The Roles of a Trustee for Investing Assets

Over the years in my capacity as a professor teaching estate planning and as an investment manager appointed to manage investment assets held within both testamentary trusts (created by Wills) and inter-vivos trusts (created during a person’s lifetime), I found that many people know very little about the role a trustee(s) play in administrating of trust assets. In this month’s article we shall explore these roles and responsibilities of a trustee in more detail.

A trustee can be a trust company or at least three individuals, who live in Canada, who are charged to promote the financial security of a trust fund through sound investment policies and practices. If the trust is set-up using 3 trustees/individuals at least one of these individuals needs to be completely independent from the settler (the individual who transfers assets into the trust).

What is expected of a trustee is something that had been considered by the Courts over the years, and is now contained in the Trustee Act, as amended July 1, 1999. The rule has been expressed that the trustee must show ordinary care; skill and prudence, he or she must act as a prudent person of discretion and intelligence would act in his own affairs.

The most popular method to date of set-up a Trust is by using the three-person trusteeship structure. Unfortunately many individuals accepting an appointment as a trustee of a trust do not have a full comprehension of his/her roles and duties. Each trustee risks serious liabilities if they are in violation of the ITA, Income Tax Regulations, the Trustee Act; various other acts, and the common laws surrounding fiduciary responsibilities of trustees.

Before someone accepts the position as a trustee, he/she should have a firm understanding of the Trust and the information contained in all documents concerning the administration of the trust.

These duties include hiring and overseeing professional advisors and service providers in carrying out the responsibilities of the trust. Trust administration includes maintaining all trustee documentation, receiving and depositing all contributions into the trust fund. The trustee/s should know all the professional advisors, service providers and understand their roles. The trustee/s should review the reports of each advisor. The trustee/s should become familiar with the legal duties and responsibilities for a trustee and should be familiar with the assets held in the trust and how these assets have been invested within it. The trustee/s is responsible in helping put together the information to file a T3P to CRA. A T3P is a Trust income tax return. The T3P must be filed within 90 days after the year-end of the trust. If this form is late CRA can impose penalties for filing late.

Prudent Trustee Investment Guidelines

Unless it has been specified in the trust documents, trustees must act unanimously on any discussion that are made concerning trust assets. Some trusts allow for the majority of the trustees to make decisions. If the trustees allow one of their members to manage and control trust assets, all trustees are still responsible for what decisions are made and how trust assets are cared for.

Beneficiaries of Trusts should be able to expect an objective test of what is careful, skilful and prudent and the trustee must document his or her conduct. Below the investment guidelines that an appointed Trustee to a trust must follow as set in Section 27 of the Trustee Act are listed.

Section 27 of the Trustee Act provides:

(1) Standard of Care – In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

(2) Authorized Investments – A trustee may invest trust property in any form of property in which a prudent investor might invest.

(3) Mutual Funds – Any rule of law that prohibits a trustee from delegating powers or duties does not prevent the trustee from investing in mutual funds.

(4) Common Trust Funds – If trust property is held by co-trustees and one of the co-trustees is a trust corporation as defined in the Loan and Trust Corporations Act any rule of law that prohibits a trustee from delegating powers or duties does not prevent the co-trustee from investing in a common trust fund, as defined in that Act, that is maintained by the trust corporation.

(5) Criteria – A trustee must consider the following criteria in planning the investment of trust property, in addition to any others that are relevant to the circumstances:

a) General economic conditions.
b) The possible effect of inflation or deflation.
c) The expected tax consequences of investment decisions or strategies.
d) The role that each investment or course of action plays with the overall trust portfolio.
e) The expected total return from income and the appreciation of capital.
f) Needs for liquidity, regularity of income, and preservation or appreciation of capital.
g) An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

(6) Investment Advice – A trustee must diversify the investment of trust property to an extent that is appropriate to do: a) the requirements of the trust; and b) general economic and investment market conditions.

(7) Investment Advice – A trustee may obtain advice in relation to the investment of trust property.

(8) Reliance on Advice – It is not a breach of trust for a trustee to rely on advice obtained under subsection (7) if a prudent investor would rely on the advice under comparable circumstances.

The appointment and acceptance to be a trustee of either a testamentary trust or an inter-vivos should not be taken lightly. A trustee should be someone completely trustworthy because a trustee/s will be the one who decides how money will be invested and how income and capital will be distrusted from the trust to the beneficiaries.

Written by Peter Merrick

Peter Merrick, FMA, CFP, FCSI, Instructor at George Brown and Seneca Colleges, President of Merrick Wealth Management, a boutique financial planning, employee and executive benefit consulting firm.

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