Investing a trust

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Investing a trust

Postby turquoisegecko » Fri Feb 01, 2013 1:21 am

My two brothers and I are trustees for a trust formed by our parents. The trust is a revocable trust that was formed in Texas. The amount in the trust is in the low 7 figures. Half of the trust is in an actively managed account with AYCO. The other half will be managed by us- currently it’s in a taxable account with Schwab. Keeping things simple, we’ve decided to focus on passively managed index funds but we are also interested in having a small portion be available for us to actively select our own stocks. The 3-fund approach as discussed in the Boglehead wiki seems like a good approach. There’s no state income tax in Texas.

We have agreed upon a moderate risk allocation:
1. US Market (50%)
2. International Market (20%)
3. Fixed Income (20%)
4. Cash- 10%

Objectives of the trust:
1. To provide a security net should any of us or any member of our family need temporary help
2. To potentially provide a source of capital investment for a start-up business which we have consensus
3. To allow us or any of our children (if desired) to take reasonable risks in life such that any of us have the opportunity to make a difference

Operating Principles:
1. We intend to invest together (versus splitting it up three ways)
2. We intend to build wealth for future generations
3. We intend to each continue working until we are able to retire using our individual earning power (versus attempting to retire and live off the interest/gains and/or principal from the Trust)
4. We intend to personally direct the Trust’s investment at any given time (versus retaining an investment broker to manage it all)

Here’s what we are thinking:
US equities- VFIAX
International market- VWIGX
Bonds- VWSTX

Questions:
1. Is the allocation appropriate for our objectives?
2. Should we invest in VFIAX or a tax-managed fund like VTCLX or VTGLX?
3. With regards to the trust objectives, will VWIGX provide the appropriate allocation for developed market vs. emerging market or should it be more aggressive/less aggressive?
4. Should we be buying ETFs or mutual funds? I’m having a hard time figuring out which way will be more advantageous in regards to fees.
5. Since this is a taxable account, is there any advantage to investing in REITs?
6. For bonds, should we only invest in municipal bonds, and not treasuries/TIPS? What about a bond ladder?
7. Would it be reasonable to hold some I-bonds?
8. Would Vanguard’s intermediate-term tax-exempt bond fund (VWITX) be a better choice than the VWSTX?

We very much appreciate recommendations and advice!
turquoisegecko
 
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Re: Investing a trust

Postby dbr » Fri Feb 01, 2013 10:36 am

turquoisegecko wrote:
We have agreed upon a moderate risk allocation:
1. US Market (50%)
2. International Market (20%)
3. Fixed Income (20%)
4. Cash- 10%

US equities- VFIAX
International market- VWIGX
Bonds- VWSTX

Questions:
1. Is the allocation appropriate for our objectives?

I think so. However, 70/30 is risky, not moderate, but that is a loosey-goosey area to assess. To me cash is not different from bonds/fixed income in general. I don't see any need for cash as such.

2. Should we invest in VFIAX or a tax-managed fund like VTCLX or VTGLX?

You want VTSAX, total stock market not VFIAX, S&P 500. You would have to look at the total tax cost of the trust. The only good answer is to run dummy tax returns for the alternatives.

3. With regards to the trust objectives, will VWIGX provide the appropriate allocation for developed market vs. emerging market or should it be more aggressive/less aggressive?

I think you want VTIAX, total international. VWIGX is a growth stock fund, which does not mean the fund grows but that it invests in growth as distinct from value asset class.

4. Should we be buying ETFs or mutual funds? I’m having a hard time figuring out which way will be more advantageous in regards to fees.

If you are investing strictly in Vanguard funds, you would probably be better off placing the account at Vanguard. You may not be able to buy the Admiral share class of everything at Schwab. ETF's are also fine.

5. Since this is a taxable account, is there any advantage to investing in REITs?

I wouldn't mess around with REITs in any account, which is not saying there is anything wrong with it either.


6. For bonds, should we only invest in municipal bonds, and not treasuries/TIPS? What about a bond ladder?

Muni's is are selected based on running tax costs. At 30% bonds you should simply select a low cost diversified bond fund and go away. If by some chance you are talking tens of millions of dollars, the considerations may be different.

7. Would it be reasonable to hold some I-bonds?

You can only buy $10,000 annually, so is that workable? I'm not sure I would mess around with a Treasury Direct account in this case.

8. Would Vanguard’s intermediate-term tax-exempt bond fund (VWITX) be a better choice than the VWSTX?

You still need to analyze tax costs to determine if tax exempt bonds are appropriate. For those listening in, be advised the tax cost in trusts are quite different from individual tax rates. As far as short term vs intermediate term, you pays yer money and you takes yer choice. Risk in a 70/30 portfolio is hugely dominated by stocks and I think long term stay the course investors will be rewarded overall by going to intermediate durations. Mostly it does not matter.

PS It took me a lot of time to look up exactly what all those tickers actually were. Posters are encouraged to post exact fund names and tickers.

We very much appreciate recommendations and advice!
dbr
 
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Re: Investing a trust

Postby Gill » Fri Feb 01, 2013 12:44 pm

You mention this is a revocable trust which would seem to indicate all income from the trust is taxed to your parents and it will likely be taxed in their estates. Are you sure it is not irrevocable?
Bruce
Gill
 
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Re: Investing a trust

Postby nydad » Fri Feb 01, 2013 11:53 pm

You could also just put it all into a simple fund of
Funds like VAGSX (life strategy growth)-

you can choose between stock/bond
Split at 60/40 or 80/20. The advantage is it will
Balance itself and will be zero maintenance given
You all have other jobs and investments and life to deal with.
It also makes withdrawal easier - you just sell shares of a single fund.

The ER is low (.17). If you mimicked this portfolio
With admiral funds your expenses would be slightly lower
But then you would have to manage balancing Yourself.

If you want to overweight emerging markets, that's
A risk/reward trade off. I personally do so, but
It's not guaranteed to do better than simply holding
The market cap of EM which total international does ( part of the life strategy fund)

I don't know about trusts and tax issues so those need
To be taken into account, but for simplicity's sake a single
Fund is hard to beat...
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