Investing when someone else gets all dividends

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ibhhvc
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Investing when someone else gets all dividends

Post by ibhhvc » Sat Jun 09, 2018 7:38 am

I am helping with investment decisions for a family trust that has an unusual setup. The trust is co-owned by three family members who have control over investment decisions but can make no withdrawals. All dividends and interest generated by the trust are required to be distributed to a fourth party for their lifetime, after which the trust will be dissolved.

Let's say our time horizon for the trust is 10-15 years. All three owners of the principal have at least 30 years until retirement. We want to make investment decisions that:
  1. Allows the principal in the account to grow without any dividend reinvestment.
  2. Creates a reasonable amount of dividend income without sacrificing the above.
It's awkward because we want to be fair to all four parties but there is no instruction in the trust on how to invest. The fourth party doesn't get to make any investment decisions and the first three have an inherent conflict of interest.

Any thoughts on how to be fair to everyone?

Jags4186
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Re: Investing when someone else gets all dividends

Post by Jags4186 » Sat Jun 09, 2018 7:50 am

There is no way to be fair. The more dividends that are paid out the less the price return will be. If there is a true need to be fair, then you should be invested in a 3 fund portfolio which will pay out the average dividends of the whole market. Otherwise you can play games from going 100% Berkshire Hathaway, which pays no dividends to some bonds/utilities mix who’s returns will be dominated by dividend payments.

Mike Scott
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Re: Investing when someone else gets all dividends

Post by Mike Scott » Sat Jun 09, 2018 7:51 am

It sounds more like be fair to #4 first and foremost since the immediate benefit is to them. The other three can do whatever they want later.

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vineviz
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Re: Investing when someone else gets all dividends

Post by vineviz » Sat Jun 09, 2018 9:11 am

It sounds like a really terribly constructed trust if, when the trust dissolves it goes to the current trustees.

Nonetheless, if you are currently both owner and trustee but NOT the beneficiary you have a binding fiduciary responsibility to the beneficiary (the 4th person). That means managing for their benef and not yours.

Being ‘fair’ is just not an option: the only interests the trustee can legally consider are those of the beneficiary.

https://www.justia.com/estate-planning/ ... abilities/
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ibhhvc
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Re: Investing when someone else gets all dividends

Post by ibhhvc » Sun Jun 10, 2018 9:39 am

vineviz wrote:
Sat Jun 09, 2018 9:11 am
Being ‘fair’ is just not an option: the only interests the trustee can legally consider are those of the beneficiary.

https://www.justia.com/estate-planning/ ... abilities/
Thank you, that's very helpful. I'll have to look into the trust agreement for more guidance.

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 2:05 pm

This really is not unusual for the terms of a trust. The trustees have a fiduciary duty to invest for a reasonable income return while still having regard for the preservation and enhancement of principal. Your investments are governed by the trust instrument and state law. I’d go with 50/50 portfolio.
Gill
Last edited by Gill on Sun Jun 10, 2018 2:13 pm, edited 1 time in total.

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oldcomputerguy
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Re: Investing when someone else gets all dividends

Post by oldcomputerguy » Sun Jun 10, 2018 2:09 pm

ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
Allows the principal in the account to grow without any dividend reinvestment.
How will principal grow without dividend reinvestment? I'm a bit confused by this requirement.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 2:14 pm

oldcomputerguy wrote:
Sun Jun 10, 2018 2:09 pm
ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
Allows the principal in the account to grow without any dividend reinvestment.
How will principal grow without dividend reinvestment? I'm a bit confused by this requirement.
Through increase in value of equities.
Gill

ibhhvc
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Re: Investing when someone else gets all dividends

Post by ibhhvc » Sun Jun 10, 2018 5:21 pm

Gill wrote:
Sun Jun 10, 2018 2:05 pm
This really is not unusual for the terms of a trust. The trustees have a fiduciary duty to invest for a reasonable income return while still having regard for the preservation and enhancement of principal. Your investments are governed by the trust instrument and state law. I’d go with 50/50 portfolio.
Gill
This is correct. I've done some investigation and the trustees have an obligation to all four parties.

In your mind is a 50/50 portfolio one that is half focused on dividends (like a bond fund and a dividend yield fund) and half invested normally without a focus on dividends?

Or would you focus one half on dividends and the other on value growth?

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 5:29 pm

ibhhvc wrote:
Sun Jun 10, 2018 5:21 pm
Gill wrote:
Sun Jun 10, 2018 2:05 pm
This really is not unusual for the terms of a trust. The trustees have a fiduciary duty to invest for a reasonable income return while still having regard for the preservation and enhancement of principal. Your investments are governed by the trust instrument and state law. I’d go with 50/50 portfolio.
Gill
This is correct. I've done some investigation and the trustees have an obligation to all four parties.

In your mind is a 50/50 portfolio one that is half focused on dividends (like a bond fund and a dividend yield fund) and half invested normally without a focus on dividends?

Or would you focus one half on dividends and the other on value growth?
I would simply buy two funds, I.e., a broadly diversified stock fund and a quality bond fund with equal amounts. Pay the income quarterly to the income beneficiary and distribute the principal balance upon termination of the trust.
Gill

VaR
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Re: Investing when someone else gets all dividends

Post by VaR » Sun Jun 10, 2018 5:34 pm

ibhhvc wrote:
Sun Jun 10, 2018 5:21 pm
This is correct. I've done some investigation and the trustees have an obligation to all four parties.

In your mind is a 50/50 portfolio one that is half focused on dividends (like a bond fund and a dividend yield fund) and half invested normally without a focus on dividends?

Or would you focus one half on dividends and the other on value growth?
I'd propose something like 50/50 total stock/total bond or 25/25/50 total stock/total international/total bond for a time horizon of 10-15 years.

There's no reason to chase dividends.

It's probably worth looking into the asset allocations that are considered reasonable for charitable remainder trusts, since that structure similarly has two goals - providing income for a beneficiary while remaindering the principal of the trust to a separate beneficiary.

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 5:50 pm

Gill wrote:
Sun Jun 10, 2018 5:29 pm
ibhhvc wrote:
Sun Jun 10, 2018 5:21 pm
Gill wrote:
Sun Jun 10, 2018 2:05 pm
This really is not unusual for the terms of a trust. The trustees have a fiduciary duty to invest for a reasonable income return while still having regard for the preservation and enhancement of principal. Your investments are governed by the trust instrument and state law. I’d go with 50/50 portfolio.
Gill
This is correct. I've done some investigation and the trustees have an obligation to all four parties.

In your mind is a 50/50 portfolio one that is half focused on dividends (like a bond fund and a dividend yield fund) and half invested normally without a focus on dividends?

Or would you focus one half on dividends and the other on value growth?
I would simply buy two funds, I.e., a broadly diversified stock fund and a quality bond fund with equal amounts. Pay the income quarterly to the income beneficiary and distribute the principal balance upon termination of the trust.
Gill
Exactly so.

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 5:51 pm

VaR wrote:
Sun Jun 10, 2018 5:34 pm
ibhhvc wrote:
Sun Jun 10, 2018 5:21 pm
This is correct. I've done some investigation and the trustees have an obligation to all four parties.

In your mind is a 50/50 portfolio one that is half focused on dividends (like a bond fund and a dividend yield fund) and half invested normally without a focus on dividends?

Or would you focus one half on dividends and the other on value growth?
I'd propose something like 50/50 total stock/total bond or 25/25/50 total stock/total international/total bond for a time horizon of 10-15 years.

There's no reason to chase dividends.

It's probably worth looking into the asset allocations that are considered reasonable for charitable remainder trusts, since that structure similarly has two goals - providing income for a beneficiary while remaindering the principal of the trust to a separate beneficiary.
This is really quite different than a charitable remainder trust. This is a personal trust that pays only net income to a beneficiary whereas a CRT pays either an annuity amount or a percentage of the trust to the beneficiary. Income from such a trust is irrelevant whereas it is crucial to the beneficiary of OP’s trust.
Gill

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 6:01 pm

Gill, do you know what accounts for the persistence of this income = dividends model in trust arrangements? It isn't something that makes a lot of sense from basic investing point of view. Is it related to the tax issue of distributing the taxable income to lower tax rates held by beneficiaries. What about realized capital gains. Is that income?

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 6:10 pm

dbr wrote:
Sun Jun 10, 2018 6:01 pm
Gill, do you know what accounts for the persistence of this income = dividends model in trust arrangements? It isn't something that makes a lot of sense from basic investing point of view. Is it related to the tax issue of distributing the taxable income to lower tax rates held by beneficiaries. What about realized capital gains. Is that income?
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary. Unitrusts and Annuity Trusts ignore this distinction.
Gill

VaR
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Re: Investing when someone else gets all dividends

Post by VaR » Sun Jun 10, 2018 6:17 pm

Gill wrote:
Sun Jun 10, 2018 5:51 pm
This is really quite different than a charitable remainder trust. This is a personal trust that pays only net income to a beneficiary whereas a CRT pays either an annuity amount or a percentage of the trust to the beneficiary. Income from such a trust is irrelevant whereas it is crucial to the beneficiary of OP’s trust.
Gill
I am well aware that the trust structures and payouts are very different. What I meant by similar is that from a beneficiary standpoint, the asset allocation has to account for two beneficiaries - the income beneficiary and the remainder beneficiary. This suggests to me that under a standard of reasonable fiduciary duty, that asset allocations considered reasonable for the remainder beneficiary in a CRUT might form a guide for reasonable asset allocations for the OPs trust.

I see from various CRUTs that asset allocations ranging from 75/25 to 25/75 are available.

As an aside, in a net income charitable remainder trust (NICRUT), the income beneficiary receives the lesser of the fixed percentage or the net income of the trust, so trust income is not always irrelevant when considering the asset allocation of a CRUT.

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 6:43 pm

Gill wrote:
Sun Jun 10, 2018 6:10 pm
dbr wrote:
Sun Jun 10, 2018 6:01 pm
Gill, do you know what accounts for the persistence of this income = dividends model in trust arrangements? It isn't something that makes a lot of sense from basic investing point of view. Is it related to the tax issue of distributing the taxable income to lower tax rates held by beneficiaries. What about realized capital gains. Is that income?
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary. Unitrusts and Annuity Trusts ignore this distinction.
Gill
Thanks, but the question was a little more than that. I can see how the existence of "shares" of an asset, and the payment of dividends and interest from those shares gives us an arbitrary distinction. But the problem is that financial understanding for investments today such as stocks and mutual funds would call that distinction nonsensical. So I was wondering how a nonsensical distinction like that still gets legal traction. I'm not sure how argricultural metaphors lead to logical arguments though lawyers seem to be prone to such things. To me it just means someone is referring to some ancient, even biblical, precedent and not to any rational concept of equity or practicality.

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 6:51 pm

dbr wrote:
Sun Jun 10, 2018 6:43 pm
Gill wrote:
Sun Jun 10, 2018 6:10 pm
dbr wrote:
Sun Jun 10, 2018 6:01 pm
Gill, do you know what accounts for the persistence of this income = dividends model in trust arrangements? It isn't something that makes a lot of sense from basic investing point of view. Is it related to the tax issue of distributing the taxable income to lower tax rates held by beneficiaries. What about realized capital gains. Is that income?
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary. Unitrusts and Annuity Trusts ignore this distinction.
Gill
Thanks, but the question was a little more than that. I can see how the existence of "shares" of an asset, and the payment of dividends and interest from those shares gives us an arbitrary distinction. But the problem is that financial understanding for investments today such as stocks and mutual funds would call that distinction nonsensical. So I was wondering how a nonsensical distinction like that still gets legal traction. I'm not sure how argricultural metaphors lead to logical arguments though lawyers seem to be prone to such things. To me it just means someone is referring to some ancient, even biblical, precedent and not to any rational concept of equity or practicality.
I guess I’m not enough of a legal scholar to explain it any better. The concept of giving the life use of something to A with remainder to B goes back many centuries and is ingrained in the common law. As I mentioned, the draftsman is usually free to modify this concept and there have been statutory attempts. Other than that, I can’t give you the answer you seek.
Gill

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 6:53 pm

Gill wrote:
Sun Jun 10, 2018 6:51 pm
dbr wrote:
Sun Jun 10, 2018 6:43 pm
Gill wrote:
Sun Jun 10, 2018 6:10 pm
dbr wrote:
Sun Jun 10, 2018 6:01 pm
Gill, do you know what accounts for the persistence of this income = dividends model in trust arrangements? It isn't something that makes a lot of sense from basic investing point of view. Is it related to the tax issue of distributing the taxable income to lower tax rates held by beneficiaries. What about realized capital gains. Is that income?
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary. Unitrusts and Annuity Trusts ignore this distinction.
Gill
Thanks, but the question was a little more than that. I can see how the existence of "shares" of an asset, and the payment of dividends and interest from those shares gives us an arbitrary distinction. But the problem is that financial understanding for investments today such as stocks and mutual funds would call that distinction nonsensical. So I was wondering how a nonsensical distinction like that still gets legal traction. I'm not sure how argricultural metaphors lead to logical arguments though lawyers seem to be prone to such things. To me it just means someone is referring to some ancient, even biblical, precedent and not to any rational concept of equity or practicality.
I guess I’m not enough of a legal scholar to explain it any better. The concept of giving the life use of something to A with remainder to B goes back many centuries and is ingrained in the common law. As I mentioned, the draftsman is usually free to modify this concept and there have been statutory attempts. Other than that, I can’t give you the answer you seek.
Gill
Thanks I appreciate the discussion.

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Re: Investing when someone else gets all dividends

Post by VaR » Sun Jun 10, 2018 7:24 pm

dbr wrote:
Sun Jun 10, 2018 6:43 pm
Thanks, but the question was a little more than that. I can see how the existence of "shares" of an asset, and the payment of dividends and interest from those shares gives us an arbitrary distinction. But the problem is that financial understanding for investments today such as stocks and mutual funds would call that distinction nonsensical. So I was wondering how a nonsensical distinction like that still gets legal traction. I'm not sure how argricultural metaphors lead to logical arguments though lawyers seem to be prone to such things. To me it just means someone is referring to some ancient, even biblical, precedent and not to any rational concept of equity or practicality.
I hesitate to bring up NICRUTs as an example due to previous ridicule. :)

In NICRUTs, most state laws allow the trust to allocate capital gains either to income or principal.

I'm not sure what you mean by "nonsensical". In the context of your trust agreement, income means whatever it is defined to mean in the trust document, within the constrictions of what it usually means to the legal community. I suppose I have to agree with you that it sounds nonsensical in that all legalese sounds nonsensical it it's attempt to be precise.

Don't be thrown off by the fact that you think someone with ill intent could "game" the system and invest the trust assets in non-income producing equities. That could be challenged as a breach of fiduciary duty.

When I think something is nonsense, I sometimes find it helpful to try to think up a reasonable alternative. What do you think is a reasonable alternative to the structure of your trust agreement without using the term "income"? I'm also interested if your trust agreement defines income.

Gill
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Re: Investing when someone else gets all dividends

Post by Gill » Sun Jun 10, 2018 8:01 pm

VaR wrote:
Sun Jun 10, 2018 7:24 pm
What do you think is a reasonable alternative to the structure of your trust agreement without using the term "income"? I'm also interested if your trust agreement defines income.
I know you didn’t ask me but, isn’t a reasonable alternative the unitrust concept and simply pay out a percentage of the trust value each year to the beneficiary? No need to define or refer to income in that type of trust.
Gill

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 8:02 pm

VaR wrote:
Sun Jun 10, 2018 7:24 pm
dbr wrote:
Sun Jun 10, 2018 6:43 pm
Thanks, but the question was a little more than that. I can see how the existence of "shares" of an asset, and the payment of dividends and interest from those shares gives us an arbitrary distinction. But the problem is that financial understanding for investments today such as stocks and mutual funds would call that distinction nonsensical. So I was wondering how a nonsensical distinction like that still gets legal traction. I'm not sure how argricultural metaphors lead to logical arguments though lawyers seem to be prone to such things. To me it just means someone is referring to some ancient, even biblical, precedent and not to any rational concept of equity or practicality.
I hesitate to bring up NICRUTs as an example due to previous ridicule. :)

In NICRUTs, most state laws allow the trust to allocate capital gains either to income or principal.

I'm not sure what you mean by "nonsensical". In the context of your trust agreement, income means whatever it is defined to mean in the trust document, within the constrictions of what it usually means to the legal community. I suppose I have to agree with you that it sounds nonsensical in that all legalese sounds nonsensical it it's attempt to be precise.

Don't be thrown off by the fact that you think someone with ill intent could "game" the system and invest the trust assets in non-income producing equities. That could be challenged as a breach of fiduciary duty.

When I think something is nonsense, I sometimes find it helpful to try to think up a reasonable alternative. What do you think is a reasonable alternative to the structure of your trust agreement without using the term "income"? I'm also interested if your trust agreement defines income.
The nonsense comes from the fact that there is no financial reason to distinguish receipt of dividends from selling shares, aka invading principal, from the point of view of withdrawing money from the trust and giving it to someone. The one consideration where these things are different is in the tax consequences, but for the moment we are not talking about that. So one obvious specification that could be made would be to specify a rate or amount of withdrawal such as x% of the portfolio value at the end of the year, or a schedule similar to RMD from tax deferred accounts. One could even define the withdrawal as an "annuity" of x dollars a year, indexed or not for inflation. It really depends on what the grantor wants to do, but the scheme should align with wanting to do something that is relevant to the actual results of investing instead of to a secondary criterion that may or may not be a good idea depending. The depending has to do with the fact that the dividends that can be extracted from a portfolio can be arbitrarily set to almost anything by investing in who knows what. This in fact is the original question in the OP>

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Sun Jun 10, 2018 8:02 pm

Gill wrote:
Sun Jun 10, 2018 8:01 pm
VaR wrote:
Sun Jun 10, 2018 7:24 pm
What do you think is a reasonable alternative to the structure of your trust agreement without using the term "income"? I'm also interested if your trust agreement defines income.
I know you didn’t ask me but, isn’t a reasonable alternative the unitrust concept and simply pay out a percentage of the trust value each year to the beneficiary? No need to define or refer to income in that type of trust.
Gill
Well, there we go.

VaR
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Re: Investing when someone else gets all dividends

Post by VaR » Mon Jun 11, 2018 2:16 am

Gill wrote:
Sun Jun 10, 2018 8:01 pm
I know you didn’t ask me but, isn’t a reasonable alternative the unitrust concept and simply pay out a percentage of the trust value each year to the beneficiary? No need to define or refer to income in that type of trust.
Yep, that's a good not-unreasonable alternative to separating the idea of principal and income.

Two concerns that may have to be addressed with a fixed percentage or fixed amount payout to the "income" recipient:
1. How to address the failing of the trust in the case where the payout results in significant principal decline due to a low interest rate / low dividend rate environment?
2. Whether to address high inflation/high income years? Percentage payout and depending on principal appreciation would be my recommended course of action here. The principal value goes up and as a result the percentage payout goes up over time as an absolute amount.

Case 1 will result in a decline in the value of the trust. In the case of a percentage payout this will result in a decline in the amount of the "income" payout over time and also a lower "principal" payout at the end of the trust term. Case 2 is "self-correcting".

Anyway, I agree that a fixed percentage payout structure is reasonable. But then again I don't think a payout based on a definition of income is entirely unreasonable. It is, after all, one of the documented retirement withdrawal methods on the bogleheads wiki: https://www.bogleheads.org/wiki/Withdrawal_methods.

If it were me I'd probably specify an asset allocation, specify investments or equivalents (total stock, total international, total bond), and specify an income floor of 2% or so. This would be more to lock in good long term investment policy rather than avoid gaming the system, since I view gaming as a breach of fiduciary duty and thus avoided through legal protections.

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Mon Jun 11, 2018 8:56 am

VaR wrote:
Mon Jun 11, 2018 2:16 am

Anyway, I agree that a fixed percentage payout structure is reasonable. But then again I don't think a payout based on a definition of income is entirely unreasonable. It is, after all, one of the documented retirement withdrawal methods on the bogleheads wiki: https://www.bogleheads.org/wiki/Withdrawal_methods.
That Wiki selection should be deleted. The only way to keep the principal intact is to invest in something that has exactly zero real return so that the principle value will be an unfluctuating amount in real dollars. Anything else is not keeping the principal intact. It is certainly not keeping the principal intact if withdrawals are being taken and a withdrawal is a withdrawal is a withdrawal.

I am sure lots of people don't like the concept presented just above, but I suggest a little thought will indicate that "keeping the principle intact" is not a useful concept to guide investing in any sense other than someone who has a need to eventually deliver a specific value in real or nominal (yes, I guess we can admit nominal) dollars at a specific time or at all times.

As far as the dilemma presented, that is exactly right. There is always a tension between what the future value of investments will be and how much can be withdrawn along the way. It could even be that withdrawals would have to be negative to keep up the principal. A company can go bankrupt and its stock become non-existent and a bond can default.

I am aware this is monkeying around with what the term principal means, but I advocate that one be thoughtful regarding what one is trying to say by using that word.

Dandy
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Re: Investing when someone else gets all dividends

Post by Dandy » Mon Jun 11, 2018 10:34 am

Why not Wellesley Income Fund. 3.21% current yield and a nice track record. Should provide a decent level of income and some appreciation for modest growth. The current yield is comparable to a 5 yr CD.

Or you could consider a CD ladder for all or some of the amount. It will provide decent income and preserve capital.

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Mon Jun 11, 2018 10:49 am

Dandy wrote:
Mon Jun 11, 2018 10:34 am
Why not Wellesley Income Fund. 3.21% current yield and a nice track record. Should provide a decent level of income and some appreciation for modest growth. The current yield is comparable to a 5 yr CD.

Or you could consider a CD ladder for all or some of the amount. It will provide decent income and preserve capital.
Because (hypothetically) both the grantor and the beneficiaries understood or hoped that the withdrawals would be more than that. At the same time the assets would have grown more than needed to "preserve the principal." The beneficiary of the income has clearly been cheated by the remaindermen.

afan
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Re: Investing when someone else gets all dividends

Post by afan » Mon Jun 11, 2018 12:40 pm

Looking at it from a distance a mix of VTI and BND, or VTEB if tax exempt interest would be appropriate, seems best. The proportions could be 50/50. But here one might consider the needs as well as what one thought to be the intentions of the grantor. If the grantor thought this would provide a lot more income than current interest rates and total market dividends would support then one might tilt towards more income.

If the grantor expected more of the money to go to the later beneficiaries then more stocks and less in bonds.

Gill, if the income to one person remainder to another, was all the instructions you had, I gather you would allocate 50% to stocks. What other considerations would come up? The number of remainder people this the income beneficiary? Their financial situations? Ages? Anything elae.?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

dbr
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Re: Investing when someone else gets all dividends

Post by dbr » Mon Jun 11, 2018 12:47 pm

If it were me I would put everything in TIPS to make sure the real value of the principal was preserved and the beneficiary would get the real interest. Naturally there is an interesting issue when the real yield on TIPS is negative. I guess the trustee would have to sue the beneficiary to contribute the negative yield to the trust :oops:

Of course, this all comes back to the question what grantors and lawyers are thinking when they do things like this. I guess in many normal cases it just works out and nobody except cynical troublemakers raise an issue. Even so I bet there are lots of beneficiaries and remaindermen out there that see their own ox being gored.

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siamond
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Re: Investing when someone else gets all dividends

Post by siamond » Mon Jun 11, 2018 1:13 pm

ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
Let's say our time horizon for the trust is 10-15 years. All three owners of the principal have at least 30 years until retirement. We want to make investment decisions that:
  1. Allows the principal in the account to grow without any dividend reinvestment.
  2. Creates a reasonable amount of dividend income without sacrificing the above.
I would suggest to keep it very simple (good philosophy overall, and notably in such conflicting situation). You want something that makes reasonable sense for an existing retiree, as well as something that makes reasonable sense for accumulators. A LifeStrategy Moderate Growth (VSMGX) would seem to do the trick:

- a 60/40 allocation, hence a good deal of dividends (bonds, plus some from stocks) combined with a solid engine of growth (60% stocks)
- very extensive diversification domestic and international to hedge long-term bets
- automatic rebalancing, nothing to manage (hence to argue about)
- very low fees (ER = 0.13%) to make everybody happy

A 3 funds portfolio with a 25/25/50 allocation, as suggested by a previous poster, would also do the trick, of course. Similar idea, although more subject to arguments due to the separation between 3 components...

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Re: Investing when someone else gets all dividends

Post by VaR » Mon Jun 11, 2018 4:50 pm

dbr wrote:
Mon Jun 11, 2018 10:49 am
Dandy wrote:
Mon Jun 11, 2018 10:34 am
Why not Wellesley Income Fund. 3.21% current yield and a nice track record. Should provide a decent level of income and some appreciation for modest growth. The current yield is comparable to a 5 yr CD.

Or you could consider a CD ladder for all or some of the amount. It will provide decent income and preserve capital.
Because (hypothetically) both the grantor and the beneficiaries understood or hoped that the withdrawals would be more than that. At the same time the assets would have grown more than needed to "preserve the principal." The beneficiary of the income has clearly been cheated by the remaindermen.
The various parties unstated "hoped for returns" are not specifically relevant to the fiduciary duty the trustees have to the beneficiaries to manage the assets in the trust to achieve the stated trust goals. What does the trust document say? The Wellesley Income Fund's investment object says "The Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation." I'd guess this to be consistent with the trust goals, but I'd like to see the trust goals first.

I'd also guess that both LifeStrategy Conservative Growth and LifeStrategy Moderate Growth suggested by previous posters would also be consistent with the stated trust goals.
LifeStrategy Conservative Growth: The Fund seeks to provide current income and low to moderate capital appreciation.
LifeStrategy Moderate Growth: The Fund seeks to provide capital appreciation and a low to moderate level of current income.

Oddly enough, Vanguard doesn't seem to have a 50/50 fund. Other threads in this forum seem to indicate that the 60/40 of LifeStrategy Moderate Growth is close enough.

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Re: Investing when someone else gets all dividends

Post by dm200 » Mon Jun 11, 2018 5:25 pm

ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
I am helping with investment decisions for a family trust that has an unusual setup. The trust is co-owned by three family members who have control over investment decisions but can make no withdrawals. All dividends and interest generated by the trust are required to be distributed to a fourth party for their lifetime, after which the trust will be dissolved.
Let's say our time horizon for the trust is 10-15 years. All three owners of the principal have at least 30 years until retirement. We want to make investment decisions that:
  1. Allows the principal in the account to grow without any dividend reinvestment.
  2. Creates a reasonable amount of dividend income without sacrificing the above.
It's awkward because we want to be fair to all four parties but there is no instruction in the trust on how to invest. The fourth party doesn't get to make any investment decisions and the first three have an inherent conflict of interest.
Any thoughts on how to be fair to everyone?
Unusual and awkward indeed!

So, this trust will continue to exist for the lifetime of the fourth party?

Just my "seat of the pants" logic
, but since the fourth party (long term) seems to be getting the short straw - I would lean towards higher dividend and interest investments - assuming that the fourth party (and perhaps his/her family) can make good use of the increased income.

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Re: Investing when someone else gets all dividends

Post by Gill » Mon Jun 11, 2018 6:21 pm

As I pointed out earlier, this is nothing but A in trust for B, remainder to C, D and E. Not really different from most trusts in existence. The trustees must give consideration to the interests of all parties to the trust, not just the income beneficiary. Why this has prompted such a discussion about trust investments, I don’t know.
Gill

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Re: Investing when someone else gets all dividends

Post by dbr » Mon Jun 11, 2018 6:36 pm

Gill wrote:
Mon Jun 11, 2018 6:21 pm
As I pointed out earlier, this is nothing but A in trust for B, remainder to C, D and E. Not really different from most trusts in existence. The trustees must give consideration to the interests of all parties to the trust, not just the income beneficiary. Why this has prompted such a discussion about trust investments, I don’t know.
Gill
It was prompted by the OP asking a question which reflects an apparent dilemma for him, or at least for the family he is helping. A specific concern is that the three trustees appear to have a conflict of interest regarding the administration of the trust. Possibly the essence of the discussion is whether or not the income beneficiary is satisfied with his lot. If he is, presumably there is no problem. If he is not, then there will be some form of family conflict or he may even take legal recourse against the trustees. Who knows? In any case the dilemma is in the details, hence the discussion.
Last edited by dbr on Mon Jun 11, 2018 6:38 pm, edited 1 time in total.

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Re: Investing when someone else gets all dividends

Post by Broken Man 1999 » Mon Jun 11, 2018 6:38 pm

ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
I am helping with investment decisions for a family trust that has an unusual setup. The trust is co-owned by three family members who have control over investment decisions but can make no withdrawals. All dividends and interest generated by the trust are required to be distributed to a fourth party for their lifetime, after which the trust will be dissolved.

Let's say our time horizon for the trust is 10-15 years. All three owners of the principal have at least 30 years until retirement. We want to make investment decisions that:
  1. Allows the principal in the account to grow without any dividend reinvestment.
  2. Creates a reasonable amount of dividend income without sacrificing the above.
It's awkward because we want to be fair to all four parties but there is no instruction in the trust on how to invest. The fourth party doesn't get to make any investment decisions and the first three have an inherent conflict of interest.

Any thoughts on how to be fair to everyone?
Is there language in the trust that indicates any desire to protect the corpus of the trust, or just language stating after the demise of the first recipient the remaining assets of the trust would be split equally to the three trustees?

If I set up a trust for my wife, with the remainder to go to my three children, frankly her financial well-being would be my first desire. Hopefully there would be assets left for my children, but the main goal isn't their inheritance, but my wife's welfare.

The desires of my children are not of interest to me in this situation.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Investing when someone else gets all dividends

Post by dbr » Mon Jun 11, 2018 6:45 pm

Broken Man 1999 wrote:
Mon Jun 11, 2018 6:38 pm
ibhhvc wrote:
Sat Jun 09, 2018 7:38 am
I am helping with investment decisions for a family trust that has an unusual setup. The trust is co-owned by three family members who have control over investment decisions but can make no withdrawals. All dividends and interest generated by the trust are required to be distributed to a fourth party for their lifetime, after which the trust will be dissolved.

Let's say our time horizon for the trust is 10-15 years. All three owners of the principal have at least 30 years until retirement. We want to make investment decisions that:
  1. Allows the principal in the account to grow without any dividend reinvestment.
  2. Creates a reasonable amount of dividend income without sacrificing the above.
It's awkward because we want to be fair to all four parties but there is no instruction in the trust on how to invest. The fourth party doesn't get to make any investment decisions and the first three have an inherent conflict of interest.

Any thoughts on how to be fair to everyone?
Is there language in the trust that indicates any desire to protect the corpus of the trust, or just language stating after the demise of the first recipient the remaining assets of the trust would be split equally to the three trustees?

If I set up a trust for my wife, with the remainder to go to my three children, frankly her financial well-being would be my first desire. Hopefully there would be assets left for my children, but the main goal isn't their inheritance, but my wife's welfare.

The desires of my children are not of interest to me in this situation.

Broken Man 1999
Right.

In that case you wouldn't write a trust that specifies the withdrawals from the trust to be the interest and dividends. You would somehow specify that your wife's needs would be taken care of no matter what happens to the remainder short of exhausting it before her death. The trustee would/should have large unconflicted discretion.

We don't know if the specifications mooted by the OP are actually in the trust document or just his idea of a starting place, other than the specification about distributing trust income. The assets of the trust can be invested in any variety of ways to distribute nearly anything while still following that rule. How about Argentine bonds paying 15%? It is only the remaindermen who apparently don't want to lose any money. Who knows what the grantor wanted?

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Re: Investing when someone else gets all dividends

Post by ibhhvc » Tue Jun 12, 2018 5:57 am

VaR wrote:
Mon Jun 11, 2018 4:50 pm
The various parties unstated "hoped for returns" are not specifically relevant to the fiduciary duty the trustees have to the beneficiaries to manage the assets in the trust to achieve the stated trust goals. What does the trust document say? The Wellesley Income Fund's investment object says "The Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation." I'd guess this to be consistent with the trust goals, but I'd like to see the trust goals first.
This is actually a very interesting idea. Trying to match the fund's investment object to the needs of all beneficiaries. It seems like you can't be perfectly fair or crystalize an investment strategy the helps everyone, but if a fund sounds like it matches everyone's needs it might be simpler to trust the fund.
Gill wrote:
Sun Jun 10, 2018 6:10 pm
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary.
I finally got to take a deeper look into the trust document. It specifies that "all of the net income" be distributed to the fourth party. After they pass, the trustee shall distribute the "remaining trust property" to the first three parties pro rata.

The trustee is also tasked to "determine in a fair, equitable, and practical manner what will be credited, charged, and apportioned between principal and income". That's about all the instruction there is.

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Re: Investing when someone else gets all dividends

Post by dbr » Tue Jun 12, 2018 6:59 am

ibhhvc wrote:
Tue Jun 12, 2018 5:57 am
VaR wrote:
Mon Jun 11, 2018 4:50 pm
The various parties unstated "hoped for returns" are not specifically relevant to the fiduciary duty the trustees have to the beneficiaries to manage the assets in the trust to achieve the stated trust goals. What does the trust document say? The Wellesley Income Fund's investment object says "The Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation." I'd guess this to be consistent with the trust goals, but I'd like to see the trust goals first.
This is actually a very interesting idea. Trying to match the fund's investment object to the needs of all beneficiaries. It seems like you can't be perfectly fair or crystalize an investment strategy the helps everyone, but if a fund sounds like it matches everyone's needs it might be simpler to trust the fund.
Gill wrote:
Sun Jun 10, 2018 6:10 pm
I believe the answer with trusts relates to the distinction between income and principal. The fruit, or income in the form of dividends and interest, belongs to the income beneficiaries. Gains in the tree, the principal, belong to principal and ultimately the remainder beneficiaries . Sometimes this is modified by the trust instrument or state law such as statutes requiring a minimum to be allocated to the income beneficiary.
I finally got to take a deeper look into the trust document. It specifies that "all of the net income" be distributed to the fourth party. After they pass, the trustee shall distribute the "remaining trust property" to the first three parties pro rata.

The trustee is also tasked to "determine in a fair, equitable, and practical manner what will be credited, charged, and apportioned between principal and income". That's about all the instruction there is.
Those criteria may be fair and Wellesley a good choice. Wellesley currently yields about 3%. It doesn't matter what the fund description says, the trustees still have to form an interpretation of what is fair, equitable, and practical. To do that you could compare that 3% yield to an expected return of say 6%. That would meant the income recipient would get half of the return each year and the remaindermen could benefit from the growth of the other half of the return. But, if it were me, I don't think that would be an adequate analysis. My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars. Also, that 6% is pretty conservative. It could be expected to grow more, but the expected return could hardly be less. So at 2% inflation, a way should be found to get the income recipient 4% or even 5%, if it were me. It would help if one knew the financial situation of that beneficiary and how many actual dollars are involved to interpret what the grantor would really have expected.

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Re: Investing when someone else gets all dividends

Post by ibhhvc » Tue Jun 12, 2018 7:38 am

dbr wrote:
Tue Jun 12, 2018 6:59 am
My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars
Would it be fair, though, to preserve the principal against inflation? So find an investment strategy that could grow the principal, after fees, at about 2-3% and put the rest of the focus on income?

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Re: Investing when someone else gets all dividends

Post by ZZZZBest » Tue Jun 12, 2018 7:52 am

To the OP, there are many reasonable options for what you might do. Like thousands and thousands.

I will throw my hat in with Gill and suggest 50% stocks, 50% bonds.
It might feel arbitrary, but you aren’t going to do PhD-level analysis to prove something else is a better balance of interests. Or shall I say, “expected better balance of interests.”
Avoiding tilts to dividends,etc, and choosing a total market fund seems neutral and least speculative for the stock side.
Rebalance once a year.
Many options for the bond/fixed income side. I’d say that total bond fits in the realm of reasonable.

...“The enemy of a good plan” and all that...

I too was wrapped around the axle about the seemingly arbitrary distinction between income and principal prevelant in trusts (ie especially in the tax code, and in an era where share buybacks can be not insignificant). I have serenely come to accept it as “a thing I cannot change.”

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Re: Investing when someone else gets all dividends

Post by dbr » Tue Jun 12, 2018 7:54 am

ibhhvc wrote:
Tue Jun 12, 2018 7:38 am
dbr wrote:
Tue Jun 12, 2018 6:59 am
My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars
Would it be fair, though, to preserve the principal against inflation? So find an investment strategy that could grow the principal, after fees, at about 2-3% and put the rest of the focus on income?
Keeping even in real dollars is what preserving the principal against inflation means. Real dollars are dollars adjusted for inflation. I agree growing the principal at 2% or 3% would be fair or more than fair to the remaindermen. I am not sure "giving the rest" to the income recipient is fair. That would depend on what the "rest" is. It isn't necessarily simple to find investments that pay, say 5%, in dividends but also return 7% to be able to pay that dividend and also keep even with inflation. A question is should the issue come to a decision would you maintain 5% payout and let the principal shrink relative to inflation. A related question is how much risk do you take with the principal to get that return. I think Wellesely is a good model for what needs to be done, but then you have to agree 3% is fair payout. Is it?

This may even be a case where the Vanguard Managed Payout Fund VPGDX would work. That fund distributes dividends, capital gains, and return of capital to amount to a distribution of about 4%. Would it violate the terms of the trust to distribute return of capital if the fund rather than the trustees do that. Of course there are other investments that behave like that. I once owned shares in a gas trust that paid out 15%. That also involves depleting the gas reserve so eventually the investment goes to zero and closes. That one did. How does that count against the trust instructions? Technically that 15% was "income."

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Re: Investing when someone else gets all dividends

Post by ZZZZBest » Tue Jun 12, 2018 8:20 am

I have a confirmation question about the case of distributed capital gains from a fund.
In this trust case, distributed long term gains must be kept in the trust as principal, right?
And some the cash from that can be used to pay trust taxes?
And the remaining LT cap gains can (should be?) reinvested.

Whereas a fund’s distributed short term gains are distributed to the beneficiary as trust income?

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Re: Investing when someone else gets all dividends

Post by Gill » Tue Jun 12, 2018 9:06 am

ZZZZBest wrote:
Tue Jun 12, 2018 8:20 am
I have a confirmation question about the case of distributed capital gains from a fund.
In this trust case, distributed long term gains must be kept in the trust as principal, right?
And some the cash from that can be used to pay trust taxes?
And the remaining LT cap gains can (should be?) reinvested.

Whereas a fund’s distributed short term gains are distributed to the beneficiary as trust income?
ST capital gains would be allocated to principal and not paid to the income beneficiary.
Gill

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Re: Investing when someone else gets all dividends

Post by Gill » Tue Jun 12, 2018 9:07 am

dbr wrote:
Tue Jun 12, 2018 7:54 am
ibhhvc wrote:
Tue Jun 12, 2018 7:38 am
dbr wrote:
Tue Jun 12, 2018 6:59 am
My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars
Would it be fair, though, to preserve the principal against inflation? So find an investment strategy that could grow the principal, after fees, at about 2-3% and put the rest of the focus on income?
Keeping even in real dollars is what preserving the principal against inflation means. Real dollars are dollars adjusted for inflation. I agree growing the principal at 2% or 3% would be fair or more than fair to the remaindermen. I am not sure "giving the rest" to the income recipient is fair. That would depend on what the "rest" is. It isn't necessarily simple to find investments that pay, say 5%, in dividends but also return 7% to be able to pay that dividend and also keep even with inflation. A question is should the issue come to a decision would you maintain 5% payout and let the principal shrink relative to inflation. A related question is how much risk do you take with the principal to get that return. I think Wellesely is a good model for what needs to be done, but then you have to agree 3% is fair payout. Is it?

This may even be a case where the Vanguard Managed Payout Fund VPGDX would work. That fund distributes dividends, capital gains, and return of capital to amount to a distribution of about 4%. Would it violate the terms of the trust to distribute return of capital if the fund rather than the trustees do that. Of course there are other investments that behave like that. I once owned shares in a gas trust that paid out 15%. That also involves depleting the gas reserve so eventually the investment goes to zero and closes. That one did. How does that count against the trust instructions? Technically that 15% was "income."
The payments from a depleting asset would need to be allocated between income and principal.
Gill

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Re: Investing when someone else gets all dividends

Post by ZZZZBest » Tue Jun 12, 2018 10:07 am

Gill wrote:
Tue Jun 12, 2018 9:06 am
ZZZZBest wrote:
Tue Jun 12, 2018 8:20 am
I have a confirmation question about the case of distributed capital gains from a fund.
In this trust case, distributed long term gains must be kept in the trust as principal, right?
And some the cash from that can be used to pay trust taxes?
And the remaining LT cap gains can (should be?) reinvested.

Whereas a fund’s distributed short term gains are distributed to the beneficiary as trust income?
ST capital gains would be allocated to principal and not paid to the income beneficiary.
Gill
OK. Thanks for that. I had read somewhere the term “dividend income” used for a ST CG distribution.

I see for Wellesley a good fraction (30%?) of the distribution is capital gains, which, I believe in this trust case, would not be distributable to the income beneficiary. Is that right?

Code: Select all

Type			$/Share		Payable date	Reinvest price
Income			$0.16890	03/16/2018	  $26.27
Income			$0.21450	12/19/2017	  $26.93
Short-Term Capital Gain $0.02460	12/19/2017	  $26.93
Long-Term Capital Gain  $0.28440	12/19/2017  	  $26.93
Income			$0.19400	09/22/2017	  $26.60
Income			$0.19000	06/23/2017	  $26.37

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Re: Investing when someone else gets all dividends

Post by VaR » Tue Jun 12, 2018 10:08 am

dbr wrote:
Tue Jun 12, 2018 6:59 am
Those criteria may be fair and Wellesley a good choice. Wellesley currently yields about 3%. It doesn't matter what the fund description says, the trustees still have to form an interpretation of what is fair, equitable, and practical. To do that you could compare that 3% yield to an expected return of say 6%. That would meant the income recipient would get half of the return each year and the remaindermen could benefit from the growth of the other half of the return. But, if it were me, I don't think that would be an adequate analysis. My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars. Also, that 6% is pretty conservative. It could be expected to grow more, but the expected return could hardly be less. So at 2% inflation, a way should be found to get the income recipient 4% or even 5%, if it were me. It would help if one knew the financial situation of that beneficiary and how many actual dollars are involved to interpret what the grantor would really have expected.
Why this focus on 6%? It seems to confuse strategy with outcome and is like the people who come here and say that they would like a strategy that provides 6% income with a guarantee of principal. Such a beast does not exist under all market conditions and certainly not in the current one. The investment strategy generally endorsed on this board is to determine risk tolerance, use that risk tolerance to determine an appropriate asset allocation, and then make investment choices from a selection of broad based low-cost index funds.

In particular, the 6% income expectation seems curiously high. Isn't the generally accepted payout rule 4% with people nowadays saying that 3.5% or even 3% is a more appropriate guideline? And this is for an annuitizing payout where it is acceptable for the principal to decline towards zero based on the life expectancy of the annuitant.

I also thought it would be informational to compare "expectations" with a SPIA for a 70-year old annuitant. Using this board's usual immediate annuity calculator, I get around a 7% life payout on a 70-year old female. I conclude from this that from an actuarial standpoint, a 7% life-income payout leads to a terminal principal expectation of zero after costs.

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Re: Investing when someone else gets all dividends

Post by VaR » Tue Jun 12, 2018 10:16 am

ZZZZBest wrote:
Tue Jun 12, 2018 10:07 am

OK. Thanks for that. I had read somewhere the term “dividend income” used for a ST CG distribution.

I see for Wellesley a good fraction (30%?) of the distribution is capital gains, which, I believe in this trust case, would not be distributable to the income beneficiary. Is that right?

Code: Select all

Type			$/Share		Payable date	Reinvest price
Income			$0.16890	03/16/2018	  $26.27
Income			$0.21450	12/19/2017	  $26.93
Short-Term Capital Gain $0.02460	12/19/2017	  $26.93
Long-Term Capital Gain  $0.28440	12/19/2017  	  $26.93
Income			$0.19400	09/22/2017	  $26.60
Income			$0.19000	06/23/2017	  $26.37
That is correct. Note that this table is from Vanguard's advisors site. On the investor site, the "Income" distributions are called "Dividend" distributions.

For reference, generally NICRUTs do not consider capital gains to be income, though many states do allow trust documents to specifically declare capital gains to be income.

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Re: Investing when someone else gets all dividends

Post by dbr » Tue Jun 12, 2018 10:18 am

VaR wrote:
Tue Jun 12, 2018 10:08 am
dbr wrote:
Tue Jun 12, 2018 6:59 am
Those criteria may be fair and Wellesley a good choice. Wellesley currently yields about 3%. It doesn't matter what the fund description says, the trustees still have to form an interpretation of what is fair, equitable, and practical. To do that you could compare that 3% yield to an expected return of say 6%. That would meant the income recipient would get half of the return each year and the remaindermen could benefit from the growth of the other half of the return. But, if it were me, I don't think that would be an adequate analysis. My opinion is that 3% to the income recipient is stingy and that the remaindermen are really not entitled to more than keeping even in real dollars, which is what responsibly preserving their principal means. The statement does not say the principal should be grown in real dollars. Also, that 6% is pretty conservative. It could be expected to grow more, but the expected return could hardly be less. So at 2% inflation, a way should be found to get the income recipient 4% or even 5%, if it were me. It would help if one knew the financial situation of that beneficiary and how many actual dollars are involved to interpret what the grantor would really have expected.
Why this focus on 6%? It seems to confuse strategy with outcome and is like the people who come here and say that they would like a strategy that provides 6% income with a guarantee of principal. Such a beast does not exist under all market conditions and certainly not in the current one. The investment strategy generally endorsed on this board is to determine risk tolerance, use that risk tolerance to determine an appropriate asset allocation, and then make investment choices from a selection of broad based low-cost index funds.

In particular, the 6% income expectation seems curiously high. Isn't the generally accepted payout rule 4% with people nowadays saying that 3.5% or even 3% is a more appropriate guideline? And this is for an annuitizing payout where it is acceptable for the principal to decline towards zero based on the life expectancy of the annuitant.

I also thought it would be informational to compare "expectations" with a SPIA for a 70-year old annuitant. Using this board's usual immediate annuity calculator, I get around a 7% life payout on a 70-year old female. I conclude from this that from an actuarial standpoint, a 7% life-income payout leads to a terminal principal expectation of zero after costs.
The 6% I mentioned was an estimate of expected return. It isn't a focus but an example. The 4% rule has such a low payout because that is what is required to sustain a portfolio in the worst case that the sequence of returns goes against the retiree while getting the mean return. As you say, SPIAs have to be supported by actuarial calculations that allow for longevity of the total insurance pool but at the same time that exhausts the principal over an average lifetime. I actually suggest maybe 4% to the income recipient, but if you do that there is a chance the remaindermen will not get preservation of principal and there is a larger chance their asset will grow faster than inflation, which is then unfair to the income recipient.

ZZZZBest
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Re: Investing when someone else gets all dividends

Post by ZZZZBest » Tue Jun 12, 2018 10:28 am

dbr wrote:
Mon Jun 11, 2018 6:45 pm
Who knows what the grantor wanted?
Would it be reasonable for the trustees to invest similarly to how the Grantor invested?
If it’s knowable at this juncture.
It might give some insight to the Grantor’s expectation for ‘income’ if they had invested themselves in 100% high dividend stocks vs say 80% Berkshire Hathaway + 20% 1 year CDs.
The rates of return for any given asset type will be different yesterday vs tomorrow, but philosophically...

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Re: Investing when someone else gets all dividends

Post by CnC » Tue Jun 12, 2018 11:17 am

vineviz wrote:
Sat Jun 09, 2018 9:11 am
It sounds like a really terribly constructed trust if, when the trust dissolves it goes to the current trustees.

Nonetheless, if you are currently both owner and trustee but NOT the beneficiary you have a binding fiduciary responsibility to the beneficiary (the 4th person). That means managing for their benef and not yours.

Being ‘fair’ is just not an option: the only interests the trustee can legally consider are those of the beneficiary.

https://www.justia.com/estate-planning/ ... abilities/

Not really terrible. Take into account a man with children remarries. He wants to leave everything he has to his children.

But, he feels an obligation to take care of his second wife so he is going to give her the dividends until she dies.

I'm fairly certain this is what the situation was. He wants his children to control the money since it will be theirs.
They probably kind of like the widow and don't want to completely hurt her, but also don't want an anchor around their inheritance.

My suggestion is a 50/50 -70/30 portfolio. That should be fair enough to everyone.
Last edited by CnC on Tue Jun 12, 2018 11:25 am, edited 2 times in total.

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