Trust investments can’t be too risky or too conservative

The trustees are required to administer the trust in terms of the law and the provisions of the trust instrument and act with the highest degree of diligence and caution. Trustees are required to be more careful and prudent with the affairs of the trust than they would be with their own affairs. In carrying out their duties, trustees fulfil a fiduciary position. A fiduciary duty is an onerous, legal obligation of a person managing the affairs of another to act in the best interest of such a person. A fiduciary relationship arises from the nature of the actual relationship undertaken; i.e. in the instance of a trust the trustees should act in the best interest of the beneficiaries. When there has been a breach by a trustee of a fiduciary duty, the beneficiary may claim the trustee’s gain out of a transaction, or may hold the trustee liable for breach of trust, even if the trustee did not financially benefit. Trustees are not permitted to play an inactive role in the administration of the trust, and may be held accountable should they behave in this manner. Trustees cannot exempt themselves from their fiduciary duties as is often found in trust instruments – that is against the law.
 
A trustee has to be more careful and cautious with the affairs of the trust than he, she or it would be with his, her or its own affairs. Whereas a person can take personal risks in managing his, her or its own investments and affairs, he, she or it has to take greater care when dealing with trust assets, and avoid any business risk as far as possible (Sackville West v Nourse case of 1925). This view was confirmed in the Estate Richards v Nichol case of 1999, that a person in a fiduciary position, such as a trustee, is obliged to adopt the standard of the prudent and careful person. However, in carrying out their duties, the trustees are required to ensure that a reasonable return is obtained on the trust capital. Trustees can be held liable should monies not be invested prudently. Trustees may therefore be proved negligent, not only if they invested in risky investments, but also if they invested capital too conservatively, resulting in the capital not growing sufficiently. In the Sackville West v Nourse case of 1925 the beneficiary succeeded in a claim for damages for negligence against a trustee who had made an unwise investment.
 
Section 9(1) of the Trust Property Control Act states that trustees shall, in the performance of their duties and in the exercise of their powers, act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another person. It is important to note that “skill” encompasses more than simply acting in good faith. Trustees could therefore also find themselves personally liable for losses suffered by the trust if it can be proved that they did not act with the necessary care, diligence and skill that can reasonably be expected of a person who manages the affairs of another. The Court held in the Gross v Pentz case of 1996 (also refer to the Estate Bazley v Estate Arnott case of 1931) that in order to sustain a direct action against a trustee, the disgruntled beneficiary must have a vested interest in the trust and not merely a contingent right interest in the future income and/or capital of the trust – such as a beneficiary in a discretionary trust. However, based on any beneficiary’s right to proper administration of a trust, even discretionary beneficiaries have a vested interest against the trustees for the trust to be properly administered. Some do therefore believe that even discretionary beneficiaries have recourse against a misbehaving trustee. Olivier makes the following proposal: “If the trust fund suffers a loss, it affects the beneficiary’s interests. The prejudice caused to the beneficiary’s interests by the trustee’s actions could be in the nature of a patrimonial loss because of a diminution in the income or capital, which will ultimately be transmitted to the beneficiary”.
 
Trustees have a delicate balancing act between seeking out safe investment and avoiding risk, versus investing trust assets productively whilst considering beneficiary needs. An element of risk-taking seems unavoidable and therefore trustees should be careful to record and document their reasons in arriving at investment decisions. Trustees should preferably develop an investment strategy which should be documented in an investment policy, taking into account the purpose and duration of the trust, and after considering the interests, needs and expectations of all beneficiaries. Such a policy should be constantly reviewed and updated as circumstances change. When capital and income beneficiaries are different people, extra care should be taken to ensure that all beneficiaries are considered. Capital beneficiaries may prefer capital growth and capital preservation, whilst income beneficiaries may favour maximising income, even if it is at the cost of capital growth or capital preservation. In the event that income and capital beneficiaries are different, it is good practice to provide in the trust instrument that in the event that income is insufficient for the maintenance of an income beneficiary, that capital can be used to make good any such shortfall. This will assist the trustees to optimise the trust’s investment returns, whilst taking into account the needs of all beneficiaries. Focusing at all cost on the short-term income production in a trust may have a detrimental effect on the long-term position and value of the trust’s assets, which in the long run may negatively impact both of the income and capital beneficiaries.
 
Although trustees are ultimately responsible for the trust’s investments, they can obtain investment advice. It can never be expected of them to know it all, but in discharging their fiduciary duty, they have to demonstrate that they have obtained suitable input from experts in areas where they consider their knowledge to be deficient or lacking.