This year has certainly not been a good year for financial markets and cryptocurrencies. Investors were rewarded for their risky investments in growth companies and cryptocurrencies in 2020 and 2021, but have seen a reversal in fortunes in 2022. While risky investments are less likely to be questioned when times are good, in times like these it is worth considering the level of risk tolerance that an estate trustee should be taking on when investing estate assets.
Is it ever permissible for an estate trustee to invest in risky companies or cryptocurrencies?
Groome Estate v Groome 2016 ONSC 7850
This case can serve as a warning to estate trustees who invest estate assets in speculative assets such as cryptocurrencies or other risky investments.
In this case, the estate trustee directed an investment account for the estate at 90% speculative and 10% growth. As a result, the portfolio invested exclusively in the energy sector, with the exception of shares of Yellow Media, which were bought on margin.
In December 2014, the energy sector experienced a market crash and the value of the energy stocks decreased by $164,983, and the investment in Yellow Media decreased by $96,150.
The estate trustee made an application to pass accounts, but it was jointly objected to by the beneficiaries of the estate. The beneficiaries asked the court to be reimbursed one-half of the losses incurred by the estate trustee.
The court ruled that the estate trustee failed to meet the standard of a prudent investor as required by s. 27(1) of the Trustee Act, and ordered the estate trustee to reimburse the estate for half of the losses.
The court pointed to s. 27(6) of the Trustee Act that requires a trustee to diversify the investments to the extent that it is appropriate to the requirements of the trust and also general economic and market conditions. The court stated that a portfolio holding almost exclusively shares in energy companies did not meet this requirement.
Although this case does not tell us if investments in cryptocurrencies are specifically prohibited, it demonstrates that the court is not likely to look favourably upon a risky investment strategy. The court stated the account objective, set at 90% speculative and 10% growth, and shares purchased on margin were unacceptable for an estate trustee. From this, we can infer that an estate trustee would be wise to follow a more conservative investment strategy.
A portfolio invested exclusively in cryptocurrencies would certainly not be deemed to be prudent. But could a very small allocation of an estate portfolio in cryptocurrencies be prudent? Given the potential for large losses, an estate trustee would be wise to avoid any unnecessary risks that could lead to personal exposure.