Obligations of trustees

Modern legal practice in Commonwealth countries and the United States, as well

as in other places, clearly spells out the obligations of trustees with respect to the

property that they hold in trust for others. A.R. Mellows, in The trustees handbook (3rd edition, 1975, 60) summarises these obligations in two points:

 The trustee(s) must do the best he or she reasonably can for the beneficiary, within the limits of the law;

 The trustee(s) must treat all beneficiaries equally and fairly, and not place one beneficiary in a better position at the expense of the others.

Mellows points out that these are only the most general obligations of trustees and

that they are especially important when applied to investments. The trustees must

balance the twin goals of high return and low risk and also take into account the

interests of all beneficiaries. This has important considerations with respect to

permanent and long-term trust funds, in which many of the beneficiaries are yet

unborn. Investments that generate high returns in the present, but sacrifice long-

term stability or income generation, would contravene this principle.

Samantha Hepburn (2001, 335-352) provides a more elaborate discussion

of the obligations of trustees. She specifies ten obligations for trustees, each of

which has a bearing on the trust funds considered in the following chapters. These

ten obligations, or duties, are:

 To avoid conflict of interest and to account for any profits;

 To act with reasonable prudence;

 To act in the interests of the beneficiaries;

 To act impartially;

 To keep funds separate (from the trustees’ own funds);

 To act gratuitously;

 To invest in authorised securities;

 To not purchase trust property;

 To keep accounts;

 To allow beneficiaries access to trust documents.

avoid conflict of interest, to act prudently, to act in the interests of beneficiaries, to

act impartially, and to keep funds separate, are all fairly straightforward. These

first five obligations are also closely related to Mellows’s two more general

obligations. Trustees are required to avoid any conflict of interest between their

own business or financial affairs and those incumbent upon them as trustees, and to

keep the beneficiaries’ funds separate from their own. They are further required to

act in the best interests of the beneficiaries and to do so without favouring some

beneficiaries over others. The property or funds held in trust must be managed

prudently and thus avoid speculative investments. The first five obligations suggest

a clear distinction between an individual trustee and his or her property, and the

beneficiary and his or her property, emphasizing the concept of individually-held

property. The obligations also assume a consensus surrounding the concept of

prudence—a concept continuing the individualist notion, as the trustee is obligated

to display the same prudence in investment for others as he or she would for his or

her own property.

The remaining five obligations are perhaps more subtle. The duty to act

gratuitously refers to the rule that trustees cannot receive any profit from the funds

held in trust (Hepburn, 2001, 343). The exception to this is where the trust

specifically allows for remuneration or where there is an agreement between the

beneficiaries and the trustees. The obligation to invest in authorised securities

requires the trustees to follow the instructions provided by the trust instrument,

statute, or the courts (Hepburn, 2001, 344). For example, the Alaska Permanent

Fund was originally prohibited from investing in non-United States equity

securities. This provision was later removed by a referendum in which Alaskan

equities. Trustees are obligated to not purchase trust property. This would give

them an unfair advantage, as trustees could use their position to influence the

transaction. Trustees must also keep proper accounts and make these available to

the beneficiaries. They must also make other, non-financial, documents available if

these relate to the trust.

Most of the ten obligations of trustees reflect a Eurocentric bias;

unsurprisingly so, as the trust is a European institution. Ideas of private property,

which remains private even in the absence of the owner, are embedded in the trust.

So too are notions of profit (in the sense that trusts can generate profits, but that

trustees themselves cannot profit from the trust), concepts of prudence (European

understandings of what a ‘prudent’ person would invest in), and impartiality (no

favouritism towards family or one’s kin or peer groups). Moreover, securities

(bonds and shares) are European ways of creating and holding value, and they are

implicit in the ways in which trusts invest. Investments of this type also require the

keeping of accounts, to reflect changes in the value of securities within a market

for them. The Eurocentric nature of the trust should be borne in mind when

contemplating the use of this institution in non-European settings, especially those

in Oceania where European economic culture only lightly overlays traditional

Oceanic economic imaginings and practices.

As will be seen in the following chapters, the performance of trust funds, in

terms of their ability to provide for the welfare of the beneficiaries, is directly

related to the trustees’ ability to adhere to these ten obligations. The trustees’

adherence to their obligations under the law of trusts is the greatest factor in

accounting for the performance of the six trust funds considered here. Chapter 7

each of the six trust funds, and develops six criteria, closely related to trustees’

obligations, that are responsible for the fiscal and spatial effects of each fund.