Probably the best known “family trust” in Australia was the estate of George Adams, which was founded in the late 19th century. It eventually became the listed public company, Tattersall’s Limited, in 2005.
Most modern family trusts are more modest affairs, but there are now more than 500,000 of them in this country. Most are owned by ordinary citizens – they are not the exclusive province of the super rich. Some of these trusts are deceased estates, but most are set up by a trust deed while their promoters are still very much alive.
The aim of all investors is to maximise the size of their total wealth. This applies equally in the case of individuals, institutions and family trusts. All trustees have a legal and moral obligation to invest their trust funds in the best interests of their beneficiaries. While some family trusts are used to operate businesses or farms, most are pure investment vehicles. Their assets would consist of the same types of investments as the portfolios of the individuals forming them – fixed interest securities, ordinary shares, real estate, managed funds, and so on. These assets could, if desired, involve investments overseas as well as in Australia.
If you are the trustee of a family trust then your prime duty will naturally be to observe the provisions of the specific trust deed. However, a trustee must not act in a vacuum – a trustee should always have regard to the objectives of the trust and the risk profiles, cash needs and other circumstances of the individual beneficiaries.
Investing other people’s money requires greater care and greater conservatism than investing one’s own. Thus a typical family trust would probably wish to avoid owning highly speculative shares or to rely heavily on using borrowed funds.
But, subject to that important qualification, building up a portfolio for a trust fund is not all that different from building up any other portfolio.
A trustee is expected to set the short term and long term investment strategy and the asset allocation policy and then to make the day-to-day investment decisions on an ongoing basis.
Trustees need to undertake periodical reviews of the investment portfolios in their charge and to monitor the performance of any external fund managers being used. Trustees are also responsible for the routine administration and bookkeeping and the preparation of the annual income tax returns. They must ensure that all trust assets are clearly identified as such.
Specifically, in regard to investments, a trustee should always give consideration to the importance of spread and the suitability of any new investments not only on their intrinsic merits but also having regard to the investments already being held by the trust (and possibly also to those being held by likely beneficiaries).
It is important to match risk and reward. And old stock exchange adage is: “If it sounds too good to be true, it probably is.” There are no black and white answers to most investment questions, but clearly trustees should avoid some of the classic mistakes often made by individual investors.
For example, in regard to borrowing, trustees should not aim at minimising income tax instead of maximising returns. If an investment does not stand up on its own merits then it cannot be made attractive by negative gearing. All investors need to realise that, while gearing can magnify profits, it also magnifies losses.
A family trust which (say) holds only fixed interest securities which keep their value in dollar terms but not in purchasing power will not really have served its beneficiaries very well. In any case, not all fixed interest investments are capital secure – interest rate increases can cause the market value of long term securities to fall significantly.
As the recent collapses of Westpoint, Fincorp and ACR have shown defaults can also occur.
The effect of inflation in the long term is often overlooked. To illustrate, 3 per cent per annum sounds a pretty low rate of inflation. However, over the 80 years life of a typical family trust the purchasing power of a dollar at the beginning of this period falls to about 9 cents at the end.
In conclusion, it is interesting to note that most Australian family trusts are financed by the father of the family, proving the accuracy of the French proverb: “A father is a banker provided by nature.”