February 7, 2022
One of the key duties of a trustee, including an estate trustee, is to invest the trust or estate assets. Failure to invest is a breach of trust, for which the trustee may be required to reimburse the estate or beneficiaries.
But what do trustees invest in?
And what if you, your trustee or your beneficiaries are in favour of “ethical investing” – choices intended to support environmental, ethical or social goals as well as returning a profit?
The trust instrument – the will or declaration of trust – governs. It may set the rules that the creator of the trust or will desires. However, circumstances change over time, and the terms of the trust are often left broad to allow flexibility in the future.
In the absence of comprehensive direction in the trust instrument, for many years, Ontario’s Trustee Act did the opposite of encouraging flexibility. The Act specified the categories of investments considered safe and limited trustee investments to those “blue chip stocks” and other investments considered “safe for widows and orphans”.
There were problems with this approach. Along with “safety”, the returns on the investment were often lower than what you might get if you invested your own money wisely. And you just need to look around to see that many of the companies behind those “blue chip stocks” turned out not to be so safe after all.
So, the Act was amended to adopt the “prudent investor rule”.
What does that mean?
It means that unless the trust instrument says otherwise, in investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments. Now, a trustee may invest trust property in any form of property in which a prudent investor might invest.
But what does this mean? And is “ethical investing” something a prudent investor might do?
Unfortunately, as we will see, the answer is still “maybe”. So, if you are creating the trust or estate, this is an issue that you want to discuss with your lawyer at the time of drafting, so that they can include terms in the trust instrument or will that give permission and direction to your trustee.
In the absence of express direction in the trust instrument, Ontario law has adopted an approach from a British case involving a pension plan that wanted to divest of investments in South Africa during apartheid (and other investments).
That case suggests that “ethical investing” may be allowed if the result is “equally beneficial” to the beneficiaries as a policy that does not include ethical investing. The case sets out other principles to help you know when ethical investing may be proper:
- Trustees are open to criticism if an investment is less beneficial than the alternative
- Trustees must put aside their personal views
- “Benefit” does mean not solely financial benefit; the beliefs of beneficiaries are relevant – if all beneficiaries are staunchly opposed to smoking or gambling or pornography, as a few examples, they benefit from the trustee respecting those beliefs and not investing in those industries
- The prudent investor rule includes a duty to seek professional advice
- Trustees should consider diversification
The first thing to unpack from this is that it is not the trustee’s views that matter. This is consistent with the general duty that trustees must always act in the best interests of the beneficiaries. If you are the settlor or creator of the trust, you also need to be aware that once you create the trust, it is no longer YOUR interests that are paramount. So if you have beliefs that you want respected, you need to provide for that in the trust instrument.
The other important take away is that “ethical investing” may aid the goal of diversification. A professional advisor may also tell a trustee that in the modern world, there is a risk in NOT investing ethically – many of the companies that fail these days do so because investors generally shy away due to lack of social responsibility; or their markets vanish; or governmental regulation makes it unprofitable to be irresponsible.
Because of this, ethical investing may well be a prudent policy – but lawyers are not the sort of professional advisors you ought to seek investment advice from. All we can really tell you is what the law permits, and that you should seek advice.
If you are creating the trust or writing your will, ethical investing is something you might want to consider. There are pros and cons. For example, what if your heirs have different views as to what is ethical, either differing from yours, or conflicting with each other? Can you select a trustee who has the judgment to handle those situations?
The questions surrounding ethical investing are not issues that a will form or computer program can help you work through during the drafting process. A “canned” will kit may not provide the custom language needed to clearly express your views and give appropriate powers and directions to your trustee. Only by having your will prepared by a lawyer can you fully reach a conclusion that expresses and protects your unique intentions.
If you are a trustee or beneficiary with concerns about ethical investing, you may also benefit from expert legal advice – the modest cost may save you expensive grief later.
In selecting the right lawyer to provide you with will drafting or other trusts and estates advice, you should consider whether they know and can work with your investment advisors. At Weilers Law we do not know EVERY advisor in Thunder Bay – there are so many – but through our practice and our community activities, we have worked with or met many of them, and believe that our experience and reputation will make it easy for us to work with those we have yet to meet.