INVESTMENT OF TRUST FUNDS

Failure to include investment powers in the deed would result in the trustees having to follow the investment guidelines that are handed down by statute, which are generally restrictive, difficult to follow and in some cases outdated (the Trustee Investment Act 1961 is perhaps a case in point).

The Duty of the Trustees
In general terms, a trustee has a duty to preserve the value of the trust property by following a prudent policy which a reasonable man would be expected to choose. Some centres have extended this general duty under their trust laws. Jersey provides a useful example of this where trustees are also expected to enhance the value of the fund.

The trustees' general duty to act in the best interest of the beneficiaries applies to the investment of trust funds.

How, then should the trustee proceed to satisfy his duties?

Set objectives
The trustees should set investment objectives which they or the appointed managers will follow as quickly as possible. Usually, a trust portfolio would be managed on a conservative basis with a long-term view. However, the trust deed may allow the trustees to follow different objectives, perhaps in respect of different parts of the trust fund.

Appoint adviser
Although a trustee might be awarded wide powers of investment it is likely that instead of managing the funds himself he will appoint someone to perform this task for him. However, this appointment carries with it certain duties and responsibilities which the trustees should be aware of.

Speculation
Despite powers which may be contained in the trust deed to the contrary, a trustee is under a duty to avoid speculative investments. If he does invest in a speculative manner he may be able to rely on the terms of the trust deed which permit him to do so, although this may not provide the comfort or support which he may hope for.

Interests of the beneficiaries
When deciding on the investment strategy to follow, the trustees should consider the interests of all the beneficiaries and not concentrate on the needs or requests or, say, a life tenant at the expense of the interests of the remainderman (or vice versa).

Diversification
The trustees should, where possible, diversity the trust portfolio to reduce the exposure to risk.

This may involve dividing the portfolio into different sectors (such as industrial stocks, chemicals, fixed interest, stores etc), investing in different markets in different countries and investing in different currencies.

Diversification may not always be possible, perhaps because the value of the funds is too small. Nor indeed is diversification always practical. The trustees should also refrain from diversifying for the sake of it and take a sensible approach when looking at risk reduction. Those trustees who invest US$50,000 by purchasing 50 holdings of a value of US$1,000 each just to spread the risk will face considerable administration problems, not least when valuing the funds and making sure income has been received.

Preservation rather than gain
Nestle v. National Westminster Bank plc (1994) is often quoted and concerned the accountability of a trustee for the performance of a trust fund. The plaintiff complained that the trust fund had not performed as well as she thought it should have done (over a period of almost 70 years) and brought an action against the trustees for breach of trust.

Eventually the case was dismissed but one of the issues which were raised was that trustees cannot be expected to guarantee returns or results and that the preservation of a trust fund is more important than seeking to increase its value.

Review
The trustees have a general duty to review the investments which have been made or acquired and they should establish a procedure which enables them to perform this task at least twice a year and of course more regularly if the size or nature of the assets dictates.

The review process should not only cover the market value of the investments, but also the diversification of the portfolio, the yields received and anticipated and the needs and future requirements of the beneficiaries.

Appointment of an Investment Manager/Adviser
Who to appoint to advise on, or manage, trust investments is an important decision and can also be a difficult one as there are a large number or organisations and institutions to choose from.

Features required
The adviser or manager chosen should be professionally qualified in this field, suitably experienced and competent to act.

Services required
The trustees should decide which services they will require. Most will require a person to manage the investments on a discretionary basis (usually because the trustees will lack the necessary knowledge or experience to act in this manner), although some would only need assistance with placing or arranging deals because they make the decisions for themselves.

If an investment manager is appointed on a discretionary basis, the trustees might be at risk unless the trust deed allows the trustees to make such an appointment. Usually, the power to invest does not extend to passing the discretion to another party. If the deed is silent, the trustees might still decide to proceed with a discretionary investment management agreement on the basis that it is in the interests of the beneficiaries, but the appointment should be reviewed at least annually and the manager asked to produce contract notes and valuations in a timely manner.

Information provided to the manager/adviser
Assuming the trustees will require help with the management of the portfolio, they will need to furnish the service provider with sufficient information to enable them to make suggestions on the most suitable course of action to follow. The trustees should therefore provide the agent with details of the assets to be managed, together with other information such as the nature of the trust (i.e. discretionary or fixed), details of any anticipated capital distributions and the income requires of the beneficiaries (or trustees to cover the fees and expenses).

Management Agreement
The trustees will have to agree (unanimously) to the appointment. A meeting of the trustees should be held to reach this decision and minutes of that meeting should be taken to record what was discussed.

In addition, an agreement or contract between the trustees and the service provider should also be executed to formalise the arrangement and to set out the terms under which the agent is to act.

Settlor as investment manager
Some settlors want to be involved in the management of the trust assets. This is of course possible and may even be advisable, especially if the settlor has experience of investment-related matters. However, the extent of the powers which the settlor would have over those assets would be an important issue because if he is able to manage or control those funds he might jeopardise the residence of the trust for tax purposes.

Investment Letter
A letter from the Settlor to the trustees, setting out how he would like the investments to be managed or the funds themselves invested, is a useful option for the trustees to consider where a settlor wants involvement in the investment matters. To have effect and to provide the trustees with a level of protection (and perhaps indemnification) the existence of the letter should be mentioned under the terms of the trust deed.

The Appointment of Agents

The majority of trust deeds will contain provisions which will enable the trustees to appoint agents to assist them with the administration of the trust. If the deed is silent on this issue there will generally be powers available to the trustees under the local statutory provisions in the centre concerned.

Provided the trustee has appointed an agent in good faith, he will not usually be responsible for the default of that agent. Under the Trustee Act 1925 subject to jurisdiction a trustee shall only be answerable and accountable for his own acts, neglects or defaults and not for those of his agents unless the same happens through his own wilful default. A number of offshore centres have adopted similar provisions in their local trust laws.

An appointment is considered to be made in good faith if the trustees carefully vet the service provider prior to appointment and are happy that he has the necessary experience and qualifications to act in the role envisaged. This will therefore mean that the usual protection offered under various trust statutes, and which is often built into the terms of the trust deeds, will not be available to the trustees unless they are able to justify their choice of agent.

Usually, appointing the settlor to a particular position will not satisfy the 'good faith' test although the trust deed may authorise the trustees to do this. However, if any appointment is not considered to be in the interests of the beneficiaries it should be rescinded and another agent appointed.

Trustees Indemnities

We shall now consider the indemnity provisions which are usually incorporated in offshore trust deeds. These provisions are aimed at providing the trustees with additional powers (over and above those which one would normally expect a trustee to have) and more importantly, to give them a degree of protection in the event of a future dispute concerning their exercise of a particular power.

Matters Which Would Usually Require an Indemnity Clause
The list will, of course, vary depending on the circumstances of a particular trust and the trustee's attitude to certain areas of potential risk. However, it would be fair to say that trustees of offshore trusts would usually seek an indemnity in respect of the following:

Usual Effect of an Indemnity Clause
This is a difficult area to comment on. There are those who believe that if a trust deed allows the trustees to act in a particular manner, the trustees cannot be held responsible for any actions or losses which result as they have been given express powers to act in this way. On the other hand, there are those who believe that a trustee cannot be totally indemnified in relation to their actions as to do so would be in direct conflict with the fiduciary nature of the position. After all, the beneficiaries have a right to enforce the terms of the trust against the trustees and therefore the trustees must be accountable for their actions.

Indemnities from the Settlor in his Personal Capacity
In addition to obtaining indemnities in the trust deed, some trustees also seek to obtain an undertaking from the settlor in respect of actions which they undertake in the course of administration. For example, the settlor may want the trustees to purchase a particular investment which the trustees believe to be speculative. Instead of refusing, they may decide instead to proceed but obtain an indemnity from the settlor designed to cover them should the investment make a loss and an action for breach of trust later be brought by the beneficiaries.

Alternatively, the trustees may decide to obtain an indemnity from the beneficiaries which they could use to prevent them from being sued for breach of trust in respect of a particular action at a later date. This may, perhaps, be a better option as it is the beneficiaries who would have the right to bring an action against the trustees. However, it may be difficult for the trustees to obtain an undertaking from all of the beneficiaries, which would be the only safe option, especially in a discretionary trust where some of the beneficiaries may not be ascertained (nor indeed born).

At the time of writing, the effectiveness of indemnities from settlors and beneficiaries has yet to be sufficiently tested by the courts. It is therefore difficult to establish whether this type of protection is desirable or indeed effective.

How the Trustees Should View Indemnities
Generally speaking, if a trustee fails to perform his over-riding duty to the beneficiaries, it is doubtful whether he will be able to rely on the indemnities which he may have built into a trust deed or which are provided by the settlor.

In addition, if the trustee fails to supervise the actions of his agent to a level which would be expected of a reasonable man, he may also be liable for the agent's actions, irrespective of any clauses or term which may be contained in the deed to the contrary.

Having said that, it is reasonable that the trustees should request, and indeed be granted, some form of protection which they could rely upon in the event of an unwarranted claim arising from a disgruntled beneficiary. However, it would be extremely unwise, if not dangerous, for the trustees to believe that they can be indemnified for all their actions, and clauses which are designed to provide such a scenario should be viewed, at the very least, with caution.

Confidential Offshore Trust Arrangements
As the reader now may understand, a trust is usually created be a settlor executing a trust deed along with the trustees.

However, some settlors are concerned that their names are included in the trust deed and may suggest to the trustees that an alternative method of creating the trust is followed. Some of readers may already be familiar with the use of declarations of trust and 'dummy settlors'. For ease of reference we have chosen to cover both issues and also look at another common offshore device which is the blind trust.

Declaration of Trust
Under the declaration of trust, the client is not named as the settlor but instead the trustee prepares a trust deed under which he declares that he has received or holds property which he will retain in accordance with the terms of the trust deed. The trustee is essentially the settlor but the client should agree the terms of the deed and must have the necessary intention to want the trustees to create the trust on his instructions.

This is a useful device if the indemnity of the client is to be kept secret and is a much better alternative than the use of the dummy settlor.

Another advantage of a declaration of trust is that as the trustees are creating the trust, it would usually prevent the need to send the deed to outside parties for execution. This can save time, enable a trust to be executed in a much more efficient manner and also increases the confidentiality aspect.

It should be noted that not all service providers are prepared to provide trustee services for this type of arrangement, usually because they are concerned about the motive behind the client's desire not to be named as settlor.

In addition, clients who wish to create such a trust should also consider the fact that their involvement in the drafting process and their introduction of funds into the structure would probably lead to them being treated as the settlor in the event of an enquiry or dispute arising.

Dummy Settlors
Some settlors are reluctant to have their names included in the trust deed and to et around this problem, another person or corporation will be named in the deed as the settlor and will execute the deed in this capacity. This person or corporation will merely be acting on behalf of the true client, who would have agreed the terms of the trust deed and will be providing the trust property. In this situation, the person or corporation who creates the trust is often referred to as a dummy settlor.

Although this is a popular technique with some advisers and trustees, it brings into question the validity of the trust, as the person who creates the trust could be seen as lacking the necessary certainty of intention as he was merely acting on the instructions of another. As a consequence, a trust created in this manner might not stand up to an attack.

When looking at declarations of trust, the involvement of the true client in the drafting process and the use of his property would, in all likelihood, lead to him being treated as the settlor in the event of an enquiry or dispute.

Blind Trusts
A blind trust is usually one where a charitable organisation has been named as the sole beneficiary of a discretionary trust. The trust deed would then include powers, usually given to the trustee, to enable other beneficiaries to be added at a later date.

The settlor (or client if it is a declaration of trust) would then request (usually be letter of wishes) that the 'real' beneficiaries be added after the trust has been created. This is seen by many settlors, and indeed advisers, as a very effective means of maintaining the confidentiality of the structure as the 'intended' beneficiaries are not named in the deed.

This type of arrangement has increased in popularity but there is a possibility that a trust created in this manner could be attacked as being invalid on the grounds that the certainty of intention was missing on the basis there was no intention to benefit the named charity. A possible solution which some practitioners use is for the trustees to make a distribution to the named charity thus proving the intention to benefit it.

However, a trust which names a charity as sole beneficiary may have to be reported to the Attorney General who would usually have jurisdiction over charitable trusts. If a report is not made to the Attorney General it might be difficult for the trustees to argue in a dispute over the validity of the trust that it was ever intended for the charity to benefit.