In brief - Trustees must ensure that they invest trust money wisely
In exercising or delegating its power of investment, a trustee must remember it owes a duty of care to its beneficiaries and ensure that the investment is both prudent and as safe as possible.
Paul Hogan's lost millions a cautionary tale for trustees and beneficiaries alike
Trustees of Australian trusts have a duty to invest trust money. This duty is particularly important in circumstances where the trust funds are significant and investment will bring a good return for the beneficiaries of the trust.
A particularly good example of an investment by a trustee apparently gone awry was recently to be found beneath sordid headlines in the local newspapers. Crocodile Dundee's Missing Cash No Joke and Hogan has $34m stolen from Swiss Bank Account both headed stories that Paul Hogan was battling to recover more than US$34 million of the royalties he had earned through his involvement in the lucrative Crocodile Dundee films.
According to the newspapers, those moneys had been settled on a trust called the Carthage Trust, but then transferred by the trustee into the control of an investment manager who maintained the trust moneys in a bank account in Switzerland.
While the full story has yet to reveal itself other than in the pages of tabloids, the allegations are that the trustee of the Carthage Trust recently discovered that the investment manager had "suddenly and without warning taken the position" that the moneys were not assets of the trust at all and may have "absconded with or spent all" of the money instead of holding it for the beneficiaries of the trust, including Mr Hogan. The trustee commenced court action in the United States to recover the missing millions.
Investments must conform to the wording of the trust deed or statute
Back here in Australia, the investment of trust funds is tightly controlled. The primary source of powers to invest and otherwise deal with trust funds is, for most trustees, to be found in the trust deed itself. However, in NSW there is also a statutory framework that confers a general power of investment on trustees which operates subject to the wording of the relevant trust deed.
The relevant legislation is section 14 of the Trustee Act 1925 (Act). This section provides that a trustee may, unless expressly forbidden by the trust deed, invest trust funds in any form of investment.
Section 14A of the Act provides that, in exercising the power of investment, a professional trustee must exercise the care, diligence and skill that a prudent person engaged in the profession would exercise in managing the affairs of other persons. If the trustee is not a professional trustee, he or she must exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons.
The different standards applicable to professional trustees and lay trustees are premised on the idea that professional trustees are required to have a greater degree of competence and understanding of trust investments than lay trustees.
Trustees should consider needs of beneficiaries, risks and tax implications
The Act also sets out matters to which the trustee should have regard in exercising his or her power of investment. These include, but are not limited to, the purposes of the trust and the needs and circumstances of the beneficiaries; the nature of, and the risk associated with, existing trust investments and other trust property; the length of the term of the proposed investment; and the effect of the proposed investment in relation to the tax liability of the trust.
Trustees should consider obtaining independent and impartial advice
Investing trust funds with regard to these factors, particularly if the trust fund is large or the trust structure is complicated, can be fraught with difficulty. With this in mind, a trustee would be well advised to obtain and consider independent and impartial advice for the investment of trust funds or the management of the investment from a person whom the trustee reasonably believes to be competent to give the advice. The trustee's reasonable costs of doing so will ordinarily be payable out of trust funds.
A breach of trust action in relation to any investment gone wrong will usually turn on the court determining whether the trustee had proper regard to these factors in investing trust moneys and/or sought independent and competent advice.
Trustees can avoid problems by adhering to investment strategies and communicating carefully with investment managers
Sadly for Mr Hogan, the trustee's legal action to recover the funds apparently missing from the Carthage Trust fell at the first hurdle: but at this stage only because of issues as to the Court's jurisdiction over the claims being made by the trustee.
In declining to grant relief, US District Court Judge Otis D Wright II described the claim as "a sordid tale of wayward fiduciaries and international fraudsters supposedly absconding with millions of dollars in funds from a Swiss bank account". The case will likely be revived in a different court, possibly in the British Virgin Islands or Switzerland, in the near future. In the meantime, the investment manager has gone public and denied all claims against him.
Whether there is any truth to the allegations that the Crocodile Dundee royalties are gone for good remains to be seen. However, the allegations and the bad press faced by Mr Hogan and his trustees are more than enough to remind trustees that the investment of trust funds is not to be taken lightly.
Trustees should be prudent, seek expert advice and keep careful records
Trustees should at all times:
- Determine what investments are in line with the investments allowed by the trust deed or the Act and will also secure the economic growth of trust investments.
- Maintain a prudent investment strategy and monitor compliance with it by investment professionals
- Seek and take expert or independent advice when the situation calls for it
- Keep a full record of reasons for investment decisions and notes of meetings with experts
- Seek advice from the court, at any early stage, where complications involving investments arise
As the Crocodile Dundee case shows, a secret Swiss bank account and an international investment manager of mystery will not always be the key ingredients to investment success. But prudence and professionalism just might be.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.