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GAZETTE
A will trust was created in 1922 with
an initial trust fund of £54,000. By
1986 the fund was worth £269,000.
The plaintiff who by then was the
only person entitled to benefit,
claimed that if investments had been
more regularly reviewed and
diversified the fund would have
been worth more than £1 million.
Before 1961 the bank had wrongly
believed, without taking legal
advice, that it could only invest in
bank and insurance company
shares that were held by the estate
on the date of his death or similar
shares.
The alleged mismanagement of the
trust funds sprang from three claims:
(1) That the bank failed to appreciate
the scope of the investment
clause.
(2) That it failed to conduct periodic
reviews.
(3) That if failed to diversify the
equities even within the scope of
the permitted investments.
What saved the bank from liability
despite such symptoms of
"incompetence or idleness" was the
court's conclusion that the trustee
had fulfilled the requisite
standard
of care.
The test adopted was what... the
ordinary prudent man ...
would do
and it involved two elements:
(1) Consideration of what the trustee
actually did
(2)
Proof
that the trustee made
decisions which it should not
have made or failed to make
decisions it should have made.
In looking at the actions of the
trustee an
objective test
was adopted
without reference to the character of
the trustee and its professional
expertise.
Despite the fact that the judges found
for the defendant in this case, each
member of the Court of Appeal took
the opportunity to disparage the
performance of the defendant bank as
trustee. Most damaging of all Leggat
J said that
"No testator in the light of this
example would choose this bank for
the effective management of his
investment"
S UMMA RY
It would appear that while some
reference was made to an element of
acceptable risk in the
Nestle
case, the
combined dicta of
Bartlett
in the UK
and
Stacey v Branch
in this jurisdiction,
would reasonably suggest that prudent
investment of trust assets by
professional trustees requires them to be
as risk averse as is possible.
This risk averse characteristic of
trustees and their activities should be
evident in
all
facets of the treatment of
the trust assets. It is certainly the
approach that should be adopted in the
context of CREST and its impact on
private client trusts.
CREST
is the new electronic settlement
system for UK and Irish equities. It
involves the dematerialisation of share
certificates and the setting of trades by
means of an advanced electronic
transfer system.
It raises two fundamental questions for
trustees:
(i) If you surrender the share
certificates you hold in trust and
accept a computer printout of the
various holdings, will you still
have "control"?
(ii) Do you participate fully in this new
settlement system on the basis that
not to do same would potentially
incur a serious cost which will
materially affect your ability to
invest the trust assets.
There is a "risk" for trustees in
participation but there is likely to be a
significant cost in staying out.
In the circumstances it would seem
that certainly in the short term the
most prudent approach for trustees
(in private client trust matters) in this
jurisdiction may be to stay out of
CREST unless specifically provided
for and mandated by the trust
NOVEMBER 1996
instrument. It remains to be seen
what happens in the medium to long
term as CREST is certainly only the
first step to a paperless society which
will have serious consequences for all
market participants - trustees
or otherwise.
CONCLU S I ON
It is interesting by way of conclusion to
look at the evolution of trusts and
settlements down through the years.
• Jane Austen's novel
Sense and
sensibility
was published in 1811.
The novel deals with the removal of
the family from the ancestral home
(as the property was held in trust to
pass down the male line only).
The family in
Sense and sensibility
may have become poor but they
retained their social position.
Settlements/trusts of real land were
an accepted part of the financial
structure of that time.
• In contrast, in the novels of Charles
Dickens set against the backdrop of
the Industrial Revolution, trust/
settlements took on a different
reputation. Land which was entailed
and held in trust became a burden
and destructive influence on the
proper management of estates.
Industrialisation and the rise of
wealth from manufacturing produced
a less stable strata of wealth who
were less content to allow generation
to succeed generation in the same
way of life.
Ask the question how are trusts views
now? Society is different and the
present use of trusts is consequently
different from their use in the past.
Wealth is earned internationally and
invested internationally. Perhaps the
greatest difference in the uses of a
modern trust is the time scale over
which the assets will be held in trust
has become shorter. Not many
settlors intend their assets to be held
for generations to preserve a way of
life or the integrity of the assets.
Modern day trusts are frequently
inspired by a short term desire to take
advantage of having the benefit of
assets in jurisdictions with favourable
tax regimes, or to provide for
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