Trustees have numerous obligations and liabilities heaped upon them and many will be wondering what they should be doing during this Covid-19 crisis whilst it is not business as usual. Whilst countries transition out of lockdown, the economic consequences of the pandemic are only just unravelling. Therefore, it is crucial for trustees to review their approach to investing, as well as their wider responsibilities, during this time of uncertainty. Catharine Bell and Roberta Harvey write
To avoid breaching the duty of care they owe to beneficiaries, trustees must act wholly within the confines of relevant trust deeds and in accordance with wider trust law. Virtually all trustees must follow statutory rules on trustees’ exercise of investment powers. Trustees holding investments cannot, in an unprecedented economic climate, simply sit back and leave decision-making to delegated fund managers.
Go deeper with GlobalData
Many (if not most) beneficiaries will see at least some reduction in their income (from trusts and other personal sources) or of capital available for distribution as a result of the enormous economic impact of the Covid-19 crisis. Beneficiaries will likely consider how they can recover losses in the aftermath of this episode and trustees should anticipate beneficiaries looking to them to make up any shortfall if they are able to argue that trustees have not been exercising their investment powers appropriately and reasonably during this episode.
While trustees may be able to rely on exoneration provisions in the governing trust documents (as was the case last year in Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others, a Hong Kong case that considered the risky investment policy of a Jersey trust around the 2008 global financial crisis), clearly the costs of litigation and reputation damage are detrimental and to be avoided. Trustees who are not found to have committed what amounts to an actual breach of trust, with corresponding loss to the beneficiaries, can nonetheless find themselves being criticised at Court for their approach. In Daniel and another v Tee and others (2016) the English High Court let the trustees off the hook in spite of their poor approach to risk when investing around the time of the dotcom bubble. However, the Court noted that only a slight variation in the facts could have changed that outcome.
At the moment especially, trustees need to be reviewing trust investments, and in particular risk profile, in the context of beneficiaries’ income needs and capital expectations. There should be engagement with fund managers and beneficiaries alike. It may be that beneficiaries’ expectations for income in the coming year will need to be managed. Equally, planned capital distributions may be unwise if they require realising losses and could be deferred with beneficiaries’ acquiescence.
It is worth reviewing trust documents to consider whether there is scope to vary the trusts if appropriate. All of these elements will need to be considered in the context of the general and specific trust provisions governing the trustees’ powers and duties and the particular beneficiaries’ circumstances. Ensuring that all reviews and decisions taken by trustees, including their reasoning, are properly documented may prove key to avoiding future claims from disaffected beneficiaries.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataSpecific considerations for trustees when reviewing their investment portfolio and overall trust investment strategy in response to Covid-19 are:
Investment considerations
Investment strategy – review the existing investment strategy of the trust, and whether it is still appropriate and achievable.
Income entitlement – review the trust terms and consider if they provide for a level of entitlement to income that may be difficult to achieve in the current market.
Beneficiaries’ requirements – consider the needs of different beneficiaries and how competing needs (income versus capital) may be met in a period of low capital values and rapidly fluctuating investment markets.
Powers of investment – note any restrictions on the trustees’ powers of investment under the trust deed (for example, whether the settlor or protector has power to direct investment by veto or otherwise) that may affect the trustees’ ability to change the investment strategy.
Scope of investments – check if there are any restrictions on the scope of the trustees’ powers to invest – a requirement to invest in a family company, for example, or a duty to invest in, or avoid investing in, specific classes of investment. Any such restrictions may hamper the trustees’ ability to alter their strategy to react to changing market conditions.
Discretionary mandate – where relevant, review the trustees’ existing investment mandate with the discretionary investment managers and consider if it requires amendment to adapt to Covid-19 related conditions.
Trust deed – consider whether a variation of the trust deed may be appropriate to respond to the current situation, for example to lift restrictions on the trustees’ powers to invest or to vary income vs capital entitlement of beneficiaries.
Meeting – where the Covid-19 crisis is expected to require significant changes to the trustees’ investment strategy and/or impact the ability of the trust fund to meet the expectations and entitlements of beneficiaries, consider a meeting with the settlor and adult beneficiaries to set out the issues and the trustees’ proposed strategy. In this way, expectations may be managed and family consensus maintained.
Jurisdiction-specific issues
Review trust assets in different jurisdictions – jurisdiction-specific responses to Covid-19 may impact on trust assets for example, countries with lockdown and/or social distancing measures may affect rental incomes and the ability of underlying businesses to trade.
Review the impact of travel restrictions:
- if Covid-19 travel restrictions affect the tax residence of individual trustees or directors of trust companies or PTCs, this may also affect the residence of the trust;
- similarly, the tax status of underlying companies may be affected by travel restrictions on directors and, as a result, the location of board meetings and where decisions are made; and
- may also affect the tax residence status of the settlor and/or beneficiaries.
- Regulatory issues – review international and jurisdiction-specific guidance regarding concessions in relation to economic substance legislation, DAC6, reporting requirements under CRS and FATCA.
Tax – review Covid-19 related guidance and concessions regarding tax reporting and payment obligations in relevant jurisdictions.
Re-structuring – consider whether re-structuring may be appropriate for tax or other jurisdiction-specific reasons while asset values are low (for example, de-enveloping).
Trustee risk considerations
Exoneration clauses – a significant drop in income and/or capital values may lead beneficiaries to blame the trustees’ management and investment strategy. Trustees should review the protection available to them under the terms of the trust.
Anti-Bartlett clauses – trustees should review their obligations to enquire and supervise in respect of investments by the trust in underlying companies, ensuring they are able to obtain adequate information to comply with those obligations.
Records – it is vital to keep detailed records of all trustee deliberations and decisions regarding investment policy, trust management and strategy, as well as discussions with the settlor and/or beneficiaries relating to such matters and their specific interests.
It is clear that there are many factors for trustees to consider as a result of the current crisis. The primary message to trustees is that they must not wait for this episode to pass; engagement now is essential.
Catharine Bell is a private client partner and Roberta Harvey is partner & head of contentious trusts and estates at Forsters.
