Summary of recommendations
Chapter 7 – Investment
Powers and duties
R14(1) The new Trusts Act should provide that:
(a) a trustee should have the power to invest any trust funds in any property;
(b) the power of a trustee to invest in any property set out in (a) above should apply only to the extent that it is not overridden or excluded by the terms of the trust or the terms of the trust do not otherwise limit or modify it; and
(c) when exercising the power to invest in property a trustee should comply with any relevant requirements contained in the terms of the trust, including any requirement relating to obtaining consent or compliance with any direction with respect to the investment of the trust fund.
(2) The new Act should provide that:
(a) when investing a trustee should have a duty to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others;
(b) where a trustee has any special knowledge or experience or holds him or herself out as having special knowledge or experience, the trustee should have a duty to exercise the level of care, diligence, and skill that it is reasonable to expect of a person with that special knowledge or experience; and
(c) the duties in (a) and (b) apply to a trustee to the extent that they are not excluded or modified, explicitly or implicitly, by the terms of the trust.
(3) The new Act should make it clear that the power to invest in property and the duty to do so prudently do not of themselves preclude trustees from taking account of other relevant matters when determining how to manage trust funds, or from purchasing or retaining property for purposes other than investment, where this is appropriate to give effect to the objectives or purpose of a trust.
(4) The powers and duties set out in R14(1) and (2) above should replace sections 13A−13D and sections 13F−13H of the Trustee Act 1956.
(5) Section 13E of the Trustee Act 1956 (which lists the matters trustees may have regard to when investing) should be re-enacted in the new Act. It should be redrafted to provide that trustees may take into account their overall investment strategy when exercising their powers of investment (as well as the other matters currently listed).
(6) Section 13M of the Trustee Act 1956 (which lists a number of matters the courts may take into account when considering whether a trustee should be liable for breach of trust in respect of an investment) should be re-enacted in the new Act.
(7) Section 13Q of the Trustee Act 1956 (which provides that in an action for breach of trust the court may set off a loss arising from an investment against a gain from any other investment) should be re-enacted in the new Act. For the avoidance of doubt, the new Act should clarify that the rule of general trust law that requires the assessment of the decisions of a trustee on an investment by investment basis if the decisions are called into question (the anti-netting rule) is abolished.
(8) Sections 13I, 13J, 13K, 13L, 13N, 13O and 13P of the Trustee Act 1956 should not be re-enacted because these provisions are now unnecessary.
Distinction between income and capitalTop
R15 The new Trusts Act should provide that:
(1) To facilitate total return investment and allow trustees to invest trust funds without regard to whether the return on investment is technically of an income or capital nature, trustees should have discretion to determine whether a return is to be treated as income or capital for the purposes of distribution.
(2) Trustees should be required to exercise their discretion on how a return is to be treated in a manner that is consistent with their duties as trustees and fairly and reasonably takes into account the interests of all beneficiaries.
(3) Trustees should ensure that a reasonable level of income is made available for income beneficiaries in situations where there are defined classes of beneficiaries. Note
The discretion of trustees to decide what is to be treated as income or capital is for the purposes of trust law and does not in any way alter or override the definitions and application of the revenue statutes, for the purposes of taxation.
Apportionment of receipts and outgoingsTop
R16 The new Trusts Act should provide that:
(1) A trustee may:
(a) apportion any receipt or outgoing in respect of any period of time between the income and capital accounts, or charge any outgoing or credit any receipt exclusively to or from either income or capital as the trustee considers to be fair and reasonable in all the circumstances and in accordance with accepted business practice;
(b) transfer funds between capital and income accounts to recover or reimburse an outgoing previously charged to the account that is to receive the funds where such corrections are fair and reasonable in all the circumstances and are undertaken in accordance with accepted business practice;
(c) transfer funds between capital and income accounts to recover or deduct any receipt previously credited to the account from which the funds are to be recovered where such corrections are fair and reasonable in all the circumstances and are undertaken in accordance with accepted business practice; and
(d) deduct from income an amount that is fair and reasonable in all the circumstances to meet the cost of depreciation, and add the amount to capital, in accordance with accepted business practice.
(2) Subject to (5) below, the trustee’s powers under (1) above should replace the traditional rules concerning apportionment between capital and income, and those traditional rules are abolished.
(3) The trustee’s powers under (1) above should apply to all trusts established before the date on which the new Act comes into force despite anything to the contrary in the terms of the trust.
(4) In relation to trusts established on or after the date on which the new Act comes into force, (1) above should be a default provision that applies unless it is modified by the terms of the trust.
(5) The apportionment rules in the Property Law Act 2007 will continue to apply where the trustee is the landlord, tenant, vendor or purchaser of land.
R17 The new Trusts Act should provide that:
(1) Trustees are authorised to appoint investment managers and give them authority to make investment decisions.
(2) The appointment of investment managers should be subject to the following legislative safeguards:
(a) trustees must act honestly and in good faith (R2(1)(c)) and exercise the reasonable care, diligence and skill of a prudent person of business (R14(2)) when appointing an investment manager, and must review the investment manager’s performance periodically;
(b) trustees must create a written policy statement that gives guidance as to how investment functions are to be exercised by an investment manager setting out the general investment objectives, and require investment managers to agree to comply with the policy statement; and
(c) trustees are liable for any default of their investment manager where the trustees have failed to act honestly and in good faith (R2(1)(c)) and exercise the reasonable care, diligence and skill of a prudent person of business (R14(2)) when making the appointment of a manager or monitoring the investment manager’s performance.