Financial Planning

Are you giving your trustees enough guidance?

A family trust is still a good vehicle for housing wealth, but, like most vehicles, it is only as good as its driver. The trustees are the driver of a trust as it is they who exercise their discretion in the best interests of the beneficiaries. Trustee services include an element of administration which can be performed to a greater or lesser degree by way of processes and systems. But comprehensive and personalised trustee service needs to be driven in consultation with the founder (or settlor) of the trust and the founder’s family so that trustees can be guided on the purpose and aims of the trust.

Two documents can prove very useful in this process. The first is an investment policy statement (IPS), and the other a memorandum of principles (MOP).

Investment policy statement

The primary aim of a trust may be to preserve wealth. This requires suitable investment of the assets and, to achieve this, the trustees may employ independent investment managers. The trustees may also wish to draw up an investment policy statement (IPS) which is an outline of the philosophy and investment principles that will guide the investment management of the trust assets. It should outline the objectives and constraints for the portfolio, yet be flexible and practical enough for implementation. The objectives and constraints deal with liquidity requirements and the need for distributions.  For example, is a monthly annuity required to meet living expenses or is an annual lump sum payment needed for education costs?

The IPS also details the general investment approach and the degree of risk and investment time horizon for the different portfolios. It may address aspects such as whether there are separate ring- fenced portfolios for different beneficiary classes. For example, the trustees may have a portfolio which is invested to generate income to educate a class of beneficiaries, say the grandchildren of the founder. This class may not require funding for a period of time and may then require a significant income drawdown on the funds. By ring-fencing this need into one portfolio, the investment managers can invest the assets accordingly. The IPS could also state permissible asset classes, taking into account any wishes that the founder may have. For example, investments may need to be Sharia-compliant or avoid ‘sin shares’ (companies selling tobacco and alcohol).

The IPS provides guidance on investment review and reporting. This could include the frequency and nature of reporting, such as whether the various portfolios are reported separately or consolidated, and benchmarks to measure the investment managers’ performance. The appropriateness of the IPS to the beneficiaries’ personal circumstances should also be reviewed annually.

Memorandum of principles

The secondary aim of the trust may be to apply the preserved wealth for the benefit of the beneficiaries. To assist in this regard, the trustees may wish to draw up a memorandum of principles ( MOP). The MOP guides the trustees on the reasons for the establishment of the trust and how the trust should be administered in the future. It is a record of wishes and is not intended to be legally binding. It is rather merely a request to the trustees to take the principles in the memorandum into account when acting or refraining to act in relation to the trust.

The MOP states the purposes of the trust; for example, it may be intended to provide for the long-term financial security of the founder’s family and/or to serve as a fund from which charitable activities may be funded and /or to allow the value of the assets not required to sustain the potential beneficiaries to accumulate outside their personal estates. To achieve these purposes, the MOP will request the trustees to establish a long-term basis for the efficient and professional holding, investment and management of the funds and/or to generate sufficient income to meet funding requirements and/or to invest assets with a view to their growth for future generations, and the prudent application of the assets for the benefit of the beneficiaries. Regarding the application of the assets by the trustees, the MOP should detail the specific nuances relating to the founder’s family. These could include whether lifestyle and education are to be funded from the assets, the principle being that the assets should primarily be used for the purposes set out in this clause of the document.

The prudent and appropriate application of assets may require the trustees to take into consideration the beneficiaries’ needs in the light of their own resources and funding. It may also request the trustees to discourage sudden large fluctuations of expenditure and request that distributions should not be at such a level as to demotivate beneficiaries from the development of a focus in life or a career.

The MOP may also contain provisions relating to the balance between the interests of the current beneficiaries and future generations. It may even contain a provision limiting the maximum amount of income distributed to a percentage of the income; for example, a maximum of 50% of the income may be distributed per annum and the balance capitalised. There may also be provisions limiting capital awards only to projects which may have the potential to be income- or capital-generating in their own right, such as business ventures.

It is not uncommon for a MOP to contain guidance on consultation with specific family members before a decision is reached.

The drafting of the above two documents is not vital to the administration of the trust, but, together or separately, they can greatly enhances the trustees’ understanding of the founder’s intention and thereby improve the overall efficiency of the trustee service.

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