Jersey: Trustee´s Investment Powers And Duties

INTRODUCTION

It is very important that a trustee is aware of his or her powers and duties before investing the trust fund. The powers and duties of a trustee are set out in the Trusts (Jersey) Law 1984, as amended, (the "Law") and the terms of the particular trust. The trustee has an obligation to, so far as is reasonable, preserve and enhance the value of the trust property such that some form of investment is essential. In addition, the beneficiaries may have a requirement to income which can only be satisfied by investing the trust fund.

TRUSTEE'S INVESTMENT POWERS

It is often the case that the terms of the trust instrument will give the trustee very wide investment powers. However, if the trust instrument does not contain provisions dealing with the investment of the trust fund, the trustee is given such powers by the scope of Article 24(1) of the Law.

Article 24(1) states:

"Subject to the terms of the trust and subject to the trustee's duties under this Law, a trustee shall in relation to the trust property have all the same powers as a natural person acting as the beneficial owner of such property."

The wide investment powers set out in Article 24(1) are subject to the terms of the trust and therefore express provisions in the trust instrument can operate so as to reduce the scope of a trustee's investment powers.

DUTIES WHICH APPLY TO A TRUSTEE WHEN EXERCISING INVESTMENT POWERS

The wide powers of investment in Article 24(1) are subject to the trustee's duties under the Law. Even if the trustee is using investment powers set out in the trust instrument rather than the statutory powers, Article 21(2) of the Law which states that, "subject to this Law, a trustee shall carry out and administer the trust in accordance with its terms" (emphasis added), makes it clear that notwithstanding any investment powers given to the trustee in the trust instrument the trustee must still comply with the duties imposed by the Law.

The trustee's core duties

Article 21(1) of the Law states:

"A trustee shall in the execution of his or her duties and in the exercise of his or her powers and discretions –

1. act –

In the context of trustee investments, the duty to act "as would a prudent person" was referred to in the English case of Re Whiteley; Whiteley v Learoyd [1886-90] All ER Rep Ext 1806:

"The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary business man would take if he was minded to make an investment for the benefit of other people for whom he felt morally bound to provide."

A trustee must act "to the best of the trustee's ability and skill" and a higher standard will be required of a person holding himself or herself out as a professional trustee. In Midland Bank Trust Company (Jersey) Limited v Federated Pension Service [1995 JLR 352] it was said that:

"the scope of duties imposed on trustees and the performance of those duties to be expected of trustees must vary according to the category of trustee concerned...This arises under art. 17(1) of the 1984 Law [now Article 21(1)]. It was most clearly stated by Brightman, J. in a much-quoted passage in Bartlett v. Barclays Bank Trust Co. Ltd."

In the case of Bartlett [1980] 1 All ER 139, Brightman J said:

"I am of opinion [sic] that a higher duty of care is plainly due from someone like a trust corporation which carries on a specialised business of trust management...a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to exercise the special care and skill which it professes to have."

The duty to preserve and enhance the trust fund

Article 21(3) of the Law states that:

"Subject to the terms of the trust, a trustee shall –

1. so far as is reasonable preserve the value of the trust property;

2. so far as is reasonable enhance the value of the trust property."

Note that this duty can be overridden by the provisions of the trust instrument. However, that will not relieve the trustee of his obligations to act "with due diligence" or "as would a prudent person" and to monitor the value of the trust fund and the investments in which it is invested.

The duty to act in the best interests of the beneficiaries

Article 24(2) of the Law states inter alia that "a trustee shall exercise the trustee's powers only in the interests of the beneficiaries".

The duty to act in accordance with the terms of the trust

The duty of a trustee to follow the terms of the trust when investing the trust fund is set out in a number of places in the Law. Article 21(2) states that "subject to this Law, a trustee shall carry out and administer the trust in accordance with its terms". Article 24(2) qualifies the wide powers of trustees in Article 24(1) by requiring a trustee to exercise them inter alia "in accordance with the terms of the trust". It is essential that a trustee is aware of any provision of the trust instrument which restricts the manner in which he or she may invest the trust fund.

The duty to act impartially

Article 23 of the Law provides that "subject to the terms of the trust, where there is more than one beneficiary a trustee shall be impartial and shall not execute the trust for the advantage of one at the expense of the other". Again the provisions of the trust instrument may override this obligation, as is the case in many discretionary trusts. If they do not, a trustee must not invest the fund in a way which benefits any one beneficiary or class of beneficiaries such as making investments which produce income for the present beneficiaries while ignoring the requirements for capital growth to benefit beneficiaries in the future.

The duty to diversify

Although there is no specific obligation in the Law which requires a trustee to diversify the investments of a trust fund (unlike English law), it is clear that a trustee is (unless the terms of the trust say otherwise) under an obligation to preserve and enhance the trust fund and diversification is one of the ways in which a trustee will achieve this. Therefore in practice a trustee is probably required to diversify investments. No prudent trustee should invest the trust fund in one investment without ensuring that he has been relieved of the responsibility to diversify by the terms of the trust.

The duty to take advice

In Cowan v Scargill [1984] 2 All ER 750, the court said, referring to the duty of trustees set out in Re Whiteley:

"That duty includes the duty to seek advice on matters which the trustee does not understand, such as the making of investments, and on receiving that advice to act with the same degree of prudence."

This may be seen as an aspect of a trustee's duty to act with due diligence and prudence.

TYPES OF INVESTMENT

If, in relation to trust property, a trustee has all the same powers as a natural person acting as beneficial owner of the property, it follows then that the trustee will, in theory at least, have the power to make any type of investment.

Perhaps the most obvious form of investment is in securities such as equities (ie shares) and bonds. Other types of securities include derivatives like futures, options and warrants. The trustee might make the investment directly or through some form of fund administered by an investment manager. Even cash in an interest bearing account is a form of investment.

Another type of investment is immoveable property¹ (ie land and buildings). For example, the trust fund might comprise of commercial property which the trustee rents out to tenants.

A trustee may also invest in moveable property. This includes what is known as intangible moveables, for example securities, interest bearing loans etc., and tangible moveables (ie chattels), for example works of art, jewellery or perhaps even cars, yachts or private jets.

The trust fund of a Jersey proper law trust cannot include immoveable property in Jersey directly. However, land in Jersey can form part of the trust fund indirectly (ie the trust fund comprises of shares in a company which itself owns land in Jersey)

DELEGATION TO AN INVESTMENT MANAGER

Because of the complexity of the investment market and the specialist knowledge required to operate in it, a trustee will usually appoint an investment specialist to advise him on investment matters or to manage the investment of the trust fund which is invested in the stock markets.

The power to delegate the trustee's powers of investment to an investment manager may be set out in the trust instrument. If it is not, Article 25 of the Law confers on the trustee the power to delegate, which includes delegation to an investment manager. The trustee can only delegate by appointing an investment manager if the trustee is satisfied that the investment manager is "competent and qualified". Article 25 states: "

1. Subject to the terms of the trust, a trustee may delegate the execution or exercise of any of his or her trusts or powers (both administrative and dispositive) and any delegate may further so delegate any such trusts or powers.

2. Except where the terms of the trust specifically provide to the contrary, a trustee –

Article 25(3) states that "a trustee shall not be liable for any loss to the trust arising from a delegation or appointment under this Article who, in good faith and without neglect, makes such delegation or appointment or permits the continuation thereof".

It is clear from the final words of Article 25(3) that a trustee's obligations do not end with the appointment of an investment manager; instead the trustee must continue to monitor the performance of the investment manager. It is therefore very important that the trustee receives regular reports on the performance of trust investments and if the investment manager does not perform adequately the trustee must be prepared to dismiss him.

CONCLUSION

If a trustee intends to invest the trust fund he must first check whether he has the power to invest the trust fund in accordance with his intentions. The trustee must then consider what effect his duties may have on the exercise of his investment powers.

For example, the duty to act in the best interests of the beneficiaries requires a trustee to understand their circumstances of the beneficiaries and invest the trust fund in a way that is appropriate to their needs. If the beneficiaries are in need of regular distributions the trustee should consider investments which provide income (eg bonds) but he should also have regard to the future requirements of persons who may not yet be beneficiaries of the trust but perhaps will be in the future.

The duty to act impartially may require the trustee to invest different parts of the trust fund in different ways, for example, if there is a life tenant and remaindermen, the trustee might invest so as to balance income and capital appreciation (eg by investing in different asset classes such as bonds and equities). Such an approach would also diversify the investments of the trust fund. Therefore, if a particular investment or asset class performs badly the whole of the trust fund will not be exposed and very often when one asset class performs poorly (eg equities) another performs well (eg bonds). This goes some way towards enabling the trustee to preserve and enhance the trust fund.

The trustee should consider appointing investment managers to manage the investments of the trust fund which are invested in the stock market, as few trustees will have the expertise and resources required to manage a portfolio of stock market investments. Other forms of investment will require delegation to agents such as a property manager where the trust property is land and buildings which are rented out.

This memorandum is intended to outline the law on trustee investments. It is not intended to be comprehensive in its scope, and we recommend that clients seek legal advice on any particular matters.

Further memoranda, on particular aspects of Jersey law, have been prepared by Walkers and are available on request or on our website at www.walkersglobal.com.

This Briefing has been prepared on the basis of the law and practice as at May 2006.

Footnote

^{1 The trust fund of a Jersey proper law trust cannot include immoveable property in Jersey directly. However, land in Jersey can form part of the trust fund indirectly (ie the trust fund comprises of shares in a company which itself owns land in Jersey).}

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.