The standard of care required of trustees in making investments is something that must be fully understood and adhered to by all trustees. Trustees may be subject to substantial claims from beneficiaries for loss or damage suffered as a result of acts or omissions on their part. If you accept appointment as a trustee, the appointment and your duty of care should be treated seriously.
Trustee Duty Of Care - Investments
The Trustee Act 1956 of New Zealand (“the Act”) sets the standard of care required of trustees in making investments, subject to the terms of the trust deed.
Under section 13b, a trustee exercising any power of investment must exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others.
Professional trustees are subject to a higher standard of care and have a duty to invest prudently with special skill. If you are a professional trustee or invest money on behalf of others, you must exercise the care, diligence and skill that a prudent person engaged in that profession would exercise in managing the affairs of other (s.13c)
The above duty of care may be limited or excluded by provisions in the trust deed.
The Act also recommends factors that a trustee should consider when exercising any power of investment:
- the desirability of diversifying trust investments;
- the nature of existing trust investments and other trust property;
- the need to maintain the real value of the capital or income of the trust;
- the risk of capital loss or depreciation;
- the potential for capital appreciation;
- the likely income return;
- the length of the term of the proposed investment;
- the probable duration of the trust;
- the marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
- the aggregate value of the trust estate;
- the effect of the proposed investment in relation to the tax liability of the trust;
- the likelihood of inflation affecting the value of the proposed investment or other trust property.
The duty of management carries the obligation to familiarise oneself with the trust deed, trust property and beneficiaries. A trust deed will often grant trustees the power to appoint an investment adviser or manager. It is important that trustees are satisfied that the trust deed permits this delegation.
When appointing an investment adviser, trustees are required to adhere to a duty of care in the selection and appointment of the adviser. Prudent trustees should gather as much information that enables them to make an informed decision regarding the appointment of an adviser. The selection of advisers should be appropriate to the circumstances of a particular trust and its specific investment objectives.
A trustee may also seek guidance from the Protector of the trust, if any. The appointment of an investment adviser may require written consent of the Protector according to the terms of the trust deed.
Ongoing Supervision & Review
Trustees should monitor and review investments to ensure that the intended investment strategy is being implemented. Depending on the nature and size of the investment portfolio, this should involve regular reviews of investment reports and adviser performance. The investment objectives of the trust may change over time and the investment strategy should be altered to ensure that it is up-to-date
The investment strategy, subsequent amendments and any other investment decisions taken by the trustee should be properly recorded in trustee resolutions or minutes.