TRUSTEE INVESTMENTS
By GEORGE L. CRAIG ,
Real Estate, Wills & Estate Law Department
ONTARIO’S NEW PRUDENT INVESTOR RULE
As a result of changes to the Trustee Act
in July 1999 trustees now, when investing trust property,
must exercise the care, skill, diligence and judgment that
a prudent investor would exercise. The changes have created
a greater obligation, requiring more formality for Trustees.
On July 1, 1999 the rules with respect to trustee investments
changed. New sections were added to the Trustee Act,
R.S.O. 1990 c.T.23 (the “Act”) which affect the
rights and responsibilities of Trustees when investing trust
assets.
It is important that Estate Trustees understand that as
a “Trustee” they must comply with the provisions
of the Act. Section 27(5) of the Act
provides that a Trustee must consider the following criteria
in planning the investment of Trust property:
- General economic conditions.
- The possible effect of inflation or deflation.
- The expected tax consequences of investment decisions
or strategies.
- The role that each investment or course of action plays
with the overall trust portfolio.
- The expected total return from income and the appreciation
of capital.
- Needs for liquidity, regularity of income and preservation
or appreciation of capital.
- An asset’s special relationship or special value,
if any, to the purposes of the trust or to one or more
of the beneficiaries.
It is important that Trustees consider these and record
the basis on which they have determined the investments.
Without a written record a trustee may have difficulty establishing
there was a prudent investor plan or strategy. In order
to take advantage of the “safe harbour” provision
mentioned below a trustee must have followed a prudent plan
even if the results were unsuccessful.
In fulfilling their fiduciary duties, Trustees are required
to meet a certain standard of care. When acting under the
terms of an express trust, in order to satisfy those duties
to the requisite standard of care, a Trustee must consider
the terms of the trust document, the relevant common law
principles applicable to Trustees and finally the statutory
rules imposed upon Trustees, as articulated in the Act.
In general terms the Act permits a Trustee
to invest in any form of property in which a prudent investor
might invest. When investing trust property a Trustee “must
exercise the care, skill, diligence and judgment that a
prudent investor would exercise in making investments”.
As a result there appears to be no restriction on the form
of investment in which a Trustee can invest. However the
standard of care will require those investments to be investments
in which a prudent investor would invest. Thus while there
does not appear to be an express limitation on the nature
of investments, if a prudent investor would not invest in
the particular investment under consideration, it follows
that a Trustee should also not so invest.
MUTUAL FUNDS
Mutual Funds are now a permissible investment. Prior to
the new legislation it was unclear whether the investment
in mutual funds was inappropriate because it involved a
re-delegation of authority. The amendments now make clear
that investment in mutual funds is permitted.
DUTY TO DIVERSIFY
The Act contains an express obligation on
Trustees to diversify the investment of trust property to
an extent that it is appropriate to (a) the requirements
of the Trust, and (b) general economic and investment market
conditions.
INVESTMENT ADVICE
A Trustee is now entitled to obtain investment advice and
is entitled to rely upon that advice if a prudent investor
would. In particular it will not be a breach of a Trust
for a Trustee to rely upon the advice if a prudent investor
would have so relied upon the advice. Where a Trustee obtains
advice and acts upon the advice and is later challenged
on the particular investment choice, if he or she can show
that a prudent investor would have relied upon the advice,
he or she will be protected. Thus, it may now be prudent
for all Trustees to hire an advisor from one of the reputable
investment houses. A Trustee is also well advised to require
all advice from his or her investment advisor to be in writing.
PROTECTION FROM LIABILITY
A new safe harbour provision has been introduced (section
28). In particular, a Trustee will not be liable for a loss
resulting from following a prudent investor plan or strategy
so long as the plan or strategy comprises a reasonable assessment
of risk and return that a prudent investor would adopt under
comparable circumstances. A Trustee will have to demonstrate
that his or her plan took into account the same risk and
return analysis that the objective prudent investor plan
would take into account.
CONCLUSION
Given the foregoing Trustees holding assets, for any length
of time, should obtain professional investment advice and
establish a written investor plan. On a regular basis that
plan should be reviewed and a record kept of the changes
made or the reason for making no changes. The written records
must be retained if a Trustee is to obtain the benefit of
the protection permitted in the Act. The frequency
of the plan review will depend on the size of the estate,
the nature of the assets held and the volatility of economic
conditions.
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The above is not intended to constitute
legal advice. Please contact a lawyer to clarify your
legal rights.
