Financial planning for trustees

Financial planning for trustees

The trend towards increased trustee responsibilities is making the role of trustee an increasingly complex one. This article considers why there is more need than ever for good quality advice to trustees, to help avoid the regulatory pitfalls and ensure good outcomes for beneficiaries.

Trustees’ powers and responsibilities

The Trustee Act 2000 introduced far wider powers with regard to trustee investment decisions than had previously been the case. It also introduced various safeguards which amount to an increased onus on trustees to demonstrate that they have exercised these powers with due diligence.

As such, trustees’ key responsibilities include:

  • Exercising reasonable skill and care. A professional trustee or someone with specialist knowledge is expected to show the highest level of care and skill. A layman acting as a trustee would not be expected to demonstrate the same level of skill, however, they are still bound by trust law and are expected to act prudently. 
  • Obtaining, and considering, proper advice.
  • Investing funds with regard to the ‘standard investment criteria’, which stipulate that investments should be chosen and managed in a way which is appropriate to the particular aims of the trust, and which takes account factors such as timescale for investment, size of funds, risk profile and tax position.
  • Ensuring proper diversification of investments.
  • Keeping trust investments under review.

The role of financial planning

Whilst there are some additional considerations, financial planning for trustees is, in essence, the same as that for private individuals. It is likely to include the following elements:

Understanding trust goals and drafting the Investment Policy Statement

Initially, the aims and tolerances of the trust must be fully understood, in order to facilitate strategic goal setting. This will require careful study of the trust documentation, for example the trust deed itself and any associated documents such as a letter of wishes from the settlor.

Detailed discussion with trustees is also essential. In these discussions, a financial planner will help to agree a suitable balance of objectives. These objectives must account for the competing rights of all groups and generations of beneficiaries, whilst adhering to the precise wording of the trust documentation. For example, there is often a need to balance the requirements of beneficiaries who are entitled to income and those who may eventually benefit from the preserved capital. 

Other areas to be discussed and agreed will include the required timescale for investment and the trustees’ attitude to investment risk. The concept of risk versus return applies in the same way as in any other investment context, but it is important to consider that the trustees are likely to have a different attitude to risk with regard to the trust than to their own affairs.

To formalise the agreed investment approach, an Investment Policy Statement should be drawn up, which provides useful guidance to the investment manager and ensures that both the trustees and the investment manager are clear about the agreed investment mandate. The statement should be reviewed regularly in the future, to ensure that it remains up-to-date and relevant.

Translating the Investment Policy Statement into an investment strategy

Once goals are clearly understood and set out, a specific investment strategy should be agreed and implemented within the trust. This strategy is designed to balance such things as income and growth, expected returns and volatility, and should ensure tax and costs are appropriately managed to maximise net returns for the beneficiaries.

There should be a clear link between the Investment Policy Statement and the investment strategy which is ultimately implemented by the trustees.  The asset allocation model used should reflect the goals of the trust, and will likely require a diversified investment portfolio to be held alongside cash, in order to balance the shorter term requirements for liquidity with the longer term requirements for income and capital growth.

Ongoing reviews and monitoring

Once in place, the trust investments should be regularly monitored, to ensure that they continue to perform adequately and within agreed risk tolerances.

At the same time, by regularly reviewing the trust, a financial planner will help to ensure that the objectives of the trust investments, the aims of the trustees and the needs and circumstances of the beneficiaries all remain correctly aligned. In reality, all of these aspects can change over time, so it is essential to review them periodically and make changes as necessary.

In conclusion, by engaging a suitably qualified financial planner to assist with the management of the trust, trustees can demonstrate that due care has been taken and that all their responsibilities, as described above, have been considered and met.

Ideally, trustees will engage a financial planner at the point the trust is established. It is, however, often the case that trustees find themselves in control of existing trust assets, but with a degree of doubt in their mind about whether they are fully meeting their statutory responsibilities. In either event, a good financial planner can be vital in making sure all the correct boxes are ticked, and in helping trustees do the best possible job on behalf of the beneficiaries whilst avoiding falling foul of the regulations.