Investing Trust or Estate Assets During a Global Pandemic – Are You Meeting Your Obligations?

Investing Trust or Estate Assets During a Global Pandemic – Are You Meeting Your Obligations?

Ryan MacNeil
Posted May 3, 2021 Category: Individuals/Families, News & Updates

In light of increased market volatility brought about by the COVID-19 pandemic, it is now more important than ever for executors and trustees to monitor their investment of estate or trust assets to ensure that their investment strategies will withstand scrutiny.

The “Prudent Investor” Rule

In Ontario, an executor or trustee must exercise the care, skill, diligence and judgment that a “prudent investor” would exercise when making investments, or risk personal liability for any losses arising from imprudent investing.  This is often referred to as the “prudent investor” rule.

Under the prudent investor rule, whether an executor or trustee will face liability for losses to trust or estate assets will depend on whether a prudent investor in the executor’s or trustee’s circumstances would have made the same investment. Since the focus is on the reasonableness of the investment strategy rather than the ultimate outcome, a trustee who invests funds prudently but nonetheless suffers losses will not be held liable for those losses, whereas a trustee who invests funds imprudently but nonetheless realizes a healthy return on his or her investment may still be subject to censure by the courts.

In assessing whether a particular investment is “prudent” or not, the courts will look at a number of factors, including:

  1. The general economic conditions that existed at the time the funds were invested;
  2. The effect of inflation;
  3. The tax consequences of the chosen investments;
  4. The role each investment plays in the overall investment portfolio;
  5. Expected rates of return;
  6. The needs for liquidity or the preservation of capital; and
  7. The extent and need for diversification.

Steps to Limit Your Liability

While the list of factors that an executor or trustee must consider when investing funds can seem overwhelming, if you are acting as an executor or trustee there are some straightforward steps you can take to help discharge your investment obligations and reduce the risk that you may be found personally liable for losses to the trust’s or estate’s funds.

  1. Have a Lawyer Review the Will or Trust Document

Before accepting an appointment as an executor or trustee it is critical that you consult a lawyer to review the will or trust document, since the document could contain prohibitions on particular investments, or may require that the trust have sufficient liquid assets to make routine payments to the beneficiaries that will need to be considered when making investments.

Furthermore, if you accept an appointment as an executor and the will contains a testamentary trust that appoints the executor as trustee of that trust, then you will be deemed to accept the trustee appointment by virtue of accepting your appointment as executor, and you may require a court order to retire from your trustee position if you no longer wish to act as trustee. Ultimately, retaining a lawyer to review the will before accepting an appointment as an executor will allow you to identify trusts that could cause your investment obligations to continue decades after the estate administration has concluded.

  1. Obtain Professional Investment Advice

The courts have long held that executors and trustees are entitled to seek professional advice when investing trust funds, that the fees associated with these services are a reasonable expense for the trust or estate to bear, and that hiring a financial advisor does not decrease the amount of compensation the executor or trustee may claim for his or her work in administering the trust or estate. Considering this, the risks posed by not obtaining professional investment advice greatly outweigh any possible benefits.

  1. Monitor and Record

Seeking professional investment advice as an executor or trustee will not relieve you of your investment duties or eliminate your liability, it is simply one factor that will help show that you acted reasonably in investing trust funds. As such, in addition to seeking professional advice, you should carefully record the advice you are given and the reasons for choosing one investment strategy over another, so that you can justify your investment decisions if questioned by a beneficiary. Moreover, once you have chosen a particular investment strategy, you should continually monitor the investments to make sure that the investment strategy remains prudent in the circumstances. 

  1. Consider Purchasing Executor’s Insurance

It is now possible for executors to purchase insurance to protect themselves against personal liability arising from any errors, omissions, or the negligent performance of their duties. Although it is questionable whether the estate should pay the premium costs to purchase such insurance, if you are not willing to put your personal assets at risk to administer an estate, the protection afforded by insurance may be a worthy investment.

  1. Obtain the Consent of the Beneficiaries

As with any action taken by an executor or trustee, it always best if you have the unanimous consent of the beneficiaries to support your decision. However, unanimity may not be possible in every circumstance, and you should not unnecessarily delay investing trust or estate assets simply because you lack the unanimous consent of the beneficiaries.

These are only a few examples of the ways executors and trustees can discharge their investment obligations. If you are considering accepting an appointment as an executor or trustee, or if you are already acting as an executor or trustee and would like to discuss ways you can meet your investment obligations, please contact the Wills and Estate Group at Cunningham Swan.

Ryan MacNeil
Posted May 3, 2021 Category: Individuals/Families, News & Updates

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