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Trustees' duties and powers — SQE1 Trusts question

A worked single-best-answer question on trustees' duties and powers, with why each wrong option is wrong — the way SQE1 traps candidates.

Trustees' duties and powers

Viv and Wes are the unpaid lay trustees of a family trust holding £600,000 in cash. The trust deed contains no investment clause. A friend of Wes has recommended an unlisted technology company, and the trustees propose to invest the whole £600,000 in its shares. They do not intend to take any professional advice, as they believe the friend's tip is a good one. The life tenant has asked whether they can do this.

Which of the following best describes the trustees' position?

  1. AThey may invest as proposed, because the general power of investment allows trustees to make any kind of investment they could make if absolutely entitled.
  2. BThey may invest only in the categories of investment authorised by statute for trusts with no investment clause.
  3. CThey may invest as proposed, because lay unpaid trustees are not subject to the statutory duty of care.
  4. DThe proposal is likely to be a breach of trust, because they must consider the suitability and diversification of investments and obtain proper advice before investing.
  5. EThey may invest as proposed provided they act honestly and in good faith.
Show answer and reasoning
D is the best answer. Although s 3 of the Trustee Act 2000 gives a general power of investment, in exercising it trustees must have regard to the standard investment criteria, including suitability and the need for diversification (s 4), and must obtain and consider proper advice unless they reasonably conclude it is unnecessary (s 5). Placing the whole fund in one unlisted company on a friend's tip without advice is very likely to breach these duties.

Rule: Trustees exercising the general power of investment must consider the standard investment criteria of suitability and diversification and obtain and consider proper advice unless reasonably unnecessary.

  • A The general power exists, but its exercise is subject to the duties in ss 4 and 5, which the proposal ignores. (answers a different question)
  • B The restricted list of authorised investments under the Trustee Investments Act 1961 was replaced by the general power of investment. (wrong rule)
  • C The statutory duty of care applies to all trustees; being lay and unpaid affects only the standard expected. (wrong rule)
  • E Honesty is not enough; trustees must also comply with the statutory duties and the duty of care. (wrong rule)

Source: Trustee Act 2000, ss 1, 3, 4 and 5

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