Inherited Trust Portfolio - Planning Advice

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one-dmc
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Joined: Tue Apr 06, 2021 1:30 pm

Inherited Trust Portfolio - Planning Advice

Post by one-dmc »

Hello, I have lurked on these forums for a while now and have learned a ton. I am now looking for more personal advice. Thank you in advance for reading.

Emergency funds: Yes - 9-12 months of expenses

Debt: 65K student loans, 170K mortgage

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 6% State

State of Residence: CT

Age: 28

Desired Asset allocation: 85% stocks / 10% bonds
Desired International allocation: 15% of stocks

I have a bit of a unique situation, my portfolio almost entirely consists of an irrevocable trust I inherited when I was 16 after my father passed. The trust has an Executor who manages the money. I do not gain control until I am 30, receiving half of the total assets, and then the second half at the age of 35. I have been very blessed to be able to use this trust for important life achievements such as bachelors and masters degrees and down payment for a house. I have a good relationship with the Executor of the Trust and he has always had my best interests at heart. After doing research and finding the Boglehead philosophy I convinced him to turn some of the more eclectic stock mix into a three-fund portfolio (FSKAX, FSPSX, FXNAX) which has since done very well. The Trust total value at time of writing is around low-seven figures (between $1-2 million). My wife and I both have steady careers, are prudent with money, and try to save and spend as if the Trust was not there. As I get closer to 30 I want to take a more hands-on approach and make sure this portfolio can continue to grow as best as it can.

Future goals include:
Paying off student loan debt
Buying or building forever home
Early retirement
Paying for kids’ college tuition

Current retirement assets

Trust (low-7 figures)
Fidelity Government Money Market Account (SPAXX): 5.56%
Fidelity Total Market Index Fund (FSKAX): 26.93%
Fidelity International Index Fund (FSPSX): 11.63%
Fidelity U.S. Bond Index Fund (FXNAX): 6.39%
Apple (AAPL): 20.18%
Berkshire Hathaway (BRK.A): 22.64%

401k (mid-5 figures)
1122 Vanguard Total Stock Market: 1.75%
9991 TRowe Price 2055 Fund: 1.14%
8633 Vanguard International Value Fund: 0.45%
2610 Vanguard LifeStrategy: 0.2%

Roth IRA at American Century (mid-5 figures)
American Century Select Fund, Investor Class (TWCIX): 3.12%

Questions:
1. Should I be worried about a large percentage of my portfolio being tied to AAPL and BRK.A? Should I aim to transfer these holdings to the other index funds I am invested in?
2. What is the best use of the cash sitting in the Money Market Account? Should I just set it into the funds?
3. Any tips or advice to keep this trust growing? I recognize the tremendous privilege of having this safety net, and want to give my children the same opportunity through funding their education.
Gill
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Location: Florida

Re: Inherited Trust Portfolio - Planning Advice

Post by Gill »

Your trust has a trustee, not an executor. Until the trust is distributed to you, it appears the trustee has the sole responsibility for managing the assets. He is taking an enormous risk having 20% of your trust in one stock.
Gill
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
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celia
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Re: Inherited Trust Portfolio - Planning Advice

Post by celia »

3. I suspect the tax brackets are higher for trust assets than for you as a couple. You should therefore be hoping to remove everything in the trust as soon as it is permitted, instead of leaving it in the trust.

Are you and your spouse maxing out your Roth IRAs and own 401Ks? If not, ask the trustee if the trust can reimburse you for the additional amounts you’d like to save for retirement. For example, if you could max both out for both of you for $25k, could the trust (or 401K) give you $25k, so that your living and savings expenses stay the same as they are now? Of course, the trust can have restrictions on this (or not). Hopefully, you’ve read the trust document.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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retired@50
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Location: Living in the U.S.A.

Re: Inherited Trust Portfolio - Planning Advice

Post by retired@50 »

one-dmc wrote: Tue Apr 06, 2021 1:44 pm
Questions:
1. Should I be worried about a large percentage of my portfolio being tied to AAPL and BRK.A? Should I aim to transfer these holdings to the other index funds I am invested in?
2. What is the best use of the cash sitting in the Money Market Account? Should I just set it into the funds?
3. Any tips or advice to keep this trust growing? I recognize the tremendous privilege of having this safety net, and want to give my children the same opportunity through funding their education.
Welcome to the forum. :happy

Answers to questions.
1. I'd be worried about the concentration in Apple and Berkshire stock. If it's feasible from a tax perspective, I'd move toward index funds if the trustee will allow it.

2. Why is there cash? Does the trust make regular payouts of some kind? If so, then having a portion in cash could make life easier. I wouldn't get creative by trying to seek out some higher interest rate. Higher yield means higher risk.

3. Just stick to a prudent investment plan, use stocks from both US and international, and short and intermediate term bonds, or a total bond market fund. See the wiki on the three-fund portfolio.
https://www.bogleheads.org/wiki/Three-fund_portfolio

Regards,
This is one person's opinion. Nothing more.
miket29
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Joined: Tue Jun 20, 2017 9:07 pm

Re: Inherited Trust Portfolio - Planning Advice

Post by miket29 »

1. Should I be worried about a large percentage of my portfolio being tied to AAPL and BRK.A? Should I aim to transfer these holdings to the other index funds I am invested in?
I wouldn't be too worried about Berkshire, but then again I'm an investor in it. Berkshire is somewhat akin to a large-cap value fund. Some have explained Berkshire's performance in the past as being due to Buffett overloading factors from the 5-factor model; see for example https://blogs.cfainstitute.org/investor ... -all-time/ Will it perform better than simply holding the market in the future? Even Buffett says not to expect the returns he's had in the past. I'm keeping my holdings under the belief someday the market will decline and Buffett or his successor(s) will deploy the massive cash holdings leading to longer-run market-beating returns, but events may not turn out the way I hope.

I'd be much more concerned about Apple. Big tech stocks do great, until they don't. Ask investors in Cisco or Intel about dramatic falls. Note I'm not predicting an imminent or even eventual fall, but owning one tech stock is taking a risk.

One advantage of Berkshire is no dividends, which means your trust account has benefitted from the rise in the stock price but has paid no tax. And Apple has a small dividend yield, about 0.65% lately, which means taxes haven't been significant. The problem you face are the capital gains (I'm assuming sizeable) if ask the trustee to sell these stocks.
senex
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Re: Inherited Trust Portfolio - Planning Advice

Post by senex »

one-dmc wrote: Tue Apr 06, 2021 1:44 pm 1. Should I be worried about a large percentage of my portfolio being tied to AAPL and BRK.A?
20% is above the comfort level of many bogleheads. Sometimes rich people are willing to accept high variance (including risk of large loss). Buffett has almost 100% in one stock; his vice-chairman (Munger) has almost 100% in 3 individual stocks.
one-dmc wrote: Tue Apr 06, 2021 1:44 pm 2. What is the best use of the cash sitting in the Money Market Account? Should I just set it into the funds?
If that 5% cash makes life easier (paying the accountant, sending distributions, etc), you could leave it. Or if it's bugging you, you could invest it.
one-dmc wrote: Tue Apr 06, 2021 1:44 pm 3. Any tips or advice to keep this trust growing? I recognize the tremendous privilege of having this safety net, and want to give my children the same opportunity through funding their education.
Typical boglehead principles are to control the things you can: minimize expenses (including taxes) and turnover, remain invested at your target allocations.
celia wrote: Tue Apr 06, 2021 3:26 pm 3. I suspect the tax brackets are higher for trust assets than for you as a couple. You should therefore be hoping to remove everything in the trust as soon as it is permitted, instead of leaving it in the trust.
Trust tax brackets are compressed, but only income is taxed. Removing "everything" from the trust will probably not reduce taxes (and will have other downsides), compared to just distributing the taxable income each year and keeping the principle in the trust.
LFS1234
Posts: 251
Joined: Fri Feb 08, 2019 4:13 am

Re: Inherited Trust Portfolio - Planning Advice

Post by LFS1234 »

one-dmc wrote: Tue Apr 06, 2021 1:44 pm
Trust (low-7 figures)
Fidelity Government Money Market Account (SPAXX): 5.56%
Fidelity Total Market Index Fund (FSKAX): 26.93%
Fidelity International Index Fund (FSPSX): 11.63%
Fidelity U.S. Bond Index Fund (FXNAX): 6.39%
Apple (AAPL): 20.18%
Berkshire Hathaway (BRK.A): 22.64%

Questions:
1. Should I be worried about a large percentage of my portfolio being tied to AAPL and BRK.A? Should I aim to transfer these holdings to the other index funds I am invested in?
2. What is the best use of the cash sitting in the Money Market Account? Should I just set it into the funds?
3. Any tips or advice to keep this trust growing? I recognize the tremendous privilege of having this safety net, and want to give my children the same opportunity through funding their education.
1.
I have about 20% of my net worth in BRK stock, so your having a similar allocation doesn't bother me in the slightest.

I do not personally feel as comfortable with AAPL for the reasons mentioned by miket29, although it should be noted that Buffett is comfortable enough with it to have BRK hold over $110 billion worth of its stock. Through your BRK holding, you indirectly have an over 4% position in AAPL in addition to your directly held position.

Perhaps talk with the trustee and see what his thinking is about the asset allocation? If I were to pare down any of the equity positions, I would pare down AAPL.

As an aside: you should be aware that your BRK.A share is convertible into 1,500 BRK.B shares, should you ever wish to do so (e.g. in order to lighten up your BRK position). https://www.berkshirehathaway.com/brksh ... compab.pdf

2.
I don't see how there can be much upside for money market or bond funds given today's interest rates. Beyond what is needed for emergency reserves and anticipated expenditures in the next few years, an option to consider is whether it might make sense to use these to pay down the mortgage and student loan.

3.
The US stock market has historically grow at around 6.5% - 7% on average annually in real terms over the very long haul, in spite of the occasional 50% drops, lost decades, and other events. For someone using the basic principles of wide diversification, cost minimization and staying in the market through thick and thin, there is no reason to expect meaningfully lower results in the next 50 years than we've had in the past 50 years.
The less you take out and spend, the more will continue compounding for you in the future.
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