Trustees: appointment, duties, powers, and liabilities - Typ...

Learning Outcomes

This article explains the general power of investment conferred on trustees by the Trustee Act 2000 and how that power interacts with express provisions in the trust instrument. It details the standard investment criteria of suitability and diversification, the statutory duty of care, and the linked duty to obtain and consider proper advice when making or reviewing investments. It covers the requirement for periodic review of trust portfolios, the rules on delegation of asset management functions to investment managers, and the safeguards trustees must implement when appointing and supervising agents. It examines the specific power to acquire UK land under s.8 TA 2000, the limits on investing in overseas property, and the practical implications of treating land as part of a diversified portfolio. It also analyses the consequences of trustees investing outside their powers or failing to follow the required process, including potential personal liability, available defences, and the relevance of exemption clauses and s.61 TA 1925. Overall, it provides a structured framework for applying these principles to SQE1-style problem questions involving trustee investment decisions, breach of trust, and remedial issues.

SQE1 Syllabus

For SQE1, you are required to understand the duties and powers of trustees, particularly regarding investment, and the application of the Trustee Act 2000, including analysing scenarios involving investment decisions to assess compliance with statutory duties and identify potential breaches, with a focus on the following syllabus points:

• The scope of the general power of investment under the Trustee Act 2000.
• The standard investment criteria (suitability and diversification) and their application.
• The trustee's duty to obtain and consider proper advice.
• The ongoing duty to review trust investments.
• The rules and limitations concerning the delegation of investment functions.
• The statutory duty of care and how it calibrates the standard expected of lay and professional trustees.
• The limits on acquiring land under s.8 TA 2000 and the practical differences between investments in land and other asset classes.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which Act provides trustees with a general power of investment?
   1. Trustee Act 1925
   2. Trusts of Land and Appointment of Trustees Act 1996
   3. Trustee Act 2000
   4. Charities Act 2011
2. What are the two components of the standard investment criteria under the Trustee Act 2000?
   1. Profitability and risk
   2. Suitability and diversification
   3. Liquidity and security
   4. Ethical considerations and beneficiary requests

3. True or False: Trustees must always obtain professional financial advice before making any investment decision.

4. Can trustees delegate their investment decision-making powers to a beneficiary?
   1. Yes, if the beneficiary is suitably qualified.
   2. Yes, if all beneficiaries consent.
   3. No, delegation can only be to suitably qualified agents or co-trustees.
   4. No, investment decisions cannot be delegated under any circumstances.

Introduction

One of the most fundamental duties of a trustee is to manage the trust property for the benefit of the beneficiaries. In most trusts, this involves not just safeguarding the assets but also investing them prudently to generate income and/or capital growth, depending on the trust's objectives and the beneficiaries' needs. Historically, trustees' investment powers were often restricted, but the Trustee Act 2000 introduced a significant shift, granting trustees wider powers while simultaneously imposing stricter duties regarding how those powers are exercised. This article focuses specifically on the investment duties and powers under the Trustee Act 2000.

The General Power of Investment

The Trustee Act 2000 ('TA 2000') provides trustees with a broad power of investment, fundamentally changing the previously restrictive framework.

Key Term: General power of investment
The power granted by s.3 TA 2000, allowing trustees to make any kind of investment that they could make if they were absolutely entitled to the assets of the trust.

Key Term: Investment
Any application of trust capital intended to produce income, capital growth, or both. Common investment types include shares, bonds (including gilts), and property; cash deposits typically provide low-risk income with no capital growth. Unsecured loans and speculative wagers are generally not regarded as appropriate investments for trustees.

This power is subject to the general duties of trustees, particularly the statutory duty of care, and any restrictions or exclusions contained within the trust instrument itself. The power applies to all trusts, regardless of when they were created, unless the trust instrument provides otherwise.

The TA 2000 also grants trustees specific power regarding land. Under s.8 TA 2000, trustees may acquire freehold or leasehold land in the UK either as an investment, for occupation by a beneficiary, or for any other reason. This power is distinct from the general power of investment but is subject to the same duties regarding suitability and diversification. The s.8 power is limited to land in the UK; overseas real estate acquisitions are outside its scope and, unless the trust instrument expands the power, would constitute an unauthorized investment.

Key Term: Statutory duty of care
The duty under s.1 TA 2000 to exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience the trustee has or holds out as having. Professional trustees are held to the standard reasonably expected of their profession.

Worked Example 1.1

The trustees of the Smith Family Trust hold £500,000. The trust instrument is silent on investment powers. The beneficiaries include a life tenant requiring income and remaindermen interested in capital growth. Can the trustees invest in a portfolio comprising UK company shares, overseas government bonds, and a small commercial property in Manchester?

Answer:
Yes. The TA 2000 grants a general power of investment (s.3) and a specific power to acquire UK land (s.8). Subject to fulfilling their duties regarding the standard investment criteria and obtaining advice, the proposed portfolio appears within the scope of their powers. They must balance the need for income (for the life tenant) and capital growth (for the remaindermen). The land element must be in the UK; non-UK land would require express power in the trust instrument.

Statutory Duties Relating to Investment

While the TA 2000 grants wide powers, it balances this with strict duties. The overarching duty is the statutory duty of care under s.1 TA 2000. Trustees must exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience they have or hold themselves out as having. Professional trustees are held to a higher standard reflecting their professional proficiency.

The duty of care calibrates the intensity of process expected when selecting investments, taking advice, documenting decisions, and reviewing performance. It does not impose liability merely because an investment later performs poorly; liability arises where trustees fail to follow the required process or select/retain investments that, viewed objectively and at the time, were inappropriate to the trust when applying the standard investment criteria.

Specifically concerning investment, the TA 2000 imposes duties regarding standard investment criteria and the need for advice.

Standard Investment Criteria (SIC)

Section 4 TA 2000 requires trustees, when exercising any power of investment or reviewing investments, to have regard to the standard investment criteria.

Key Term: Standard investment criteria
The criteria set out in s.4 TA 2000, requiring trustees to consider (a) the suitability to the trust of investments, and (b) the need for diversification of investments, in so far as is appropriate to the circumstances of the trust.

Key Term: Suitability
Relates to the appropriateness of a particular investment, or type of investment, for the specific trust, considering its objectives, duration, size, tax position, and the beneficiaries' needs (e.g., income vs capital growth).

Key Term: Diversification
Relates to spreading investments across different asset classes, sectors, and geographical regions to reduce risk. The extent of diversification required depends on the trust's specific circumstances.

Suitability and diversification are assessed at portfolio level, not in isolation. Modern portfolio theory underpins this approach: trustees should judge risk and return across the whole portfolio, recognising that a prudent spread can tolerate a limited number of higher-risk holdings if balanced by safer assets. Trustees must also consider liquidity needs and the trust’s tax position; for example, a trust with foreseeable near-term distributions may need a greater proportion of liquid assets to meet payments without incurring disproportionate transaction costs.

Trustees must consider the SIC both when making new investments and when reviewing existing ones. Failure to properly consider the SIC can lead to liability for breach of trust if loss results.

Worked Example 1.2

Trustees of a small trust fund (£50,000) established for a single beneficiary who will become entitled to the capital in two years' time decide to invest the entire fund in shares of one newly established tech company, hoping for rapid growth. Does this comply with the SIC?

Answer:
Likely not. While suitability might be argued (potential for growth), investing the entire fund in a single, high-risk stock fails the diversification requirement appropriate for most trusts, especially one with a short timeframe where capital preservation might be important. The lack of diversification significantly increases risk.

Duty to Obtain and Consider Advice

Section 5 TA 2000 imposes a duty on trustees to obtain and consider proper advice about how the power of investment should be exercised, both when making and reviewing investments.

Key Term: Proper advice
Defined in s.5(4) TA 2000 as the advice of a person who is reasonably believed by the trustee to be qualified to give it by their ability in and practical experience of financial and other matters relating to the proposed investment.

This advice should relate to how the investment powers should be exercised having regard to the standard investment criteria. The trustees must consider the advice obtained, but the ultimate decision remains theirs. Proper advice is not a rubber stamp: trustees remain responsible for testing advice against the trust’s circumstances and may depart from advice if they have cogent grounds, well-documented at the time.

This duty does not apply if the trustees reasonably conclude in all the circumstances that it is unnecessary or inappropriate to obtain such advice. This exception is narrow. It might apply, for example, to very small proposed adjustments in a large, diversified portfolio where the costs of advice would be disproportionate, or where a trustee possesses suitable skill and experience and the trust is small enough that external costs would erode value. Professional trustees who charge for their services should rarely rely on the exception: they are expected to know when and how to obtain appropriate advice.

Exam Warning

Lay trustees cannot simply ignore the duty to take advice because they feel they know best or wish to save costs. They must reasonably conclude it is unnecessary. For significant or complex investments, failure to take advice is likely a breach of duty.

Worked Example 1.3

Trustees intend to switch 10% of a £4 million diversified portfolio from short-dated gilts to an equivalent-value money market fund to increase cash management flexibility. The trust has a long horizon; the switch mechanics are straightforward; total advisory fees would be high relative to the simplicity of the move. Do trustees need to obtain external advice?

Answer:
Not necessarily. If the trustees have documented a reasonable conclusion that advice is unnecessary in the circumstances (small allocation change, similar risk profile, clear liquidity rationale, disproportionate cost), and if at least one trustee has suitable financial experience to assess the risks, they may proceed without advice. The decision and reasoning should be minuted to evidence compliance with s.5.

Duty to Review Investments

Section 4(2) TA 2000 explicitly requires trustees to review the trust investments from time to time and consider whether, having regard to the SIC, they should be varied. The frequency and depth of review depend on the nature of the trust and its investments. Market conditions may necessitate more frequent reviews. Trustees should adopt a review schedule proportionate to the trust—commonly annual or semi-annual—with ad hoc reviews triggered by material events such as a market shock, a beneficiary’s changing needs, or significant corporate actions affecting a major holding.

Failure to conduct appropriate reviews is a breach of duty. Documenting reviews and decisions is part of prudent administration and assists trustees in demonstrating compliance with s.4 and s.1.

Worked Example 1.4

Trustees held a concentrated portfolio of cyclical equities. They did not review the portfolio for three years despite two major market downturns. The fund fell materially. Beneficiaries claim breach and seek compensation. Are trustees likely liable?

Answer:
Yes, if the trustees cannot show timely reviews and consideration of suitability/diversification in response to market events. Liability turns on process: an unreviewed, undiversified portfolio amid significant market changes suggests breach of s.4(2) and s.1. If loss is causally linked to failure to review and diversify, compensation is likely.

Delegation of Investment Functions

Trustees generally have a duty to act personally. However, the TA 2000 permits trustees to delegate certain functions, including asset management functions (which include investment decisions), provided they comply with specific safeguards.

Key Term: Delegation
The act by which trustees authorise an agent to exercise certain functions on their behalf.

Under s.11 TA 2000, trustees may authorise an agent to exercise delegable functions. Investment decisions fall under 'asset management functions' (s.15) which can be delegated.

Key requirements for delegating asset management functions include:

• The delegation must be by an agreement in writing.
• The trustees must prepare a written policy statement providing guidance on how the functions should be exercised to ensure they align with the beneficiaries' best interests.
• The agent must agree to comply with the policy statement.
• Trustees must exercise the statutory duty of care when selecting the agent and when agreeing the terms of the agency agreement.
• Trustees have an ongoing duty under s.22 TA 2000 to keep the delegation arrangements under review.

Key Term: Asset management functions
Functions relating to investment, acquisition, management, and disposal of trust property (including creating or disposing of interests in such property), which can be delegated under TA 2000.

Key Term: Policy statement
A written statement trustees must provide to an agent when delegating asset management functions, setting out investment objectives, risk appetite, constraints, and guidance to ensure the agent exercises functions in the beneficiaries’ best interests.

Trustees are generally not liable for the acts or defaults of the agent, provided they have complied with their own duties of care in selecting, appointing, and reviewing the agent (s.23 TA 2000). However, failure to comply with these duties (e.g., appointing an unsuitable agent or failing to provide an adequate policy statement) can lead to trustee liability for losses caused by the agent's actions.

Trustees should not appoint a beneficiary to act as their investment agent: this presents an obvious conflict, and the statutory scheme envisages independent, suitably qualified agents. Co-trustees are not “agents” in this sense; they act jointly. Trustees should also avoid appointing agents with insufficient skill and experience or connections that undermine independence.

Worked Example 1.5

The trustees of the Green Trust wish to delegate investment management to XYZ Investments Ltd. They verbally agree the terms and tell XYZ to "invest prudently". Six months later, XYZ makes a speculative investment that results in a significant loss. Are the trustees liable?

Answer:
Potentially, yes. While delegation is permitted, the trustees failed to comply with the statutory requirements. The agreement was not in writing, and they failed to provide a written policy statement. These failures constitute breaches of the trustees' own duties regarding delegation. If these breaches caused or contributed to the loss (e.g., a proper policy statement might have prevented the speculative investment), the trustees could be personally liable despite the agent making the investment decision.

Worked Example 1.6

Trustees of a UK family trust instruct a wealth manager to acquire a rental villa in Spain for a beneficiary’s occupation, via a simple agency letter. The manager completes the purchase; rental value falls; beneficiaries allege unauthorized investment. Was the purchase within the trustees’ powers?

Answer:
No. Acquisition of land under s.8 TA 2000 is limited to UK land. Overseas real estate is outside s.8 unless expressly authorized by the trust instrument. Delegation does not expand trustees’ powers: the agent can only do what trustees are lawfully empowered to do. The purchase was unauthorized. The trustees risk personal liability for any loss resulting from exceeding their powers and for failing to control the agent’s scope.

Ethical Investments

A trustee's primary duty is usually to maximise the financial return for the beneficiaries, considering the level of risk appropriate for the trust. However, questions arise about whether trustees can or should consider non-financial ethical factors.

The general position (established in cases like Cowan v Scargill) is that trustees must prioritise the best financial interests of the beneficiaries. They cannot allow their own personal, social, or political views to influence investment decisions if it results in significantly lower financial returns.

However, exceptions exist:

• The trust instrument may explicitly authorise or require ethical considerations.
• If choosing between two investments with identical financial prospects, trustees can choose the more ethical option.
• For charitable trusts, investments conflicting with the charity's aims may be avoided (Harries v Church Commissioners). Charity law and Charity Commission guidance now permit “responsible investment” where trustees reasonably conclude it serves the charity’s best interests (including reputation and mission alignment), provided decisions remain properly reasoned and documented.
• If all beneficiaries are sui juris (adult and mentally capable) and consent, they can authorise an ethical investment policy even if it risks lower returns.

Trustees of non-charitable private trusts should be cautious: reputational considerations carry less weight than for charities. The touchstone remains financial benefit to beneficiaries and proper process under TA 2000.

Practical Applications of Authorized Investments

To convert statutory principles into practice, trustees should adopt a process that integrates the TA 2000 duties, the trust’s particular objectives, and prudent portfolio management:

• Identify objectives and constraints: the trust’s purpose, beneficiaries’ income and capital needs, time horizon, liquidity, and tax. Prior life interests and remainder interests typically require a balance between income-producing assets (for life tenants) and capital-growth assets (for remaindermen).
• Determine strategic asset allocation: asset classes and target weights consistent with suitability and diversification, tailored to the trust’s profile.
• Obtain and consider proper advice: choose advisers with suitable qualifications and experience; evaluate advice; make decisions that can be evidenced as reasonable at the time.
• Implement and monitor: record decisions and rationale; review performance and risk periodically; respond to material changes in circumstances or markets.
• Consider delegation where appropriate: appoint reputable investment managers under written agreements and policy statements; keep arrangements under regular review; adjust policy as necessary.

Worked Example 1.7

Trustees of a £800,000 trust propose investing £700,000 across three oil and gas majors, with the remainder in cash. Is this diversified?

Answer:
Likely not sufficiently. Although there are three issuers, concentration in a single sector exposes the portfolio to sector-specific risks. Diversification requires spreading across asset classes and sectors appropriate to the trust. Trustees should rethink sector concentration and consider mixing equities across sectors, fixed income, and possibly UK property (s.8), guided by proper advice.

Consequences of Breach and Defences in the Investment Context

If trustees breach their investment duties—by failing to consider SIC, omitting required advice without reasonable grounds, ignoring review obligations, exceeding powers (e.g., acquiring non-UK land under s.8)—and loss results, beneficiaries may seek compensation for the loss to the trust fund. Liability is assessed by reference to the trustee’s breach and the causal link to the loss. Trustees are judged by the standard of a reasonably prudent person or, for professionals, of a reasonably competent professional in the field.

Loss calculation focuses on restoring the trust fund to the position it would have been in had the breach not occurred. Courts may award interest; compound interest may be appropriate where trustees acted dishonestly or made unauthorised profits. Trustees in breach are jointly and severally liable; beneficiaries may sue one or more trustees for the whole loss, leaving contribution issues between trustees to be resolved separately. A trustee who passively fails to supervise may be liable alongside an actively defaulting co-trustee.

Defences and protections include:

• Exemption clauses: many trust instruments limit trustees’ liability for non-fraudulent breaches. An exemption cannot protect against fraud or dishonesty (the irreducible core of trusteeship requires honest fidelity to beneficiaries’ interests).
• s.61 TA 1925: the court may relieve a trustee wholly or partly from personal liability if they acted honestly and reasonably and ought fairly to be excused.
• Beneficiary consent or acquiescence: a sui juris beneficiary who consented, with full knowledge of material facts, cannot later complain about loss affecting their interest; their consent does not protect trustees against non-consenting beneficiaries.
• Limitation: the general limitation period for breach of trust claims is six years, running from the accrual of a beneficiary’s interest in possession; there is no limitation where the trustee was party to fraud or where the claim seeks recovery of trust property or its proceeds from a trustee.

Trustees should therefore keep robust records of advice sought, decisions made, and reviews undertaken, and ensure clear minute-taking of investment committee deliberations.

Worked Example 1.8

Trustees invested in a single unlisted start-up outside their skill and experience without advice, contrary to the trust instrument’s caution clause. The company failed; the fund lost 40%. The trustees argue the trust’s long-term horizon justified risk. Are they protected?

Answer:
Likely not. A long horizon does not dispense with process or override explicit trust constraints. Failure to obtain proper advice on a high-risk, illiquid, unlisted investment and to consider SIC, combined with non-compliance with the trust instrument, points to breach. Unless an exemption clause applies and there is no dishonesty, trustees may be liable to compensate the loss attributable to the breach. The long horizon argument may mitigate but not eliminate liability where process failures are clear.

Additional Notes on Land as an Investment

Investing in land raises specific issues:

• s.8 TA 2000 permits acquisition of UK land as an investment, for occupation by a beneficiary, or for any other reason. Trustees must still apply the SIC: for example, a single illiquid property may be unsuitable where the trust needs regular income payments and liquidity.
• Trustees should consider rental yield, maintenance obligations, void periods, and the need for diversification (e.g., property should be one component of a wider portfolio).
• Land outside the UK is not within s.8; trustees need express authority in the trust instrument to acquire overseas property.
• Transactions must be at arm’s length; trustees should avoid conflicts, including buying trust property themselves (the self-dealing rule) or selling their own property to the trust.

Key Point Checklist

This article has covered the following key knowledge points:

• The Trustee Act 2000 grants trustees a general power of investment (s.3) and a power to acquire UK land (s.8).
• This power must be exercised in accordance with the statutory duty of care (s.1), with a higher standard for professional trustees.
• Trustees must consider the standard investment criteria (SIC): suitability and diversification (s.4), assessed at portfolio level and documented.
• Trustees have a duty to obtain and consider proper advice before investing or reviewing investments, unless it is reasonably unnecessary (s.5).
• Trustees must review trust investments periodically and respond to material changes (s.4(2)).
• Investment (asset management) functions can be delegated to suitable agents under strict conditions, including a written agreement and policy statement, and ongoing review (ss.11, 15, 22).
• Trustees are generally not liable for agents' defaults if they complied with their duties in delegation and review (s.23); failure to comply can create liability.
• Acquisition of land under s.8 is limited to UK land; overseas land requires express authority in the trust instrument.
• Ethical considerations are generally secondary to maximising financial returns unless the trust instrument permits, beneficiaries consent, or specific exceptions apply (e.g., charities).
• Breach of investment duties can give rise to personal liability for loss; protections include exemption clauses (subject to fraud), s.61 relief, beneficiary consent, and limitation where applicable.

Key Terms and Concepts

• General power of investment
• Investment
• Statutory duty of care
• Standard investment criteria
• Suitability
• Diversification
• Proper advice
• Delegation
• Asset management functions
• Policy statement