For trustees as for everyone, the last few years have been challenging. In the UK, concerns about the likely impact of Brexit on the economy gave way to the more immediate health and economic consequences of the COVID pandemic. Just as life, travel and business appeared to be returning to a degree of normality, the tragic events in Ukraine are exacerbating an already difficult economic picture following two years of heavy government spending. Energy costs are soaring in the UK and internationally, leading to predicted rises in inflation to 8% by the end of June.
How do the uncertain conditions affect trustees?
Such an uncertain economic picture leads to unpredictability in the markets. For trustees trying to manage trust assets on behalf of their beneficiaries, any decisions they make are fraught with the risk that, with hindsight, they may turn out to have been wrong. Nevertheless, the trustees must take account of their statutory investment duties. They cannot simply do nothing and leave the decision making to their investment managers.
What should they do?
Review the nature and scope of their duties
First, the trustees should review and understand their investment responsibilities, both under the Trustee Act 2000, and under the Trust Deed itself. They should also consider if they are bound by any additional obligations arising from other arrangements to which they are a party.
Review the existing investment strategy
Bearing in mind any obligations imposed by the trust deed, the trustees should review their existing investment strategy and, if investment managers are in place, their discretionary mandate, to determine if it is still appropriate in the current investment climate. It may be necessary to re-design the existing strategy to take into account market volatility and ensure that an appropriate level of diversification is achieved, where possible.
Review the terms of the trust deed and how this may affect their scope for change
Having considered their investment strategy, trustees should also review the trust deed to determine if this imposes obligations that may impact their ability to alter their existing approach. For example, there may be significant entitlements to income that may be difficult to achieve under current market conditions. Equally, the trust deed may place specific restrictions on the trustees' powers of diversification (for example, there may be a family company in which the trust fund is and should remain invested), which may prevent the trustees making the changes they would like.
Taking this into account, the trustees may need to consider whether it is possible to amend the trust deed in order to respond to market conditions, for example to alter income versus capital entitlements.
Review the location of their assets and any jurisdiction-specific issues
Trustees should review the economic and investment climate in all jurisdictions in which they hold assets and respond accordingly. An investment strategy that is appropriate in one country may not work in a different one. Trustees should also be alive to other issues, for example, the need for tax advice in different jurisdictions, and any relevant regulatory rules applicable in jurisdictions with which they have a connection.
What if it all goes wrong?
Despite the trustees' best efforts and those of any investment manager, in a fluctuating financial environment, it may be impossible to enhance, or even maintain, the value of the trust fund. In the event that things go wrong, settlors and beneficiaries may view the trustees as their first port of call to recoup any losses and may seek to question their management and decision-making. What are the trustees' options in this situation?
Exoneration clauses
Trustees should never assume that an exoneration clause will absolve them of all responsibility for their investment and management decisions when these go wrong. However, they should be aware of the terms of any such clause, the circumstances in which it would apply and its limitations, in case that they may need to rely on it in the future.
Anti-Bartlett clauses
Trustees have a duty to supervise and intervene in the management of a company in which they hold a controlling interest. The extent of their duty to inform themselves of the company's affairs and to intervene where necessary was clarified in the case of Bartlett v Barclays Bank Trust Company ([1980] 1 All ER 139). It is not uncommon for settlors to seek to restrict the trustees' duties to inform and involve themselves in the management of underlying businesses for example, a family company, in order to avoid interference. Such a provision is referred to as an "anti-Bartlett clause".
While such clauses have been upheld in the Hong Kong courts relatively recently in the case of Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others [2019] HKCFA 45, trustees should not assume that they would be upheld in all circumstances. If they have reason to believe that an underlying company is being mismanaged, or is suffering heavy losses, their overriding duty as trustees would be to enquire into any problems and seek to address them at an early stage for the benefit of the beneficiaries.
Records
Trustees should ensure they maintain detailed records of all their decisions, the factors they took into account in determining their investment and management strategy, and any changes they may make in response to different circumstances. They should also record any discussions they have with the settlor and beneficiaries with regard to such issues.
Communication
Trustees should always communicate regularly with the settlor and the beneficiaries, where appropriate, in relation to the trust fund, investment strategy and how prevailing market and other conditions may be affecting values.
In uncertain times, regular communication is even more vital. If settlors and beneficiaries are aware of the factors affecting the performance of the trust investments, they will be prepared for any losses that may occur and may be less likely to blame the trustees.
Seeking directions of the court
In certain circumstances, trustees may be unable to determine the appropriate course of action. There may be disagreement between the trustees themselves, or the settlor or beneficiaries may disagree with decisions proposed by the trustees.
In such circumstances, they may decide to seek the directions of the court. Provided they have considered all the options available to them, and are genuinely in need of direction, the court should be willing to assist.
What now?
The most important message for trustees to remember is that they should act now to review their investment strategy, to consider their powers to make changes, and to make any such changes, where necessary. They should not cross their fingers and hope for difficult economic conditions to pass.
If you would like to discuss any of the points raised in this note, or any other issues you may have encountered as trustee, please contact Monika Byrska or another member of our Trusts and Estates Disputes team.
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