In the context of a global pandemic affecting lives and livelihoods the world over, the focus of most of us has been on those legal matters which are front and centre in our lives. What has perhaps gone under the radar is the impact COVID-19 may have on our trusts and charities, many of which hold investments that are likely to be significantly affected by the ensuing economic fallout. What follows, therefore, is an outline of some of the steps that people connected with these entities should be considering taking during this time.
Duty of prudent investment
One of a trustee’s most important duties is the prudent investment of trust assets. Under the Trustee Act 1956, trustees are authorised to invest in all manner of assets. In doing so, they are required to exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others. This means that the trustees are not justified in engaging in speculative investments, which expose the beneficiaries and the trust fund to unacceptable levels of risk.
In the context of COVID-19, trustees must therefore take care to ensure that the assets they are investing in are likely to provide a concrete return. If they don’t and the trust suffers loss (or it doesn’t do as well as if the money had simply been put in the bank) then they may be liable to compensate the trust.
Even more important is a trustee’s obligation to review investments. There are many examples arising out of the global financial crisis of trustees who, with their heads lodged firmly in the sand, remained oblivious to the effect the crisis was having on trust investments. Trustees should therefore be actively reviewing their investment portfolios to determine whether there is a need to vary investments, either because of a reduced appetite for risk or because of the changed nature of many industries.
Impact of directions by settlors or beneficiaries
In many cases, a trust or charity will have been set up with a specific purpose in mind – a common purpose being the holding of shares in a family-owned company.
The trustees’ obligations in these circumstances will, to a large degree, depend on where and how the direction regarding how to deal with the trust assets is encapsulated.
If provided for in the instrument itself, the trustees may well be justified in continuing to hold an underperforming family business. More complicated, however, is the situation where the directions are expressed in a non-binding memorandum of wishes, or where the beneficiaries wish to have a say in how the trust assets should be dealt with.
Any decision must be that of the trustees, but how much regard should be paid to any directions is a question without a clear answer. If faced with a potential conflict, it is advisable for trustees to seek legal advice, which may culminate in an application to the court for directions.
The fact that the trustees are the legal owner of the trust property does not preclude them seeking independent advice on the exercise of their powers of investment. Indeed, faced with a global pandemic, it would behove all trustees to consider whether independent advice is required in order to properly review the investment strategy being pursued. Many trustees (especially those of family trusts) are simply unqualified to analyse the impact COVID-19 may have on their investments.
The caveat to this is that the ultimate decision must remain that of the trustees; they must actively consider the advice received before coming to their own decision as to the exercise of any power of investment.
An inability to delegate decision-making is, however, distinct from consultation with the beneficiaries of the trust, which should be encouraged. In deciding how to exercise a power of investment under the trust deed, trustees will invariably need to consider the wishes of the beneficiaries and their needs.
If the primary beneficiaries of the trust are all in their later years, it does not make sense for the trustees to be investing trust assets in, say, property development, which is unlikely to provide a return within the beneficiaries’ lifetimes.
In other cases, beneficiaries may desire investments that produce a quick and guaranteed return, as their other sources of income may have been affected. However, the greater long-term investment returns foregone must be borne in mind, and trustees may also need to consider whether there are any future beneficiaries who would be unduly affected by a focus on short-term investments.
Claims against trustees
The other side of all this is that beneficiaries should be taking an active interest in the performance of trust investments. If significant losses have been suffered, then serious questions should be asked about whether the trustees have properly discharged their duty of prudent investment, including their obligation to review investments. The COVID-19 pandemic is obviously a significant event, but it is not a panacea and trustees must still be able to show that they exercised the necessary degree of care, diligence and skill.
The above are just some of the potential issues facing trusts and charities at this time. If you are involved with a charity or a trust and are concerned to know more about how these issues may affect you, please get in touch with your lawyer who will be happy to provide you with advice on your specific issue.