HM Insights

Coronavirus: what does a trustee need to do as trust income and estates drop in value?

While much of the focus around the current pandemic has been on the health and wellbeing of individuals, and rightly so, the economic impact cannot be ignored. For trustees, who are constantly required to balance the needs of the beneficiaries and the investment of the trust funds, this is a particularly trying time.

With some forecasters predicting a 25% drop in dividend income over the next year, this will clearly impact on beneficiaries who are entitled to the trust income and many charitable trusts where grants are made out of the trust income. In such circumstances, the trustees may wish to consider whether the trust deed gives them power to make up the income shortfall from the capital of the trust but also whether this is prudent in the circumstances.


Can trustees be held liable for drops in a trust's value?

One hopes, if not expects, that over time the stock markets will recover and trustees very often are investing for the medium to longer term. There will be, however, trusts which have vested in the beneficiaries around this time. Those beneficiaries may feel aggrieved that the share of the trust estate to which they are now entitled is worth considerably less than it was, say, six months' ago. They may seek to lay the blame at the door of the trustees.

In the first instance, it should be remembered that just because the beneficiaries are entitled to their share of the trust, the trust assets do not have to be immediately sold. In most cases, the trustees will have the option of transferring the investments in specie to the beneficiaries who can then hold the investments in the hope of a recovery. Trustees should, therefore, be liaising closely with any beneficiaries who are in this position to ascertain whether the beneficiaries wish to take over the shareholdings, with their inherent risk, or whether they would wish the trustees to sell now to guard against the risk of further falls in the market.

More litigious beneficiaries may seek to hold the trustees accountable. In many cases, the beneficiaries will fail should the matter come to Court if they cannot persuade the Court that the trustees' conduct was a cause of the loss. The trustees arguably cannot be held liable for the loss when no one predicted the current financial crisis.

Trustees may take some comfort from an indemnity in the trust deed (which might typically say that the trustees are not to be held liable for any depreciation in the value of the trust estate). However, while this may excuse trustees for errors of judgement, it will not assist those who have been guilty of gross negligence.

First and foremost, trustees should be seeking investment advice on an ongoing basis. Trustees should maintain a record of the reports issued by the advisers, the recommendations made, the consideration of those recommendations and the actions taken by the trustees as a result. Clearly, face-to-face meetings are not currently possible but meetings by telephone or video call with all interested parties will help to ensure that trustees can steer the trust through these choppy waters

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Should you have any questions regarding the obligations of trustees, our Private Client specialists would be happy to help.

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