Irrevocable Trust Asset Allocation

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Topic Author
Kelty
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Irrevocable Trust Asset Allocation

Post by Kelty »

Should the asset allocation of an irrevocable trust that ends with the death of the grantor be based on the age of the grantor, the age of the beneficiaries, or neither?
Gill
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Re: Irrevocable Trust Asset Allocation

Post by Gill »

Depends on the purpose of the trust, the ages and need of the income beneficiaries and the disposition of the trust upon the death of the grantor. Are you sure this is irrevocable? Impossible to give you a simple answer.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Leesbro63
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Re: Irrevocable Trust Asset Allocation

Post by Leesbro63 »

It also depends on if income is being paid out at the tax rates of the beneficiaries or if it's accumulated and taxed with the higher rates kicking in at much lower (than personal income tax rates) thresholds.
Topic Author
Kelty
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Re: Irrevocable Trust Asset Allocation

Post by Kelty »

The trust is irrevocable. Its purpose is Medicaid planning. The five-year qualification period has not yet been met. No distribution to the beneficiaries (ages 50s and 60s) is expected. The trust ends with the death of the grantor (age 90s and still healthy) at which time the assets will be distributed among the grantor's heirs. Does this give you enough information to advise me about asset allocation of the irrevocable trust funds?
dbr
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Re: Irrevocable Trust Asset Allocation

Post by dbr »

Kelty wrote:The trust is irrevocable. Its purpose is Medicaid planning. The five-year qualification period has not yet been met. No distribution to the beneficiaries (ages 50s and 60s) is expected. The trust ends with the death of the grantor (age 90s and still healthy) at which time the assets will be distributed among the grantor's heirs. Does this give you enough information to advise me about asset allocation of the irrevocable trust funds?

It helps, but it really isn't enough because a lot of people here would not base asset allocation only on age.

The other part of the question is whose risk and reward is in question, the grantor or the heirs. A natural and logical approach would be to invest as if investing for the heirs, whatever the appropriate AA might be in their view. It is also possible that the grantor might have some feelings about the risk he would like taken with his money for the benefit of others. Those opinions might be quite different from the choices the heirs would make.
Gill
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Re: Irrevocable Trust Asset Allocation

Post by Gill »

It appears that the trust won't be of a long duration before it terminates. I would invest quite conservatively, perhaps a 20/80 equity/fixed income. The remaindermen may have differing investment objectives and therefore they can invest as they see fit upon termination.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Calm Man
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Re: Irrevocable Trust Asset Allocation

Post by Calm Man »

OP, are you saying that this 90 year old set up a trust so that he/she could become impoverished (Medicaid requires that) and thus qualify for a Medicaid facility instead of leaving the possibility for privately paying for a superior facility? Why would younger people allow him/her to do that? And it sounds like the money is now locked up and not available anymore. I get so sad when I hear this unless I am missing something?
Gill
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Re: Irrevocable Trust Asset Allocation

Post by Gill »

Calm Man wrote:OP, are you saying that this 90 year old set up a trust so that he/she could become impoverished (Medicaid requires that) and thus qualify for a Medicaid facility instead of leaving the possibility for privately paying for a superior facility? Why would younger people allow him/her to do that? And it sounds like the money is now locked up and not available anymore. I get so sad when I hear this unless I am missing something?
While I agree with you, the OP wasn't asking for our comments about the morality of this trust. He has only asked about the investment of it.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
Kelty
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Re: Irrevocable Trust Asset Allocation

Post by Kelty »

Whether or not an irrevocable trust should have been set up in the first place I do not know. At this point it seems that all that can be done is to manage the trust as well as possible.

The trust is designed so that the trustee can at any time distribute funds to a beneficiary who could then use the funds for the benefit of the grantor (and would be morally expected to do so). The beneficiary would pay taxes on such a distribution.

I very much appreciate your comments, which are all helpful, and welcome any further comments.
bobdny
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Re: Irrevocable Trust Asset Allocation

Post by bobdny »

I would say you should be responsible to pay your own bills...not try to hide your money so we have to pay for you!
trademil
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Re: Irrevocable Trust Asset Allocation

Post by trademil »

Kelty wrote:
The trust is designed so that the trustee can at any time distribute funds to a beneficiary who could then use the funds for the benefit of the grantor (and would be morally expected to do so). The beneficiary would pay taxes on such a distribution.

I very much appreciate your comments, which are all helpful, and welcome any further comments.
I think this is the key element here, if the money is expected to be used for the grantor - it should be invested according to his needs, and not according to the needs of some agent who uses the money for him. For a 90 years old I would say it should be close to 100% bonds.
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prudent
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Re: Irrevocable Trust Asset Allocation

Post by prudent »

Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?

In any case, I think given the circumstances of the trust goal the right asset allocation would be 80/20 in favor of fixed income.
Gill
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Re: Irrevocable Trust Asset Allocation

Post by Gill »

prudent wrote:Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?
Gift tax exemptions have nothing to do with it. Distributions of principal would only be taxable to the beneficiary to the extent there were capital gains realized in the trust.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
dbr
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Re: Irrevocable Trust Asset Allocation

Post by dbr »

MBMiner wrote:
prudent wrote:Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?
Gift tax exemptions have nothing to do with it. Distributions of principal would only be taxable to the beneficiary to the extent there were capital gains realized in the trust.
Bruce
Or a nice gift of capital loss carryovers.
Gill
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Re: Irrevocable Trust Asset Allocation

Post by Gill »

dbr wrote:
MBMiner wrote:
prudent wrote:Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?
Gift tax exemptions have nothing to do with it. Distributions of principal would only be taxable to the beneficiary to the extent there were capital gains realized in the trust.
Bruce
Or a nice gift of capital loss carryovers.
Capital losses are only distributed on termination of the trust, not on principal distributions.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
MN Finance
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Re: Irrevocable Trust Asset Allocation

Post by MN Finance »

Kelty wrote:Whether or not an irrevocable trust should have been set up in the first place I do not know. At this point it seems that all that can be done is to manage the trust as well as possible.

The trust is designed so that the trustee can at any time distribute funds to a beneficiary who could then use the funds for the benefit of the grantor (and would be morally expected to do so). The beneficiary would pay taxes on such a distribution.

I very much appreciate your comments, which are all helpful, and welcome any further comments.
If this is indeed the likely use of the funds, for the assistance of the grantor, then the allocation should probably follow a risk level given that short time horizon. And if not used for that reason, the corpus would be distributed to the beneficiaries sooner than later. If they end up in the look back period, then the medicare benefits will be reduced, and the assets will most certainly be needed sooner than later. 20/80, as already stated, seems prudent. I could see this depending partly on asset size, though. Given the circumstances, we'd assume it's not several million (ie, if it was large, there's the ability to take more risk). I'd also assume if they went through the trouble of planning, it's not a trivial sum (like $50k), in which case it might just stay in cash since there's no real upside to taking any risk at all.
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prudent
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Re: Irrevocable Trust Asset Allocation

Post by prudent »

MBMiner wrote:
prudent wrote:Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?
Gift tax exemptions have nothing to do with it. Distributions of principal would only be taxable to the beneficiary to the extent there were capital gains realized in the trust.
Bruce
Ah, of course. Thanks for catching that - I need to have more coffee before responding to questions at that hour! :)
dbr
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Re: Irrevocable Trust Asset Allocation

Post by dbr »

MBMiner wrote:
dbr wrote:
MBMiner wrote:
prudent wrote:Not sure why the distributions of corpus (trust principal) out of the trust would be taxable to the beneficiary. Wouldn't the funds put into the trust have been covered by a lifetime gift tax exclusion?
Gift tax exemptions have nothing to do with it. Distributions of principal would only be taxable to the beneficiary to the extent there were capital gains realized in the trust.
Bruce
Or a nice gift of capital loss carryovers.
Capital losses are only distributed on termination of the trust, not on principal distributions.
Bruce
Yes, I was jumping to a conclusion.
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