Yet at the same time, this same market turmoil has produced a range of buying opportunities for those ready to exploit them. Such opportunities are likely to be of interest in the main to those with a higher risk appetite, given that risk free alternatives (cash deposits) continue to deliver historically low returns.
Opportunities abound
Being entrepreneurial in the current environment is relatively easy for an individual if they control assets directly. They have the ability to exploit opportunities as they see fit and make sure that the cash/leverage is in place to help progress their plans.
If the assets (or the majority of the assets) are held in trust, where the assets are not controlled directly by the beneficiaries, then the beneficiaries need to request that the trustee consider making such investments. This requires the trustee to consider risks and be more adventurous than they ordinarily might. As a result, trustees may refuse these types of requests.
However, if the trustees agree the principle, a myriad of tactical opportunities present themselves including:
* Purchasing land, product and stock at bargain prices
* Buying up assets from distressed firms
* Acquiring the competition to increase market share
Commercial considerations
Unlike fund managers, trustees are not paid a performance fee for taking risks. It is a moot point as to whether remuneration based on performance would or should make a difference to trustees’ decision making.
Fund managers have a different focus to trustees, which is performance driven, while trustees have a primary duty to protect and enhance trust assets. So, the prudent trustee must be risk averse by nature.
In the future, inflation may well cause assets to depreciate faster in real terms. Cash and gilts may be low risk investment solutions for clients in the current climate, but will they be regarded as prudent in hindsight by beneficiaries when there has been below market performance in the trust fund?
If trust assets are illiquid, then leveraging the trust assets is a possibility to generate liquidity for investment purposes.
However, taking on debt must be considered carefully by a trustee, although many have experience of leveraging portfolios and property for this purpose and of course the trustee can usually appoint an expert to advise the trust on such matters.
In circumstances where a trustee has concerns that the entrepreneurial project or loan proposed is too onerous, it is possible for the trustee to make a distribution to a beneficiary, so as to allow the beneficiary to use the money as he sees fit. However, such a step would require a consideration of the tax consequences for the beneficiary.
Problems facing the trustee
Assuming access to funds had been resolved, other issues will need to be addressed before a project is undertaken. Such questions might well include:
* Are all the beneficiaries ascertained as a class and are they all considered in the request, and what are their views of the proposed investment? If the beneficiaries are not considered in their entirety or don’t have a consensus view, can this course of action be considered to be in their best collective interests? If not, the trustee may risk being considered to be in breach of trust.
* Are the trustees demonstrating control of their structures? If a trustee agrees too readily or with insufficient information then how are the trustees demonstrating independent control? Moreover, is governance actually resting with the client where he is resident? If the governance of the structure is found to be tax inefficient, then the underlying structure may well be considered to be resident for tax purposes where the client is, which may leave the trust open to investigation from the relevant fiscal authorities.
* If the settlor dictates how the assets within the trust are used and the trustee administers the trust strictly in accordance with his directions, then the question of sham comes into play. If found to be a sham, there are potentially painful consequences, as the trust assets may need to be redistributed back to the settlor.
Of course, settlor directed trusts get around these problems, but many trusts are not created as such for tax purposes. In addition, in In Re Esteem Settlement the court held that both settlor and trustee intended that the assets should be held on terms different to those in the trust deed and that the trustee went along with the settlor’s intention in a reckless manner, so the test is no longer unilateral.
All three scenarios have the potential to lead to a trustee’s worst nightmare, that of being sued by the beneficiaries for breach of trust.
The risk/reward matrix
The heart of the problem lies in the risk/reward matrix. The law tends to punish the trustee who takes risks that are subsequently proven to fail, but is unlikely to punish the risk averse trustee irrespective of subdued performance.
In Bartlett, Brightman J expressed the opinion that ‘a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to exercise the special care and skill which it professes to have’. The trustee was held not to have discharged its duties in supervising the new ventures of the company, and was ordered to make good all losses within the trust.
However, the decision offered some potential for the trustee to make commercial choices, by making clear that liability will not be attributed to a trustee who has committed no more than an error of judgment from which no business man however prudent can expect to be immune. The court went out of its way to say that a trustee is not ‘bound to avoid all risk and in effect act as an insurer of the trust fund’.
The way forward?
All may not be lost for trustees who have entrepreneurial demands being made of them and possibilities exist that allow them to be more active with the trust funds. However, a process must be established whereby the trustee can take a degree of risk within the trust, without abdicating his responsibility as a ‘prudent man’.
If a settlor is aware of a need for entrepreneurial decision making within the trust prior to a structure being created, it is possible to create a structure that keeps the settlor, beneficiaries and trustee aligned with this objective. However, standard structures and drafting are unlikely to be suitable.
The entrepreneurial trustee needn’t therefore be an oxymoron. Drafting options exist to accommodate a more aggressive investment approach and appropriate advisers and specialists can always be retained to help shape an investment strategy that can take maximum advantage of commercial opportunities.
Marc Farror is the Private Client and Family Office Director of Vistra Jersey
