Trustee with a investment dilemma

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dogman
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Joined: Fri Mar 23, 2007 2:09 pm

Trustee with a investment dilemma

Post by dogman »

I am hoping that some of the more knowledgeable Diehards can help me with my new job of managing the Trust investments of my parents Trust.
The Trust involves me and my sister as beneficiaries and the Grantor is 87 and in a nursing home. We have talked to two different Financial Advisers. One advocates a 60/40 Stk/Bond Allocation using an 11 fund,s&d wrap portfolio with a 1.35% fee/yr. The second proposed a 25 stock portfolio and a 30/70 Stk/Bond Allocation. Neither of these options is palatable to us. I favor an index approach after reading books by Bernstein and Swedroe.
We have assumed a 3-5 year time horizon before the assets may be divided-could be more as the Grantor has good genes.
My risk tolerance is low, while my sisters is only a touch more toward risk side.
I am 60, retired with a net worth of 200k and my sister is 63 retired with a net worth of 400k.

Now for the numbers . The Trust of 625K is currently invested as follows:

Franklin Utilities 98K
Franklin Income 83K
Oppenheimer Quest Value 32K
Oppenheimer Core Bond 58K
Eaton-Vance Strategic Income 61K
American Funds World Allocation 74K
Money Market 219K

We have looked at the gains on these funds to assess the tax implications, and with one fund. (American ) not counted there is a gain of 22K. Since the Grantor has sizable expense (120K/yr) in the nursing home, it would seem in the near term not to be a tax problem from the gain if sold , nor for downstream portfolio gain. We are in the process of consulting with the tax accountant about these issues.
Does anyone have any ideas on how to approach this? As anyone can see the expense ratio on most of these funds is not low.
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dm200
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Comments:

Post by dm200 »

1. Perhaps you have already done so, but make sure all the details are complete and accurate on the legal setup of the trust, any possible obligations (Some of these laws and regs have changed) if there is any kind of Medicaid eligibility involved. Better to get these things resolved now rather than have a surprise.

2. it seems to me the "target" timeframe is not the distribution of the trust assets, but rather the "target" of the ultimate use of the funds, which could be considerably longer.

3. The FIRST issue, IMO, is NOT index vs managed, but rather where the funds are invested and whether you pay someone for advice. If you pay someone, then who do you pay and how. Can you manage the investments yourself at Vanguard? That would be the least expensive, IF you can do it and want to do it.

4. I think (check with Vanguard) you can move these funds to vanguard, so you may not need to take a tax hit on all the gains.

dan
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dogman
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Post by dogman »

dm200

We have verified the Trust validity especially with respect to the Medicaid issues and it is fine.
The time frame is a rough estimate of the distribution because it will be shared between two individuals with different investment goals after the money is realized.
As far as managing a portfolio, paying someone is not high on our list unless there is some added value from it. I believe I have the ability to handle the details once an appropriate approach is arrived at.
The reasons we are considering any sales are twofold. First the allocation seems skewed to us and second the expenses are high enough that the effect they have on return is perhaps significant.
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hollowcave2
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I would seek a fee only financial planner for simple advice

Post by hollowcave2 »

I'd seek the help of an independent financial planner. Don't let them touch the accounts, just ask for their advice and a plan for a one-time fee.

My own opinion is that there's nothing wrong with letting things be. Your time horizon of 3-5 years is short and then the trust is liquidated. Even if the time is longer, I just don't see messing around with what you have. You have a relatively conservative mix. Now I am assuming that all of these funds are Class A shares, where the loads have already been paid. If some of these funds are Class B or C shares, then I would ask if they are eligible to become Class A shares soon. If not, then perhaps liquidate those funds NOT Class A and start getting new funds with those proceeds.

But if all of the loads have been paid, then I'd just let this ride until the trust needs to be liquidated. Otherwise, the best advice is to seek a planner because there are estate issues also.

JMHO

Steve
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White Coat Investor
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Re: Trustee with a investment dilemma

Post by White Coat Investor »

dogman wrote: We have assumed a 3-5 year time horizon before the assets may be divided-could be more as the Grantor has good genes.

Now for the numbers . The Trust of 625K is currently invested as follows:

Since the Grantor has sizable expense (120K/yr) in the nursing home, it would seem in the near term not to be a tax problem from the gain if sold , nor for downstream portfolio gain. .
At 120K per year there may not be much of a trust to divide if the time horizon turns out to be much more than 3-5 years. I would manage this money VERY conservatively as it appears to me it will be used by the grantor. Perhaps 25% stocks, 25% bonds, 50% money market/short term CDs. Just my $0.02.

I'd sell what doesn't have a gain, and buy Vanguard funds. I'd let the rest ride and hopefully it will become your inheritance and you can benefit from the resetting of the basis at the grantor's death.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
dogman
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Post by dogman »

Sorry about not making another fact clear. The Grantor has another source of funds in the form of a portfolio currently about 275k .In addition this is an irrevocable trust that because of the time frame in which it was set up should be protected from being used for nursing home costs once the other funds run out.
I am going to do the math to identify the higher cost funds which are under performing with the thought of using Vanguard Funds to replace them. However the proper mix of assets is still of concern, and I can use some suggestions about how to proceed.
colejr
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Joined: Sat Mar 24, 2007 7:48 pm

Consider trust specifics

Post by colejr »

FIrst, I am sorry for your father's failing health. Your original query was about asset allocation, but medicaid trusts appear to be complicated. If you haven't already, you might consider talking with the lawyer who drafted the trust. I am in no way an expert, but here's some things I would consider if I were in your shoes:

1) Does your father receive (and pay tax) on all trust income? (I think this is usual in medicaid trusts.) If so, you may want to alter your asset allocation decisions to produce more or less income, depending on his needs

2) Are you sure capital gains are taxed to your father and not the trust? Normally capital gains are taxed to an irrevocable trust, but some forms of "defective" trusts might possibly pass through the tax liability to the grantor. (A defective trust fails one or more of the IRS tests for a 'true' irrevocable trust.) Trust tax rates are high and the AMT kicks in at a very low level. If taxed to the trust, consider not selling any funds with large capital gains that are broadly in keeping with your overall asset allocation decision.

3) Do you get a cost-basis step-up when your father passes away? Again, my understanding is that some types of "defective" trusts get the step-up, and this type of 'defect' is often used for medicaid trusts, but standard irrevocable trusts do not. If you do get the step-up, consider deferring the sale of funds with large capital gains. The step-up might also be a reason to consider a slightly increased percentage of equity.

4) You mention you and your sister's overall net worth. If any of this is in investable assets (not home equity), you need to consider your overall asset allocation inside and outside the trust (along with the needs of your father, of course).


Now, to answer your question: My mother is in a similar, but not identical, situation. (Alzheimer's, but with LTC insurance.) She doesn't need the income, so I have her trust in ~90% equities and balance this with extra bonds in my tax-deferred accounts. Our overall allocation for all accounts is about 60/40 equity/fixed and distributed roughly as follows:

60% Equity:
- 40% Total Stock Market
- 15% Tax Managed International
- 05% Emerging Markets
40% Fixed:
- 25% Total Bond Market
- 10% Inflation Protected Securities
- 05% Prime Money Market

Hope this helps,

Jim
Last edited by colejr on Mon Mar 26, 2007 8:02 pm, edited 1 time in total.
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dm200
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I think this might be more accurately rephrased ...

Post by dm200 »

dogman wrote:In addition this is an irrevocable trust that because of the time frame in which it was set up should be protected from being used for nursing home costs once the other funds run out.
There may be valid and defensible reasons for this trust, however, another way to express this situation is that the person who set this up took assets, that might have been used for nursing home care, and moved them so that if/when other personal assets ran out, the taxpayer would pick up the nursing home costs. That "taxpayer" is folks like me.

We should, I think understand that the phrase "protected from nursing home costs" has nothing to do with the money of the "nursing home", but rather taxpayer money (Medicaid).

This is a case of voluntarily becoming financially "needy" or "indigent" and the taxpayers pay for care.

dan
colejr
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Post by colejr »

There may be valid and defensible reasons for this trust, however, another way to express this situation is that the person who set this up took assets, that might have been used for nursing home care, and moved them so that if/when other personal assets ran out, the taxpayer would pick up the nursing home costs. That "taxpayer" is folks like me.
dogman's father didn't make the rules.
It's just another example of our benevolent politicians providing us with more ways to collect "free stuff".
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dm200
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Making the "rules"!!

Post by dm200 »

Just because something is "legal" doesn't make it right, moral, ethical, a good idea, etc.

It is perfectly legal for me to split up with my wife and take up with a hottie that is 18, but not moral or ethical, for example.

And so on.

Using "sanitized" terms such as "protecting assets from the nursing home" is wrong and misleading, IMO. This is protecting assets from the Medicaid program, that is funded by federal and state general taxpayers.

dan
colejr
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Post by colejr »

Just because something is "legal" doesn't make it right, moral, ethical, a good idea, etc.

It is perfectly legal for me to split up with my wife and take up with a hottie that is 18, but not moral or ethical, for example.
Don't forget those immoral people who send their kids to public school on our dime, even when they can afford to pay for a private education(':wink:')

This isn't some sneaky loophole the medicaid rule-writers forgot to consider. The rules were purposely written to allow this type of asset transfer beyond a specific look-back period. It's now just another "entitlement" our government hands out.

And I have no idea whether someone who saved a little money is any more or less morally deserving of government handouts than someone who blew all his earnings on drugs, gambling and prostitutes.

The moral problem, in my view, isn't with the people who avail themselves of such government largess. Instead, it's with the people who elected a government that thinks it's ok to pick our pockets to provide all these "free goodies" .

Jim
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dm200
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We disagree, Jim -

Post by dm200 »

Medicaid is expressly and overtly intended for the poor and indigent, and is funded by general taxes.

dan
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