are required to understand the duties and powers trustees have concerning the investment of trust property. A thorough understanding of this area is necessary to advise on appropriate investment strategies and identify potential breaches of trust related to investment decisions, with a focus on the following syllabus points:

• The statutory duty of care applicable to trustees' investment functions.
• The general power of investment granted by the Trustee Act 2000.
• The requirement for trustees to consider suitability and diversification (standard investment criteria).
• The trustees' obligation regarding obtaining and considering proper investment advice.
• The duty to review investments periodically.
• The rules permitting delegation of asset management functions and the associated duties of trustees.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Under the Trustee Act 2000, what are the two standard investment criteria trustees must consider?
   1. Profitability and Risk
   2. Liquidity and Security
   3. Suitability and Diversification
   4. Short-term gain and Long-term stability
2. A trustee is managing a trust fund solely for an adult beneficiary with full capacity who is absolutely entitled. Can the trustee delegate investment decisions to a qualified financial advisor?
   1. Yes, without restriction.
   2. Yes, provided they comply with the statutory requirements for delegation, including providing a written policy statement.
   3. No, the beneficiary's absolute entitlement prevents delegation.
   4. No, trustees must always make investment decisions personally.
3. Are lay trustees and professional trustees held to the same standard of care when making investment decisions under the Trustee Act 2000?
   1. Yes, the standard is the same for all trustees.
   2. No, professional trustees are expected to exercise a higher degree of skill and care.
   3. No, lay trustees have no duty of care regarding investments.
   4. Yes, but only if the trust instrument explicitly states this.

Introduction

Trustees are entrusted with managing assets for beneficiaries. A core aspect of this management involves the duty to invest the trust fund. This duty requires trustees not merely to preserve the trust property but to make it productive, generating income and/or capital growth as appropriate for the beneficiaries, while acting prudently. The Trustee Act 2000 provides the modern framework governing trustees' powers and duties regarding investment, replacing older, more restrictive rules. This article explores these key statutory provisions and associated common law principles.

The Statutory Duty to Invest

Unless excluded or modified by the trust instrument, trustees generally have a duty to invest trust money rather than leaving it unproductive, for example, in a current account yielding no interest. Failure to invest appropriately can constitute a breach of trust if it leads to loss. The Trustee Act 2000 (TA 2000) grants trustees broad powers while simultaneously imposing significant duties.

General Power of Investment

Section 3 TA 2000 confers on trustees a General Power of Investment.

Key Term: General Power of Investment
The power under s 3 TA 2000 enabling trustees to make any kind of investment they could make if they were absolutely entitled to the trust assets, except for investments in land specifically covered by s 8.

This power provides significant flexibility, allowing investment in assets like shares, bonds, and collective investment schemes (like unit trusts). It contrasts sharply with the restrictive lists of authorised investments under previous legislation. The trust instrument may widen or restrict this statutory power. If the instrument expressly excludes certain asset classes (for example, derivatives or crypto-assets), trustees must comply with those limits even though s 3 is broad.

Trustees may invest through pooled or collective vehicles (e.g., authorised unit trusts or OEICs), directly in listed or private company shares, in fixed income securities, or in other permitted instruments. They must not engage in speculative or imprudent strategies that would fail the statutory duty of care, and they must avoid conflicts (for example, buying assets from themselves or companies in which they have a personal interest without appropriate authority and safeguards).

Power to Acquire Land

Section 8 TA 2000 grants a distinct power for trustees to acquire freehold or leasehold land in the United Kingdom. This can be done:

• As an investment (e.g., buying property to let out for rental income).
• For occupation by a beneficiary.
• For any other reason (e.g., acquiring land adjoining existing trust property).

This power is separate from the general power under s 3 and is specifically limited to UK land unless the trust instrument permits acquiring land abroad. Once land is acquired, trustees may manage and dispose of it as if they were absolute owners, subject to their fiduciary obligations and any express restrictions in the trust instrument. If land is acquired for a beneficiary’s occupation, trustees should document terms of occupation (for example, maintenance responsibilities and insurance) and keep under review whether continued occupation remains suitable.

Statutory Duty of Care

When exercising investment powers (and other specified functions like appointing agents), trustees are subject to the statutory duty of care defined in s 1 TA 2000.

Key Term: Statutory Duty of Care (s 1 TA 2000)
The duty requiring a trustee to exercise such care and skill as is reasonable in the circumstances, having particular regard to any special knowledge or experience they have or hold themselves out as having, and, if acting professionally, the knowledge and experience reasonably expected of such a professional.

This duty imposes an objective standard but adjusts it based on the trustee's actual or purported competence. Consequently, a professional trustee (e.g., a solicitor or trust corporation) is held to a higher standard than a lay trustee (e.g., a family member) with no specialist financial knowledge. Case law confirms that trust corporations and paid professional trustees must proactively monitor investments and corporate assets owned by trusts and seek appropriate advice where needed.

A practical feature of this duty is the modern portfolio approach. Trustees are assessed by reference to the risk and return of the overall portfolio, not individual investments in isolation. A single loss-making holding may be defensible if the portfolio overall is suited to the trust’s aims and reasonably diversified.

Standard Investment Criteria

Section 4 TA 2000 mandates that trustees, when exercising any power of investment (whether statutory or under the trust instrument) or reviewing investments, must have regard to the Standard Investment Criteria.

Key Term: Standard Investment Criteria
The criteria set out in s 4 TA 2000 requiring trustees to consider (a) the suitability to the trust of investments, and (b) the need for diversification of investments, so far as appropriate.

Key Term: Suitability
Relates to the specific trust's needs. Trustees must consider the appropriateness of both the type of investment (e.g., equities, bonds, property) and the specific investment being considered (e.g., shares in Company X) in light of the trust's objectives, duration, size, tax position, and beneficiaries' requirements (e.g., income versus capital growth).

Key Term: Diversification
Spreading investments across different asset classes (shares, bonds, property, cash), geographical areas, and industry sectors to reduce risk. The extent of diversification required depends on the trust's circumstances; a small, short-term trust might require less diversification than a large, long-term one.

Failure to properly consider these criteria constitutes a breach of duty.

Suitability is not a static test. Trustees should consider liquidity needs (for example, regular distributions to a life tenant), currency risk, tax efficiency, costs of investment products, and the time horizon over which returns are expected. For trusts with successive interests (life tenants entitled to income and remaindermen to capital), trustees must be even‑handed and balance those interests. In practice, this can mean favouring income-producing assets without unduly prejudicing capital growth, or adopting total‑return approaches where the trust instrument permits.

Duty to Obtain Advice

Section 5 TA 2000 requires trustees to obtain and consider Proper Advice before exercising any power of investment or when reviewing investments.

Key Term: Proper Advice
Advice on how investment powers should be exercised, considering the standard investment criteria, given by a person reasonably believed by the trustees to be qualified to give it due to their ability and practical experience of financial and other relevant matters.

Trustees need not obtain advice if they reasonably conclude in all the circumstances that it is unnecessary or inappropriate to do so. This might apply if:

• The amount being invested is very small.
• The proposed investment is very simple and low-risk (e.g., depositing funds in a standard savings account).
• A trustee possesses the requisite competence themselves (e.g., a trustee who is a qualified investment manager acting within their competence).

However, lay trustees should be cautious about deciding advice is unnecessary, as failure to take advice when appropriate can lead to liability. Trustees who do take advice must actively consider it; blindly following advice will not excuse trustees from applying their own judgment and the statutory criteria.

Duty to Review

Trustees have an ongoing duty under s 4(2) TA 2000 to review the trust investments from time to time and consider whether they should be varied, having regard to the standard investment criteria. The frequency depends on the nature of the investments and the trust's circumstances, but regular reviews are essential.

A practical approach is to set a review timetable (for example, quarterly reviews with annual strategic rebalancing) and record in minutes why changes are made or not made. Reviews must re‑assess suitability and diversification, and should respond to material events (for example, market shocks, changes to beneficiaries’ needs, or tax regime changes).

Worked Example 1.1

The trustees of the Green Family Trust (fund value £500,000) hold the fund for Mrs Green for life, remainder to her adult children. Mrs Green relies on the trust income. The trustees, believing technology stocks offer the best growth, invest the entire fund in shares of one company, TechFutures plc, without seeking advice. The shares subsequently fall significantly in value.

Have the trustees breached their duties?

Answer:
Yes, the trustees have likely breached several duties. Firstly, by investing the entire fund in a single company, they have failed to consider the need for diversification (s 4 TA 2000). Secondly, this high-risk strategy potentially ignores the suitability requirement regarding the income needs of the life tenant, Mrs Green. Thirdly, unless one of the trustees possessed relevant professional competence, they likely breached their duty under s 5 TA 2000 by failing to obtain proper advice before making such a significant and undiversified investment. Their failure to consider the standard investment criteria demonstrates a breach of the statutory duty of care (s 1 TA 2000).

Ethical and Non‑Financial Considerations

Trustees’ primary duty is to act in the beneficiaries’ best interests, ordinarily understood as financial interests. As a general rule, trustees should not sacrifice financial return for ethical or non‑financial motives unless the trust instrument authorises such policies or all adult beneficiaries consent and there is no significant risk of financial detriment. In charity trusts, there is a distinct regime reflecting charitable purposes, but for private trusts caution is required.

Where trustees adopt an ethical screen (for example, excluding fossil fuels), they should record their analysis showing the screened portfolio is suitably diversified and expected to be at least as financially appropriate as available alternatives. If ethical investment is pursued because beneficiaries of full age and capacity direct it (and there is no material financial detriment), trustees may follow that direction.

Even‑Handedness for Successive Interests

In trusts with life interests and remaindermen, trustees must be even‑handed between the different classes. Investments should be chosen so the life tenant receives a reasonable income while capital is preserved and has prospects of growth for the remaindermen. Trustees should document how the chosen asset allocation achieves this balance, and review it when circumstances change (for example, the life tenant’s spending needs or a major change in market yields).

Delegation of Investment Functions

Trustees must generally act personally. However, the TA 2000 permits the collective delegation of certain functions, including most asset management functions (which include investment decisions), to an agent.

Key Term: Delegation
Authorising an agent to exercise certain trustee functions, governed by ss 11-15 and 22-23 TA 2000.

Key Term: Asset Management Functions
Functions relating to the investment of trust assets, acquisition and disposal of trust property, and ongoing management of property subject to the trust.

Under s 11 TA 2000, trustees can delegate asset management functions but cannot delegate dispositive decisions, such as deciding whether to make distributions, the allocation between income and capital where that involves discretion, or the selection of beneficiaries under a discretionary trust.

Formal Requirements for Delegation (s 15)

To delegate asset management functions, trustees must:

1. Appoint the agent under a written agreement.
2. Prepare a written policy statement giving guidance on how the functions should be exercised in the best interests of the trust (considering suitability, diversification, and trust objectives). Trustees must use reasonable care preparing this statement.
3. Ensure the written agreement requires the agent to comply with the policy statement.

Key Term: Policy Statement
A written document prepared by trustees that sets objectives, risk constraints, permitted asset classes, performance benchmarks, diversification requirements, reporting obligations, and how the agent should exercise delegated asset management functions.

A robust policy statement typically covers: investment objectives; attitude to risk; liquidity needs; expected time horizon; benchmark indices; asset allocation ranges; exclusions or restrictions; rebalancing rules; reporting frequency; and how the trustee will monitor performance and compliance. The agent must confirm receipt and agreement to comply.

Trustees may also appoint nominees and custodians, but those appointments are subject to separate statutory provisions and the duty of care. Delegation must be a collective trustee decision unless the trust instrument provides otherwise.

Trustees' Duties When Delegating (s 22)

Even when functions are delegated, trustees retain important duties:

1. Duty of Care in Selection: They must exercise the statutory duty of care (s 1) when selecting the agent, ensuring they are suitably qualified.
2. Duty of Review: They must keep the arrangements under review, considering whether the agent is complying with the policy statement and whether the policy statement itself needs revision.

This means trustees should conduct due diligence (qualifications, regulatory status, track record, conflicts) when appointing the agent; require regular written reports; meet periodically to review performance and compliance; and take timely corrective action where necessary. If circumstances change (for example, beneficiaries’ needs or market conditions), the policy statement should be updated and the agent notified.

Liability for Agents (s 23)

Critically, s 23 TA 2000 states that a trustee is not liable for any act or default of the agent unless the trustee has failed to comply with their duty of care under s 1 TA 2000 either in the appointment process or in the ongoing review process required by s 22.

If trustees do not prepare an adequate policy statement, fail to ensure the agent agrees to comply, or neglect monitoring and corrective action, they risk personal liability for resulting losses. Good governance—minutes, policies, and documented reviews—are essential to preserve s 23 protection.

Key Term: Bare Trust
A trust in which the beneficiary of full age and capacity has an absolute right to the trust property and the trustee has no active discretion; the beneficiary can direct the trustee how to deal with the property.

Under a bare trust, an adult, capacitated beneficiary can direct the trustees to appoint a specific investment manager or adopt a particular investment approach. The trustees should still comply with statutory delegation formalities, and may seek confirmations in writing. If the beneficiary directs a particular investment and the trustees implement that direction properly, the beneficiary’s instruction can provide a defence where a loss arises, though trustees must still avoid acting in a way that is plainly imprudent or in breach of the statute.

Worked Example 1.2

The trustees of the Harper Trust appoint an investment manager by email exchange. They do not prepare a policy statement, and they do not require the manager to provide periodic reports. Two years later, the manager has concentrated the portfolio in illiquid private company shares contrary to the trust’s need for income, and the fund has suffered losses.

Are the trustees protected by s 23 TA 2000?

Answer:
Probably not. The trustees failed to exercise the s 1 duty of care in the appointment (no proper written agreement or due diligence evident) and in the ongoing review (no regular monitoring, no reports, and no policy statement). Section 15 requires a written agreement and a written policy statement. In these circumstances, s 23 protection will be unavailable, and the trustees risk personal liability for losses flowing from negligent appointment and supervision.

Worked Example 1.3

Trustees of a family trust delegate asset management to a regulated investment firm under a detailed written agreement. They prepare a policy statement specifying income objectives for the life tenant and capital preservation, set diversification parameters, and require quarterly reports. Over time, bond yields fall materially; the trustees hold review meetings, revise the policy to allow limited income reserves and more global equity exposure, and instruct the agent accordingly. The portfolio suffers a modest short‑term drawdown during a market correction but recovers thereafter.

Will the trustees be liable for the temporary loss?

Answer:
Unlikely. They complied with s 15, exercised the s 1 duty of care in selection and review, and responded to changing circumstances through policy updates. Modest losses within a suitably diversified, well‑monitored strategy will not generally indicate breach. The modern portfolio approach assesses performance and risk at the portfolio level and over an appropriate time horizon.

Conflicts and Self‑Dealing

Trustees must avoid conflicts of interest in investment decisions. A trustee should not purchase trust property personally or direct investments for personal gain without express authority and full disclosure. Trustees appointed as directors of companies in which the trust holds shares should account to the trust for any directors’ fees earned by virtue of the trust shareholding unless permitted by the trust instrument or clearly independently obtained. Where conflicts cannot be managed, trustees should seek beneficiary consent or court directions.

Breach of Investment Duty and Liability

If trustees breach their investment duties and loss results, beneficiaries can claim compensation. The measure is to restore the trust fund to the position it would have been in had the duty been performed, with appropriate interest (simple or, in serious cases, compound). Gains from separate breaches generally cannot be offset against losses, though linked investment schemes may permit netting where the parts are genuinely interdependent. Trustees are jointly and severally liable where more than one is at fault; a passive trustee can be liable for failing to participate and supervise co‑trustees.

Defences can include informed consent by adult, capacitated beneficiaries; exclusion clauses in the trust instrument (subject to the irreducible core of honesty) and the court’s discretionary relief (s 61 TA 1925) where the trustee acted honestly and reasonably and ought fairly to be excused. There is a six‑year limitation period for breach of trust claims, subject to exceptions (for fraud, or for actions to recover trust property or its proceeds, and where remainder beneficiaries’ time runs from when their interest falls into possession).

Worked Example 1.4

Trustees follow their nephew’s unqualified suggestion to invest 70% of the fund in a single start‑up without seeking advice, despite trust terms indicating a balanced, income‑oriented strategy for a life tenant. The investment fails and the fund loses significant value.

Are the trustees liable, and what factors will the court consider?

Answer:
The trustees are likely liable. They failed to obtain proper advice (s 5), ignored suitability and diversification (s 4), and breached the s 1 duty of care. The court will consider whether the loss flowed from the breach, the trust’s objectives, the trustees’ competence (with higher expectations for any professional trustee), and whether any exemption clause applies. If the trustees acted honestly but unreasonably, s 61 relief is unlikely for a professional trustee; a lay trustee may obtain partial relief in exceptional circumstances, but the loss here is substantial and the failures are clear.

Additional Practical Considerations

• Liquidity: Trustees must ensure adequate liquidity to meet foreseeable distributions or expenses. Over‑concentration in illiquid assets may be unsuitable for trusts with regular outgoings.
• Tax and costs: Investment choices should take into account taxation (income tax, capital gains tax) and fees. High‑cost products require justification in terms of expected net return and suitability.
• Documentation: Minutes of decisions, written rationales, advice received, and review timetables are central to demonstrating compliance.
• Collective investment: Using authorised funds may help diversification and reduce operational risk, but trustees must still assess suitability and monitor performance.
• Real estate: Where trustees acquire UK land, robust management and insurance are required; the trust should not carry on a business unless the instrument expressly authorises it, and trustees must not expose the trust to undue trading risks.

Exam Warning

While trustees can delegate investment decisions, they cannot delegate responsibility entirely. Liability can still arise if they are negligent in choosing or supervising the agent, or in providing an inadequate policy statement. Remember s 23 protection is conditional on compliance with their duties under ss 1 and 22.

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees have a general duty to invest trust funds, governed primarily by the Trustee Act 2000.
• Section 3 TA 2000 provides a broad general power of investment.
• Section 8 TA 2000 provides a power to acquire UK land.
• Trustees must follow the statutory duty of care (s 1 TA 2000).
• Trustees must consider the standard investment criteria: suitability and diversification (s 4 TA 2000).
• Trustees generally must obtain and consider proper advice before investing or reviewing (s 5 TA 2000).
• Trustees have an ongoing duty to review investments (s 4(2) TA 2000).
• Trustees must act even‑handedly where beneficiaries have successive interests.
• Ethical investment policies are permissible only where authorised or not detrimental to financial interests.
• Trustees can delegate asset management functions to an agent, subject to strict requirements regarding written agreements, policy statements, and review (ss 11, 15, 22 TA 2000).
• Trustees are generally protected from liability for an agent's acts unless they breached their own duties in appointment or review (s 23 TA 2000).
• Breach of investment duties can lead to personal liability; defences include informed beneficiary consent, valid exemption clauses, and possible court relief under s 61 TA 1925.

Key Terms and Concepts

• General Power of Investment
• Statutory Duty of Care (s 1 TA 2000)
• Standard Investment Criteria
• Suitability
• Diversification
• Proper Advice
• Delegation
• Asset Management Functions
• Policy Statement
• Bare Trust