Investment Planning for Trusts and Estates: A Practical Guide for Trustees

Trustees of family trusts, charitable trusts, and estates in administration occupy a position of significant legal responsibility. Unlike an individual investor managing their own wealth, a trustee is managing assets on behalf of others — beneficiaries who may have competing interests, and a legal duty of care that extends well beyond what a prudent investor would apply to their own affairs. Making investment decisions without a clear understanding of the trustee's legal obligations can expose trustees to personal liability.

This guide covers the principal investment obligations under UK trust law, the practical challenges of balancing competing beneficiary interests, and how a well-structured investment policy statement protects both trustees and beneficiaries.

The Trustee Act 2000: The Statutory Duty of Care

The Trustee Act 2000 established a statutory duty of care that applies to all trustees when exercising investment functions. A trustee must act "with such care and skill as is reasonable in the circumstances, having regard to:

(a) any special knowledge or experience that he has or holds himself out as having, and (b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession."

What this means in practice. A lay trustee (a family member acting as trustee of a family settlement) is held to the standard of a reasonably prudent person managing others' property. A professional trustee (a solicitor, accountant, or specialist trust company) is held to the higher standard of their professional expertise. In both cases, the duty is to act as a prudent investor would act for the benefit of others, not for their own account.

Investment implications. The Trustee Act 2000 specifically empowers trustees to invest in "any kind of investment" — removing the historical restriction to a narrow "authorised investments" list. However, this broad power comes with corresponding obligations: trustees must exercise the investment power with due care, diversify appropriately, and review investments regularly.

The General Duty to Invest and Diversify

Section 4 of the Trustee Act 2000 requires trustees to have regard, when investing, to "standard investment criteria" — specifically:

1. The suitability to the trust of the kind of investment proposed (and of the specific investment), taking into account the purposes of the trust and the needs of beneficiaries
2. The desirability of diversifying the trust's investments

Diversification as a duty. Unlike an individual investor who may choose to hold a concentrated portfolio, a trustee has a legal duty to diversify — unless there is a specific power in the trust deed overriding this duty or a compelling reason why concentration is in the interests of all beneficiaries. A trustee who holds 90% of trust assets in a single stock without documented justification is at risk of a successful breach of duty claim by a disadvantaged beneficiary.

Suitability review. Trustees must review the suitability of existing investments, not merely new purchases. The same due care that applies to acquisition also applies to retention. If an investment that was appropriate at acquisition has become unsuitable (e.g., a property investment that generates insufficient income for a trust whose primary purpose is income distribution to a life tenant), the trustee has a duty to address it.

Balancing Income and Capital Beneficiaries

Many family trusts create a split between income beneficiaries (who receive the trust's income during their lifetimes — often a surviving spouse) and capital beneficiaries (who receive the capital upon termination of the income interest — often the children). This structure creates a fundamental tension:

Income beneficiary's interest. The income beneficiary wants the trust to invest in high-income assets — bonds, equities with high dividend yields, property with good rental yields. Low-income assets that appreciate in capital value do not benefit them during their lifetime.

Capital beneficiary's interest. The capital beneficiaries want the trust to maximise long-term capital growth — total return, including capital appreciation. High-income assets that pay out all return as income leave less to compound into capital value.

The Nestlé v National Westminster Bank [1993] principle. English case law requires trustees to act impartially between different classes of beneficiaries. Investing exclusively for income (depleting capital growth at the expense of capital beneficiaries) or exclusively for capital (at the expense of income beneficiaries) is a breach of the duty of impartiality.

The total return approach. A widely adopted solution is the total return investment approach, under which the trust invests for total return (without preferring income over capital) and distributes a fixed percentage of the trust's total value to the income beneficiary each year (typically 3–4%), regardless of whether that amount came from income or capital distributions. Express powers in many modern trust deeds (and, in some cases, an application to court or use of statutory powers to allocate between income and capital) permit this. The total return approach allows full diversification — including growth assets that pay little dividend income — while meeting the income beneficiary's income needs from a combination of income and capital.

Investment Policy Statement for Trustees

The Trustee Act 2000, Section 5, requires trustees to obtain and consider "proper advice" before exercising investment powers, and to review investments regularly. The starting point for a trustee investing fund with a reasonable amount should be a written Investment Policy Statement (IPS) addressing:

Purposes and objectives of the trust. What is the trust for? Long-term capital accumulation for grandchildren? Current income for a surviving spouse? Charitable grant-making? The investment policy must reflect the trust's purpose.

Investment horizon. How long will the trust exist? A trust with a 25-year horizon can accept more illiquidity and equity risk than one that will terminate in 5 years.

Beneficiary profile. Who are the current and future beneficiaries? What are their needs? Are there competing interests between income and capital beneficiaries?

Risk tolerance. What level of portfolio volatility and potential drawdown is consistent with the trust's purposes? A charitable trust making regular grants needs liquidity; a family trust accumulating for grandchildren can tolerate more short-term volatility.

Asset allocation. Target weights for each asset class, with allowable bands around the target. The allocation must reflect the conclusions on horizon, risk tolerance, and beneficiary needs.

Diversification standards. Maximum concentration in any single security, sector, or geography.

Permitted and excluded investments. Are there ethical or policy exclusions? Can the trust hold alternative investments (PE, hedge funds)? Is leverage permitted?

Review frequency. At minimum, an annual investment review should be documented. Major market events may require interim reviews.

Delegation authority. Has the trust delegated investment management to a discretionary manager? Under what terms? The trustee retains responsibility for monitoring the manager even when delegation occurs.

Delegation and Monitoring

Trustees may delegate investment management functions to a discretionary investment manager under Section 11 of the Trustee Act 2000. The delegation must:

• Be in writing
• Subject the agent to a policy statement from the trustees (effectively the IPS)
• Include terms for reviewing the agent's performance

Trustees retain oversight responsibility. Delegation does not transfer liability. A trustee who delegates to an investment manager and never reviews performance or checks the portfolio against the policy statement is still at risk of breach of duty. Regular documented review meetings with the investment manager, at least annually, and documented consideration of the manager's performance against the policy statement, are best practice.

Tax Considerations for UK Trusts

Trusts are taxed in a complex manner that affects investment strategy:

Income tax. Trust income (dividends, interest) above the trust standard rate band is taxed at the trust rate (currently 45% for income from savings/investments, 39.35% for dividends). This very high trust tax rate on income within the trust makes income-accumulating investments expensive. Distributing income to beneficiaries may be more tax-efficient where they are lower-rate taxpayers.

Capital gains tax. Trusts have an annual CGT exempt amount of half the individual exempt amount (£1,500 from 2024/25). CGT within the trust is charged at 24% on gains for both residential property and other assets (following the rate changes that took effect on 30 October 2024). Distributions of assets from a trust to a beneficiary are disposals for CGT purposes (with a holdover relief election possible in some cases).

Inheritance tax. Discretionary trusts are subject to 10-year anniversary inheritance tax charges (at up to 6% of the trust's value above the nil-rate band) and "exit charges" on distributions. The level of the periodic charge depends on the trust's value and the settlor's available nil-rate band. Large IHT charges every 10 years affect the trust's investment strategy — the trustee needs liquidity to meet the charge or must plan to use portfolio assets to fund it.

Interest in possession trusts. Trusts with a current income beneficiary (life tenant) are typically "interest in possession" trusts for IHT purposes. On the death of the life tenant, the trust assets pass to the capital beneficiaries as part of the deceased's estate.

Common Trustee Investment Mistakes

Excessive caution. Some trustees hold excessive cash balances for fear of losses, falling short of the duty to invest trust assets productively. Hoarding cash below inflation rates is also a breach of the investment duty in many cases.

Failure to diversify. Concentrating trust assets in a family business or property on the grounds of familiarity without proper diversification analysis.

Not obtaining proper advice. Trustees of substantial trusts who invest without written professional advice documentation expose themselves to personal liability claims.

Failure to review. Setting an investment policy in 2015 and never reviewing it is not adequate. Market conditions, tax rules, beneficiary circumstances, and the investment universe all change.

Mixing personal and trust assets. Holding trust assets in the trustee's own name (commingled with personal assets) is a serious breach. Trust assets must be registered in the trustees' names as trustees or with a nominee service.

Compliance Notes

UK trust law and tax rules are complex and subject to change. This guide is a general overview and does not constitute legal or tax advice. Trustees should seek specialist legal advice when establishing investment policy for a trust, and should consult a tax adviser on the trust's specific IHT, income tax, and CGT position. The duty of care imposed by the Trustee Act 2000 creates personal liability for individual trustees who fail to meet it. This guide is for information purposes only.

How Global Investments Can Help

We provide investment management services for family trusts, charitable trusts, and estates in administration. Our trust investment service includes preparation of a documented Investment Policy Statement, discretionary portfolio management within the stated policy, and regular trustee review reporting that documents compliance with the IPS and the Trustee Act 2000 duty of care. Contact us to discuss how we can support your trustee obligations.