Tag: s 27 trustee act
In Tuesday’s blog, I scratched the surface of the recent battle between titans of Wall Street and a social media community over shares of GameStop, a brick-and-mortar video game retailer. The enormous volatility seen in GameStop’s share price, fluctuating between $20 and $350 in a matter of only a few weeks, led to some investors profiting handsomely, leaving others, including certain institutional investors, to foot the bill so to speak. Today’s blog discusses the obligations of a trustee to prudently invest trust capital and to generally avoid high-risk, high-reward strategies unless specifically instructed.
Section 27(1) of Ontario’s Trustee Act provides that a trustee investing trust assets “must exercise the care, skill, diligence and judgment that a prudent investor would in making investments” – colloquially known as the Prudent Investor rule. A further subsection of the Trustee Act, section 27(5), sets out a non-exhaustive list of criteria that a trustee is to consider when making investment decisions which include, among others, the expected total return on investment.
A savvy but risk-prone hypothetical trustee might have viewed the GameStop saga as an opportunity to earn significant returns for the benefit of the trust. Of course, had such a trustee “gotten in early” when the share price was still low and also correctly predicted the meteoric rise, the trust in question might well have enjoyed a capital return many times the size of their initial investment. Great!
However, the opposite consideration is relevant to any discussion of a trustee’s obligation as a prudent investor. What if the trustee took steps to invest in GameStop or any other volatile security, without reasonable justification for doing so, and suffers substantial losses? What recourse, if any, is available to the beneficiaries of a trust that suffers such losses?
In the ordinary course, a trustee may be personally liable for any investment losses as a result of imprudent investment decisions. Whether the trustee committed a breach of his fiduciary duty by choosing to invest in high-risk, high-reward securities is a nuanced question. In carrying out their obligation as a prudent investor, a trustee must consider several factors, including:
- The terms of the trust instrument or Will including any investment guidelines contemplated by the grantor or testator;
- The guidelines of any investment plan or strategy relied on by the trustee in making investment decisions, including any such plan prepared by a professional advisor; and
- The nature and extent of the investment made and the loss suffered.
A consideration of the factors above will determine whether a trustee’s actions constitute a breach of fiduciary duty. Hypothetically, a trustee may be directed by the terms of the governing instrument to invest a certain portion of the capital into specific types of assets, which could include volatile securities, with asset diversification as a main goal.
Although such investments might not ordinarily be viewed as “prudent”, section 27(9) of the Trustee Act provides that a trustee is not authorized to act in a manner that is inconsistent with the terms of the governing instrument. Although the trustee has some discretion in terms of the choice of investment, they may nonetheless be directed by the instrument to engage in risky transactions.
As such, the risk of personal liability to a trustee who was directed to invest a small share of the total capital of a trust into high-risk securities, as compared to a trustee who unilaterally decides to invest half of the trust capital into similar assets, will be considerably different. Provided the conduct of the trustee is in accordance with the directions and reasonable professional guidance offered to them, it is unlikely that a trustee will be personally liable for investment losses.
Thanks for reading.
There is so much in flux right now due to COVID-19. In the area of estates and trusts though, the obligations that an estate trustee owes to beneficiaries remains stable. During this time, estate trustees need to consider how best to administer an estate, and what they should be doing to limit future claims against them. The purpose of today’s blog is to consider the estate trustee’s duty to invest.
According to section 27(1) of the Trustee Act, “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 often referred to as the prudent investor rule. Section 27(5) sets out certain criteria the trustee is required to consider in investing trust property, including, amongst other things, the general economic conditions and the possibility of inflation or deflation.
Given the current market fluctuations, estate trustees need to give invested trust property considered attention. While they cannot be expected to produce resounding returns for the beneficiaries, they can take steps to make sure their investments are prudent in the circumstances and avoid future claims from beneficiaries. These could include claims that the estate trustee failed to properly invest trust assets or that they failed to exercise their discretion.
The estate trustee should consider doing at least four things. First, they should review the terms of the will as to whether there are any specific investment requirements. Second, they should contact their investment advisor to obtain professional advice and share any relevant terms of the will. Third, the estate trustee should ask the investment advisor to put their advice/comments in writing and the estate trustee should hold on to this. Fourth, if the trustee is afforded some sort of discretion (for instance, considering the interests of capital versus income beneficiaries), the trustee should prepare a memorandum to themselves. The memorandum should set out the reasons why they reached the investment decision that they did and the factors they considered, which should include the section 27(5) criteria.
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