Trustees powers; the balance between income and capital beneficiaries

We are asked to advise the trustees of a life interest trust. Step mother is the life tenant and the family trustees are the capital beneficiaries on life tenant’s death. We have advised of the general duty of trustees to balance investments betwixt the two interests. The Will incorporates the STEP First Edition powers which on comparison with the Second Edition appear quite different in so far as the first state that “the Trustees may decide not to hold a balance between conflicting interests of Persons interested in Trust Property”. The trustees wish to see more capital growth as the life tenant in their eyes is “not short” in any way applying what they see as practical fairness test. This is particularly so since they agreed to the life tenant downsizing in terms of a trust property after the deceased’s death thereby releasing additional cash for investment which was not originally envisaged by the deceased. The trustees feel they are not seeing capital growth in terms of bricks and mortar in this respect which would otherwise have been the case. Can the trustees use the STEP powers they have to shift the balance return towards capital growth as they would like?
Angela Scott
Thomson & Bancks LLP

The simple answer is “Yes, they can”.

However, the trustees need to be aware that just because they are given a power, they are not compelled to use it.

When they do use such a power, they are bound by the test of reasonableness, which will mean different things to different people.

The main issue here is probably that by looking towards capital growth, rather than income generation, the trustees appear to be looking to their own interests and not to the purposes of the trust, which would often in these circumstances be to benefit the widow whilst preserving the estate for the deceased’s children. By freeing up capital of the trust as a result of “downsizing”, the increased liquidity has introduced greater flexibility in the management and investment of the fund, the benefits of which on would normally expect to be “shared” rather than allocated to the remaindermen. Whilst the widow “downsizing” may benefit her significantly, in the reduction of ongoing costs, if the new property is subject to service charges the move could have increased her annual outgoings.

It sounds as though the widow and children may not enjoy the best of relationships. If this is the case, then what appears “fair” to the children may not appear at all reasonable to the widow. Despite having the power under the trust instrument, the trustees might decide to maintain a “balanced” investment profile so as to avoid costly (both financial and emotional) disputes with the widow.

Paul Saunders

I am not sure what the trustees want to do. It seems from the original post that they are unhappy that they have downsized the house and the replacement assets have grown less than house prices.

There are three mainstream types of investment

  1.  Gilts and corporate bonds yield very little and frequently stand above par as yields are currently at a historic low so they fundamentally offer a guaranteed capital loss at maturity and do not seem to benefit anyone.
  2.  Equities in general yield more than Gilts so they seem to benefit  everyone but I would think that the life tenant should get the dividend income.
  3.  Property is the other option either through direct investment or through a fund or a REIT. These are much like equities as regards the life tenant/ reversioner split.

I suppose there is the fourth option of pride in possession objects such as antiques or maybe classic cars, but the logic of the situation suggests that the life tenant should have the benefit of them during her lifetime. However antiques can get broken and I am not sure that the trustees would be entirely happy for the life tenant to be driving round in an expensive classic car. I am not sure that these would be considered prudent investments.

There is always cash deposits but there is no capital growth there.

I suspect that the real problem is that investment returns are low and expected to remain low for years to come. If that is the case it is difficult, to escape that, unless the trustees want to do something pregnant with risk which the prudent man would avoid doing anyway.

Ian McKeever

Ian McKeever & Co Consulting Actuaries