So you are a trustee or you indemnify a trustee. Do you know if your trust fund is being properly safeguarded?

Safeguarding trust assets where trustees are individuals

These days, trustees are so focused on selecting the right basket of investment for a scheme’s profile they may overlook one of their key obligations: to safeguard the scheme’s assets.

In this article Fiona Thornton reflects on this basic duty and how, unwittingly, trustees who are individuals may be failing to ensure that their assets are lawfully held and transferred on a change of trustees.

  • A primary duty of trustees is to place the trust property in their own names and under their own control. Title to the assets must generally be vested in the trusteesas a body and it is not enough for only one of the trustees to exercise control or hold the title to the assets.
  • This duty may be varied by the express provisions of the particular trust deed.
  • Trustees are, as a matter of law, precluded from holding investments in the name of “the Trustees of the XYZ Scheme”. A trust is not a separate legal entity and therefore cannot hold assets in its own name.

Unitised Funds

  • Most unitised funds are not used to dealing with individual trustees and do not record the investor as the individual trustees (either choosing to record the owner as the scheme or the “trustees of the xyz scheme”) despite neither being a legal entity capable of holding the investments. Although it is not legally correct, it appears the managers do not seem to mind doing this and it makes their life easier.

The Subscription Form

  • It is key to ensure that the correct legal owners are described on the subscription form for the funds. If the fund then chooses, as a matter of practice, to record them as “trustees of the xyz scheme”, then that is up to the fund, but provided the trustees have subscribed in their own names (and properly transfer ownership on change of trustee), they should technically be complying with the trust deed even if the fund is using a short cut to record ownership in its registry.

Deeds of Appointment

  • The issue is slightly more complex for individual trustees as they may be required by their trust deed to hold investments in a certain way. On a change of trustees, there may be legal issues around whether contracts entered into by one set of trustees are enforceable by successor trustees.
  • A contract, such as an investment subscription agreement, may be in one set of trustees’ names and successor trustees may not be bound by it or the retiring trustee not discharged in respect of his/her obligations when he/she retires. Failure to ensure that the contract applies to successor trustees may put the trustees and their sponsor/the fund at risk if the manager does not discharge its functions properly.
  • These issues can be solved depending on the language in the deed of appointment, by using a particular form of words.

It is important for trustees, especially individuals, to arrange for a review of existing contracts to establish the names in which the trustees contracted with third parties, remedy any historic issues and put procedures in place to ensure that any prior bad practices are not repeated.