When a Good Bet isn’t the Best Bet: Trustee Investments
On Saturday, American Pharaoh became the first horse in 37 years to win the Triple Crown, joining an elite list of eleven other horses who have accomplished the extraordinary feat since Sir Barton first did so in 1919. The morning of the race, American Pharaoh was highly favoured to win. But not everyone was keen on him. After all, fourteen horses—including last year’s California Chrome—had won at the Preakness and Kentucky Derby but had been unable to complete the sweep at Belmont. Given the short recovery time between races and the additional length of the Belmont track, winning is tough. Just ask Steve Coburn—owner of California Chrome. At any rate, despite the favourable odds, betting on a champion like American Pharaoh was anything but a financial certainty.
Trustees are responsible for the management and investment of trust property. They have a duty to make investment decisions that benefit the estate and the beneficiaries who will inherit from it. From time to time, questions arise regarding appropriate investments they can make with those assets.
In Ontario, the standard for investment decisions made by trustees is set out in section 27(1) of the Trustee Act. It states: “In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” This is called the prudent investor rule.
One example of an imprudent investment is the lending of trust funds without security. In Adye v Fouilleteau (1783), 1 Cox 24 at 25-26, Lord Commissioner Hotham compared it to betting. He said, “The court will always discourage lending trust money on private security, though larger interest may be gained. It becomes a species of gambling.”
In the end, American Pharaoh proved his naysayers wrong and provided his beneficiaries a 75% return on their money, but in the world of trusts and estates, even a good bet is not the best bet when making investment decisions.
Thank you for reading.