Explain to the trustees the legal principles applicable to the investment of trust funds


Trusts are not confide to the world of wills and family settlements, they have a considerable and increasing relevance in many commercial enterprises such as investment trust funds. However, over the course of time the economic and social nature has evolved so rapidly that the law governing the powers and duties has not been able to keep up. The Scottish Law Commission have stated that the Trusts Act 1964 is out of date, it was examined critically by them and they propose it should be replaced by new statutory provisions which give trustees power to make an investment of any kind if they are entitled to the trust absolutely or beneficially. And that trustees should have the power to acquire land on behalf of a trust.

A trust deed if it involves an investment will have to be adhered to whether it be to invest in a particular area or to avoid certain investments. However, under the Trusts (S) Act 1921 s4 it states that, if the trust deed is silent it gives trustees the power to make “any kind of investment”. This covers heritable property, moveable or incorporeal such as shares. Lord Watson gave his description in the case of Learoyd v Whiteley 1887 he stated that

As a general rule the law requires of a trustee no higher a degree of diligence in the execution of his office than a man of ordinary prudence would exercise in the management of his own private affairs. It is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended with hazard”.

Before the 1921 Act, if there was no power conferred in deed very limited power to invest. The 1921 Act sought to improve situation by conferring certain powers in addition to those in deed provided they did not conflict with deed however, this provision was not really satisfactory. The Trust Act 1961 divides investment of trust into two groups; the narrow range of investments which are fixed securities and wide range such as shares. The act states that if a trustee seeks to invest in a wide range he must firs divide the fund into two parts. This however, was regarded as being a burden and that the “wide range” investments were restricted as it did not include investments to purchase land. A reform was sought by the Scottish Law Commission.

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Duncan’s Trs Petrs 1951 where it was held that, as the testator’s directions did not necessitate severance of each of the daughters’ shares from the others during their respective lives, no direction to appropriate investments to each share was implied and the trustees were not entitled to make the desired appropriation. The Act does not permit appropriation of assets to specific beneficiary. It is not competent at common law. 1961 Act perceived as out of touch with current investment conditions unduly restrictive as illustrated in the Glasgow University 1991 case, where it was held provisions of the 1961 Act are seen as a barrier to the sound investment of the endowment pool, which is of a sufficient size to justify the modern investment practices which are available to the petitioners.

The legal principles applicable to investment of trust funds are governed largely by Trusts act s4(2) duty to review investment ‘from time to time’ which was amended by the Charities and Trustees Investment (s) Act 2005.

Before exercising the new wider investment powers, trustees have a number of duties. The first duty is to have regard to both the suitability to the trust of the proposed investment and the need for diversification of investments. In so far as is appropriate to the circumstances of the trust the suitability of different types of investment will be influenced by many factors, including: The nature and terms of the trust or the sum available for the investment.

Trustees must also obtain and consider proper advice about the way in which their power should be exercised unless they reasonably conclude that in all the circumstances it is unnecessary or inappropriate to obtain such advice. This same duty also applies to trustees when reviewing their trust investments.  The need to review as illustrated in the case of Clarke v Clarke’s Trs 1925 makes it clear that trustees cannot simply retain shares or place funds in a current account or deposit account and leave them there indefinitely.

When reviewing a trust’s investments, a trustee must obtain and consider proper advice about whether the investments should be varied unless they reasonably conclude that in all the circumstances it is unnecessary or inappropriate to obtain such advice. “Proper advice” is defined as the advice of a person who is reasonably believed by the trustee to be qualified by the person’s ability and practical experience of financial and other matters relating to the proposed investment.

The Charities and Trustee Investments (S) Act 2005 suggested specific power to delegate investment decisions to fund manager within agreed policy parameters and duty to report now s94(4) The Act allows trustees “to make any kind of investment of the trust estate (including an investment in heritable property)”. This means that trustees will generally have the same power of investment as if they were the beneficial owners of the trust estate. A further power enables trustees to acquire heritable property for any other reason (the term ‘any other reason’ is not otherwise defined but it may refer, If a later trust deed gave trustees the investment powers contained in the 1961 Act, the trustees will now have the new general powers.

This Act removed many of the restrictions to the way in which trustees, who were previously limited by the terms of the Trustee Investment Act 1961, can invest the trust fund. The new legislation, which allows much greater investment freedom and a duty to consider obtaining specialist advice when making or reviewing investments. A new statutory default power for trustees to appoint nominees for the purpose of investment was also introduced. This allows trustees to pass title to property to nominees where a trust deed is silent

The Charities and Trustee Investment (Scotland) Act 2005 extended the statutory default investment powers for trustees of trusts operating under the Law of Scotland. The previous default investment powers, within the Trustee Investments Act 1961, were very restrictive and widely considered to be archaic. The changes were therefore overdue and welcomed.