Tag: trustee investments
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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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.