It is time for trustees to consider the investment strategy and due didigence of their trust. Photo / Supplied
Family trusts have become popular recently, but they have been with us in one form or another for more than 400 years. Their fundamental nature remains much the same—to protect the assets and secure them for future generations—but their role has evolved to meet the needs of each generation.
The Trusts Act 2019 ("Act") will take effect from January 30, 2021, and it is the most significant reform of Trust Law in New Zealand for some time.
The Act is intended to introduce several changes and consolidate the existing law to make it more accessible and understandable. This is partly to provide better guidance for trustees and beneficiaries and to enhance the ability of beneficiaries to hold trustees to account.
Running trusts under the new regime can be divided into three components — functional, emotional, and ethical. Neglecting to invest trust property or poor investment choices can be reasons for the breakdown of trusts.
One of the primary roles of a trustee is to manage a trust fund prudently for the beneficiaries. This will often involve making decisions and investing money held in trusts correctly.
Whilst this may sound easy, it is often one area that trustees find themselves in error, specifically when families or friends are acting as trustees. This can lead to being personally liable for failing to have a robust prudent investment process in place and not taking advice, not to mention the potential for family disputes. Where a professional is appointed as a trustee, they are expected to exercise an even higher standard of care and skill.
Investment choice & duty to invest prudently
The general investing and financial principles are contained in the Act, and may also feature in the trust deed itself, gives trustees the power to put trust assets into any investment.
This is a wide-ranging power; however, there is further guidance as to how trustees exercise this function in the Trust Act 2019 (s30).
When exercising any power to invest trust property, a trustee must show the care and skill that a prudent businessperson would exercise in managing the affairs of others;
Trustees must consider the suitability of proposed investments of the trust;
The investment strategy should be diversified if appropriate to spread risk;
Where trustees do not feel they are suitably experienced, they can take qualified financial advice to comply with their obligation.
Depending on the nature of the trust, other factors may need to be considered regarding the appropriateness of any investment. For example, if $500,000 was placed in a trust in the 1990s for the benefit of a surviving widow, where the only consideration was given to generating income via term deposits and not any subsequent capital growth.
Now, $500,000 in the 1990s had a significantly greater value than the same amount in 2020 (declining interest rates and inflation eroding the capital) and had the fund been invested to both generate income and increase the capital then the trust fund would have been substantially more, all beneficiaries would have been happy, and more importantly, the trustees would have acted correctly.
Beneficiaries' age or tax position may also be relevant to the investment choice of trustees and should be considered under the new Trusts Act. If $50,000 is held for a child until they reach 21 and currently they are 17, then a conservative / low-risk choice could be sensible, but if the same amount is held for a 2-year-old so there are 19 years to manage the funds, a longer-term approach to growing the capital would be more sensible.
Investment review
Following initial investment choices by trustees, regular reviews should be undertaken, and if necessary, amendments should be made to ensure that trustees continue to exercise their professional duties and responsibilities. Where trustees utilise financial advisers in relation to investments, the obligation is often met by the financial adviser submitting regular investment performance reports to the trustees.
Under the new Act, trustees must hold records and reports of the due diligence conducted on trust contracts, investment products, fee/cost disclosures, fiduciary nature of the financial advice & service providers and if they are acting in the best interest of the trust and its beneficiaries.
If a trustee's conduct of the trust does not align with the deed and the new Act guidelines, there is a real risk, and it could be broken wide open by creditors and claimants.
Where trustees do not manage a trust fund correctly, they can be held to have breached their position and be held accountable for the loss. Where a loss had been incurred, and the trustees have acted per their duties, for example, stock market volatility, trustees will not be liable if they have acted appropriately and with due care.
With the new Act there is also an increased possibility that beneficiaries will have the potential to hold trustees to a higher level of accountability in the discharge of their duties and post the 'D' Day, January 31, 2021, they will be notified that they are indeed a "beneficiary" and on request will be furnished with a set of financial accounts.
After reading this article and asking yourself some thought-provoking questions, it is perhaps an ideal time for trustees to consider the investment strategy and due diligence of their trust and document any decisions.
Stewart Group is conducting a free presentation in Hawke's Bay to elaborate more on this topic and touch upon unique aspects to financial advice concerning trust investment and a fiduciary's role. The presentation is on December 8, 2020, at 5.45pm at Porters Boutique Hotel, Havelock North.
Only a few spots available, please register your place at www.stewartgroup.co.nz/trusts-act or email your details to enquiries@stewartgroup.co.nz
Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
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