Feb 03, 2010

The Prudent Investor Rule

On July 1, 1999 the Trustee Act of Ontario was amended. The Act had previously provided a list of authorized investments for persons acting as executors in estates or trustees of a trust. The list consisted of debt issued by banks, government, or trust companies such as treasury bills, GICs, and equities of Canadian companies that met a certain dividend test. In addition, there were limits on the size of any particular investments based on the size of the entire investment amount.

Over time, the "legal list" had become too restrictive and did not keep up with the investment trend followed by most investors. Investors moved out of the types of investments set out in the legal list due to the decline of interest rates and moved into mutual funds, stocks and bonds. The legal list became impractical and was, more often than not, specifically excluded in drafting wills and trusts.

In addition, the development of the common law resulted in disallowing trustees to invest in mutual funds and a strict approach to trustee responsibility for losses in the trust.

The amendment to the Act replaced the former legal list of authorized investments with the "prudent investor" standard.

The Act no longer sets out the types of investments that Trustees are authorized to make but rather sets out an investment methodology. Trustees in Ontario must now exercise the standard of care, skill, diligence and judgement that a prudent investor would employ in making investments.

The Act now requires a trustee to diversify the investment of the trust property as are appropriate given the requirements of the trust and under the general economic and investment market conditions.

The Act sets out specific criteria that must be considered by a trustee in planning the investment of trust property. Those are:

1. General economic conditions. 2. The possible effect of inflation or deflation. 3. The expected tax consequences of investment decisions or strategies. 4. The role that each investment or course of action plays within the overall trust portfolio. 5. The expected total return from income and the appreciation of capital. 6. The needs for liquidity, regularity of income and preservation or appreciation of capital. 7. An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

The rule against the delegation of trustees' powers or duties is modified by the Act so as to permit Trustees to invest in mutual funds.

Of interest to investment advisors, the Act specifically authorizes a trustee to obtain advice in relation to the investment of trust property.

Lastly, if a trustee is liable for a loss to the trust arising from the investment of trust property, the court assessing the damages payable by the trustee is now allowed to take into account the overall performance of the investments thus eliminating the former "anti-netting rule".

If you are a trustee of a will, a trust, or a director of a charitable organization, this new rule may affect your duties and obligations.

If you have a Will, now is the time to have a look at it and bring it up-to-date!

If you are contemplating a Will or setting up a trust, this is a consideration requiring expert advice.

For more information, call Mary Wahbi

Photography by OTA Photos