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Trust of the argument

Most financial advisers will have encountered, advised on or even set up

trusts for their clients. Some may also have trustees or beneficiaries of

existing trusts as their clients. If so, it is likely that investment

business will have been on the agenda.

Given the substantial assets held subject to trust in the UK and the

continuing establishment of new trusts, it is reasonable to assume that

there will be no diminution in the level of trust assets available for

investment.

Obvious gatekeepers to this market are, to a large extent, solicitors and,

perhaps to a slightly lesser extent, accountants.

If financial advisers are looking for a reason to call on trust clients or

any of the suggested gatekeepers about new business opportunities, then the

imminent changes to trustees&#39 statutory powers of investment may be a very

good reason.

The truth is, of course, that the statutory powers (largely contained in

the Trustee Investments Act 1961) will not be substantially relevant for

most trusts. Why? Well, the statutory direction on what can and cannot be

invested in – subject to the constant requirement for trustees to act in a

fiduciary manner and, where relevant, to treat all beneficiaries fairly and

equally – only has to be referred to if and to the extent that the trust

provisions do not specify investment powers for the trustees. Most modern

trust deeds would specify the powers.

In this respect, the provisions of the Trustee Investments Act are rather

like the intestacy provisions directing the destination of a deceased&#39s

property where there is no will.

This does not mean there are no trustees affected by the statutory

provisions nor does it mean there is not widespread misconception that all

trusts – regardless of their specific powers – are affected by all the

statutory provisions on trustee investment. Good reasons to call, then.

What are the changes proposed and when are they likely to take place? On

July 21, 1999, the Law Commission and Scottish Law Commission jointly

published a report on trustees&#39 powers and duties. The report covers the

following areas:

Powers of investment.

Duties of care.

Powers of delegation.

Powers to employ nominees and custodians.

Powers to insure the trust property.

Professional charging clauses.

The report recommends reform of the law in England and Wales and in

Scotland governing trustees&#39 powers to invest the trust fund where no

express powers are included in the trust document or will. For England and

Wales, it also recommends a range of reforms intended to facilitate more

effective trust administration concerning collective delegation by

trustees, the use of nominees and custodians, powers of insurance and

remuneration of professional trustees.

The report included the draft Trustee Bill for England and Wales proposing

the implementation of the recommended reforms as well as draft clauses to

amend Section 4 of the Trusts (Scotland) Act 1921 dealing with trustees&#39

powers of investment in Scotland. It is expected that the Trustee Bill will

be enacted imminently.

In respect of trustees&#39 investment powers, it has long been considered

that the present statutory provisions on trustee investments contained in

the Trustee Investments Act 1961 as amended are out of date and inadequate.

Since 1984, the courts have been willing to extend trustees&#39 investment

powers but, for many, going to court, say, under the provisions of the

Variation of Trusts Act, will have represented too high a hurdle to jump to

secure wider investment powers.

Extended powers of investment have already been put on a statutory footing

for trustees of pension schemes in the Pensions Act 1995. For charitable

trusts, the Charities Act 1992, while relaxing certain restrictions on

trustee investments, strengthened certain trustee duties as regards their

investment responsibilities.

The question of trust variation came up in a relatively recent case heard

by the Jersey Court. Although the variation in this case was not to do with

extending investment powers – one of the main reasons for trust variation

being sought, by the way – it did make clear the rules of variation by

virtue of the agreement of all the beneficiaries under the reasonably well

known case of Saunders versus Vautier (1841).

In the case in question, a non-UK-resident accumulation and maintenance

trust was set up in Jersey for the benefit of the settlors&#39 six children.

The trust assets comprised, among other things, shares in some 49 companies

of an estimated gross value of around £450m.

The trust was set up before 1991 primarily for UK capital gains tax

purposes. The settlors were excluded from benefiting from the trust and

their letter of wishes indicated that the family fortune should remain

intact for the benefit of the family for many years to come. The letter

also gave the impression that the settlors believed they had created a

dis-cretionary trust.

Following changes to the taxation of capital gains introduced in the

Finance Act 1998, tax advice was obtained and the opinion of several senior

counsel was that the property of the trust should be transferred under one

of the trust powers to a new and separate settlement which was distinct

from the existing one. Application for a variation of the trust was made to

the Jersey Court under Article 43 Trusts (Jersey) Law 1984.

So, now I&#39ve hooked you, you will have to wait until next week for the outcome.

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