Investment and asset management for trusts and estates
What the exam tests
Investment and asset management tests the trustee's investment power, the standard investment criteria, and the balance between income and capital. The exam often asks whether a proposed investment is permitted and whether the trustee has taken advice.
Powers and duties
Under s.3 Trustee Act 2000, a trustee has the same general power to invest as an absolute owner, subject to the trust deed and any statutory restrictions. Section 4 requires the standard investment criteria: suitability to the trust and diversification, reviewed periodically. Section 5 requires proper advice unless it is unnecessary or inappropriate. The s.1 duty of care applies. Trustees must act in the best financial interests of the beneficiaries; in Cowan v Scargill, the court held that ethical considerations cannot justify sacrificing financial return. A trust with a life tenant and remainderman needs a balance between income and capital growth, and liquidity for distributions.
Worked example
A trust has £1m, a life tenant aged 75 and a remainderman aged 40. The trustees propose putting 90% into a single speculative technology fund because it has high expected growth. That is unlikely to satisfy s.4: it is not diversified and may not be suitable for the income needs of the life tenant. A more defensible policy is a diversified portfolio with a documented income target, a cash reserve and periodic review. The trustees should record the advice and the reasons for their decision.
Traps
Equating "safe" with "no equity exposure"; ignoring inflation; failing to review the portfolio; and treating ethical investment as prohibited in all cases. Do not let the trust deed's wider powers override the duty to act prudently.