Trustees: appointment, duties, powers, and liabilities - Duty to invest and powers relating to investment

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Overview

Trustee management of trust assets is essential in trust law, especially for the SQE1 FLK2 exam. This article examines trustees' appointment, duties, powers, and liabilities, focusing on their investment responsibilities. Understanding these concepts is vital for aspiring legal professionals, as they are fundamental to effective trust management and fiduciary responsibility in English law.

Appointment and Fiduciary Duties of Trustees

Appointment Process

Trustees can be appointed through various methods:

  1. Express appointment: Specified in the trust document
  2. Statutory appointment: Granted under the Trustee Act 1925, s.36
  3. Court appointment: Determined by the Trustee Act 1925, s.41

The appointment method influences a trustee's powers and responsibilities, a topic frequently assessed in the SQE1 FLK2 exam.

Fiduciary Duties

Fiduciary duty, originating from equity and shaped by case law, forms the basis of trusteeship. Key principles include:

  1. Duty of loyalty: Trustees must act solely in beneficiaries' interests, preventing conflicts of interest.
  2. Duty of care: Enshrined in the Trustee Act 2000, s.1, mandating reasonable skill and care.
  3. Duty to account: Trustees must maintain accurate records and furnish regular accounts to beneficiaries.

Investment Duties and Powers

The Trustee Act 2000 revolutionized trustees' investment powers, granting them flexibility similar to absolute owners, but within stringent guidelines and a duty to prioritize beneficiaries' best interests.

Standard Investment Criteria

Section 4 of the Trustee Act 2000 mandates that trustees consider:

  1. Suitability: The appropriateness of investments for the trust's objectives and beneficiaries' requirements.
  2. Diversification: The importance of spreading risk by investing in various assets.

Duty to Review

The Trustee Act 2000, s.4(2), compels trustees to regularly review investments by:

  1. Evaluating whether investments remain appropriate
  2. Confirming the portfolio maintains sufficient diversification
  3. Implementing necessary adjustments to align with the trust's aims

Special Statutory Powers

The Trustee Act 2000 confers specific powers to ensure effective trust management:

  1. Power to acquire land (s.8)
  2. Power to appoint nominees and custodians (s.16)
  3. Power to insure trust property (s.19)

Standards of Care and Professional Trustees

The Statutory Duty of Care

Section 1 of the Trustee Act 2000 outlines the duty of care, requiring trustees to exercise "such care and skill as is reasonable in the circumstances," taking into account:

  1. Specialized knowledge or experience the trustee possesses or professes
  2. Whether they operate in a professional capacity

Professional Trustees

Professional trustees, such as trust corporations or solicitors, are held to a more stringent standard. As determined in Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515, they must:

  1. Exhibit a higher level of skill and care
  2. Effectively utilize their professional knowledge
  3. Proactively manage investments, seeking expert guidance when necessary

Delegation and Liability

Power to Delegate

Sections 11-15 of the Trustee Act 2000 authorize trustees to delegate investment decisions to agents, contingent upon:

  1. Formal written delegation
  2. A policy statement outlining the agent's role
  3. Yearly evaluation of the delegation arrangement

Limiting Liability

To mitigate liability when delegating, trustees should:

  1. Carefully select agents
  2. Clearly define delegation terms
  3. Regularly supervise agent performance
  4. Intervene if the agent deviates from the trust's best interests

Practical Examples and Case Studies

Example 1: Conflict of Interest

In Boardman v Phipps [1967] 2 AC 46, trustees, despite acting in good faith, breached their fiduciary duty by personally profiting without beneficiaries' consent.

Example 2: Failure to Review Investments

Consider a trust established to fund minors' education. Trustees heavily invest in tech stocks, initially yielding positive results. However, they fail to adjust the portfolio as beneficiaries approach university age, leading to substantial losses during a market downturn.

Example 3: Professional Trustee Liability

A solicitor, acting as a trustee, invests in a high-risk cryptocurrency without obtaining expert advice or ensuring proper diversification. This results in losses. The solicitor, bound by a higher standard, faces potential liability for breach of duty.

Example 4: Improper Delegation

Trustees of a family trust delegate all investment decisions without establishing guidelines or implementing performance reviews. The appointed advisor makes speculative investments, leading to losses. Consequently, the trustees bear liability for their failure to exercise proper oversight.

Conclusion

For success in the SQE1 FLK2 exam, understanding trustees' investment responsibilities, powers, and liabilities is essential. Key takeaways include:

  1. The fiduciary nature of trusteeship and the critical importance of beneficiaries' interests
  2. The investment criteria of suitability and diversification
  3. The ongoing obligation to review investments
  4. The higher standards expected of professional trustees
  5. The need for balance in delegation, including diligent oversight
  6. The potential for personal liability in instances of breach or negligence

A comprehensive understanding of these concepts equips aspiring legal professionals to effectively manage the complexities of trust law and fiduciary duty throughout their careers.