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GAZETTE
DECEMBER
1996
Trusts: A new era. Issues of Risk
for Trustees
by Rachel Curran
The nature of a trust involves one party
("the transferor") taking a risk by
legally transferring assets into the
ownership of another ("the trustee") to
hold those assets for the benefit of a
third party ("the beneficiaries"). When a
trustee is appointed to a trust fund and
accepts the appointment, the risk
attaching to the safe keeping of the trust
assets then
prima facie
falls on the
trustee.
Questions frequently asked by the
transferor are:
• who is
responsible
for the trust
assets?
• how will the funds be
invested?
• will the beneficiaries of the trust
have
access to records/trust
accounts?
These questions collectively represent
some of the key risk issues involved for
trustees and it is these issues that are
addressed in this article.
1. TRUST LAW: "RISK" IN
CONTEXT
In Ireland, the
Trustee Act
of 1893
and the
Trustee (Authorised
Investments) Act, 1958
provide the
basis of our trust law.
In addition to these two statutes some
of the more recent legislation
providing for financial investment
vehicles contain their own trustee
provisions e.g.
The Unit Trust Act
1990
and
The Limited Partnerships
Act 1994.
Reference to sources of trust law
would not be complete without
mention of the Central Bank Series
of Regulatory Notices for UCITS and
non UCITS. These notices while not
"law" in its true sense also provide a
body of trustee rules and obligations
in relation to the activities which
they regulate.
Rachel Curran
The trust concept also features
historically in the land Acts and more
particularly in the
Irish Land Act,
1903
as amended.
Land Commission
Trusts
are created under provisions
contained in the 1903 Act.
Common Law
and the
Courts of
Equity
have also contributed, and
continue to contribute to the body of
trust law by way of judicial
precedent.
A trustee operates in a fiduciary
capacity and as such owes a special
duty of care to the beneficiaries of
the Trust Fund. The following
maxims, distilled from the various
sources of trust law, provide a useful
code of conduct for all trustees.
• Treat the assets more carefully than
your own
• Do not part with control, unless
expressly instructed (and
appropriately indemnified)
• If found to be negligent, you must
reimburse the trust fund
accordingly
• A trustee should be clear thinking,
fair, impartial, hardworking, patient
and tolerant - only seriously
committed people need apply.
2. WHO ARE THE "RISK
TAKERS": THE ROLES TO BE
PLAYED
Once a trust is validly created, the
trustee then enters into a series of
relationships, and any issues of risk
have to be considered in the light of
these new relationships.
INVESTMENT ADVISER
In the majority of trusts with liquid
assets, it is likely that the trustees
will procure the services of an
investment adviser. This relationship
should be governed by an agreement,
and the nature of each party's
responsibilities should be clearly
stated therein.
The trustee and the investment
adviser in the case of personal trusts
will agree on an
investment strategy
for the trust. This can vary,
depending on the trust, between a
possible requirement for maximum
income and minimum capital growth
and maximum capital growth with
little or no income. The trustee must
look to balance all the interests of the
beneficiaries.
CUSTODIAN
When a trustee accepts an
appointment in the case of a
collective investment scheme,
pension fund, or other such fund
where the assets tend to be primarily
marketable securities, and the level
of trading high, it is likely that
formalised arrangements will be put
in place to provide for the custody/
safe-keeping and administration of
the trust assets.
This custody agreement should
clearly define the roles and
responsibilities of each of the parties
involved.
The Central Bank in its non-UCITS
series of notices has provided that