allocating trust fund money
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allocating trust fund money
I inherited a trust fund from a family member. There is $2 million in there and I am in my late 20's. I cannot touch the fund until I am 40, so I have a fairly long time horizon.
I have not seen the fund statements yet, but I will soon. I have a few questions.
I do have a strong background theoretically in finance (passed the CFA level 1 and 2), but I do not have any applied knowledge managing people's money.
1. If I don't like the fund allocation, can I tell the trustee to allocate as I wish?
2. All I know is that the fixed income portion is in munis. Not a fund. Is this okay, or would someone suggest alternate fixed income products like Treasuries or a specific fund?
3. What would seem like a reasonable equity/fixed income allocation?
4. Besides fixed income, what are some other good equity funds to invest in?
Thanks in advance
I have not seen the fund statements yet, but I will soon. I have a few questions.
I do have a strong background theoretically in finance (passed the CFA level 1 and 2), but I do not have any applied knowledge managing people's money.
1. If I don't like the fund allocation, can I tell the trustee to allocate as I wish?
2. All I know is that the fixed income portion is in munis. Not a fund. Is this okay, or would someone suggest alternate fixed income products like Treasuries or a specific fund?
3. What would seem like a reasonable equity/fixed income allocation?
4. Besides fixed income, what are some other good equity funds to invest in?
Thanks in advance
1. You might suggest, and you might be ignored.
2. Income to the trust that is not distributed is taxed at a fairly high rate. Municipal bonds are common for trusts that are not distributing income. It all depends on the type of trust (tax status). You should find out more about the trust and then study tax issues for trusts of that kind.
3. I might go 60% equity, 40% munis, but it's not my money. That decision is up to the trustee.
4. Ones that don't generate a lot of dividends and capital gains. See point 2.
That's about as much as I know. You need to do some more research on the trust and tax issues as mentioned above.
P.S. I interpreted "cannot touch" as meaning no distributions. If "cannot touch" just means you can't control it but can get all the income that the trust generates, then that changes things. You need the facts.
2. Income to the trust that is not distributed is taxed at a fairly high rate. Municipal bonds are common for trusts that are not distributing income. It all depends on the type of trust (tax status). You should find out more about the trust and then study tax issues for trusts of that kind.
3. I might go 60% equity, 40% munis, but it's not my money. That decision is up to the trustee.
4. Ones that don't generate a lot of dividends and capital gains. See point 2.
That's about as much as I know. You need to do some more research on the trust and tax issues as mentioned above.
P.S. I interpreted "cannot touch" as meaning no distributions. If "cannot touch" just means you can't control it but can get all the income that the trust generates, then that changes things. You need the facts.
Re: allocating trust fund money
Yes, you can tell them whatever you want, but almost certainly they don't have to do as you say. Your benefactor did not want you to be able to blow the money away, and so paid a trustee to manage the money for you.wheretoputmymoney wrote:I inherited a trust fund from a family member. There is $2 million in there and I am in my late 20's. I cannot touch the fund until I am 40, so I have a fairly long time horizon.
I have not seen the fund statements yet, but I will soon. I have a few questions.
I do have a strong background theoretically in finance (passed the CFA level 1 and 2), but I do not have any applied knowledge managing people's money.
1. If I don't like the fund allocation, can I tell the trustee to allocate as I wish?
It depends on who the trustee is too, and how you approach them. If you find the asset allocation too risky, and ask them nicely to reduce the risk in the portfolio, they might oblige. They are likely not going to take higher risk at your request.
If the income of a trust is not distributed (to you), it is usually taxed at a very high rate very quickly. So munis often make sense for trusts.wheretoputmymoney wrote: 2. All I know is that the fixed income portion is in munis. Not a fund. Is this okay, or would someone suggest alternate fixed income products like Treasuries or a specific fund?
Whatever allocation your benefactor desired is "reasonable". If the benefactor gave no specific instructions, you may be able to influence this decision. I would recommend a relatively high fixed income allocation -- say 60% fixed income, 40% equity, because your need to take risk with this money is quite low. If you are risk averse, even higher fixed income allocations may be reasonable.wheretoputmymoney wrote: 3. What would seem like a reasonable equity/fixed income allocation?
Best to look at the trust documents to see what the trustee is supposed to do, before trying to influence the decisions. Then read a few books on the bogleheads reading list. Design an investment policy statement. Have it reviewed on this site. You have 20 years before you can manage the trustwheretoputmymoney wrote: 4. Besides fixed income, what are some other good equity funds to invest in?
Thanks in advance
money.
Low cost passive equity funds are good -- but choosing specific funds comes much later, after you have at least a framework of an Investment Policy Statement in place.
You ask the trustee for an investment policy statement for the managed funds -- I think this is a legitimate request, but they may or may not oblige, and they may or may not have one.
Cheers,
Joppy
PS: I am not a lawyer, and have no specific knowledge of trust law etc.
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sscritic wrote:1. You might suggest, and you might be ignored.
2. Income to the trust that is not distributed is taxed at a fairly high rate. Municipal bonds are common for trusts that are not distributing income. It all depends on the type of trust (tax status). You should find out more about the trust and then study tax issues for trusts of that kind.
3. I might go 60% equity, 40% munis, but it's not my money. That decision is up to the trustee.
4. Ones that don't generate a lot of dividends and capital gains. See point 2.
That's about as much as I know. You need to do some more research on the trust and tax issues as mentioned above.
P.S. I interpreted "cannot touch" as meaning no distributions. If "cannot touch" just means you can't control it but can get all the income that the trust generates, then that changes things. You need the facts.
Thanks for the reply. I do have a CPA but no tax background so I should be able to find out more about the tax and trust issues at a later date.
I am not able to touch any of the principal or the income the trust generates until I am 40.
Any other suggestions on how to look out for myself and be aware of would be greatly appreciated.
I too think 60% stocks/40% bonds is reasonable. You have no need to take risk, so the stock to bond ratios that people your age might be using are not necessarily right for you. This does not mean they are wrong for you either - you just don't need to take the risk.3. What would seem like a reasonable equity/fixed income allocation?
Index funds - because they do not generate a lot of taxable distributions. For example you could hold 40% Total Stock Market, 20% Vanguard's Total International, and 40% munis (individual or in a fund I suppose) and the money would likely grow steadily and not drop too much in a crash.4. Besides fixed income, what are some other good equity funds to invest in?
The best way to get the trustees to listen to you is to learn a lot about investing, present them a reasonable plan, and act like an adult (meaning no tantrums, no threats, not angry confrontations). Be prepared to defend your idea without being defensive. Also be able to show them that you are managing your own income, assets, and debts responsibly.
If you don't like the fund's allocation and can't change it, just ignore the whole thing and do what you want at age 40. This assumes that the fund is not mishandled. By "mishandled" I don't mean invested in a different way from what you would do - there is more than one reasonable way to invest money. But if the market has been rising for a year and your funds are getting smaller, there might be something worth looking at (mismanagement, excessive fees, etc.) Again, you'll need some knowledge to spot something like this and to make a reasonable argument to your trustee or the trustee's boss.
You have a lot of money to be responsible for in 10 or 15 years - learn something about how to do it. http://www.bogleheads.org/readbooks.htm
If all turns to poop and the trust is not what you want, don't let it ruin your life. Just go on and enjoy the lemonade.
Link to Asking Portfolio Questions
You need to find out whether you have any influence on the decisions made by the trustee, and whether there is a provision to replace the trustee. Unfortunately, many traditional trustee arrangements charge extremely high prices for very simple services. This has nothing to do with whether any principal or income can be distributed to you before age 40. Given your educational background, you should be able to support yourself quite well without the money in the trust. But you don't want to waste a lot of what will be your money on overpriced investment services.
Your trustee should be checking on your financial situation, since your ability to tolerate risk should be a consideration in the investment style. If I correctly guess a high risk tolerance, then you might be best off with a more aggressive asset allocation, more stock, small, value, foreign, etc.
If you will rely on the trust for living expenses then a more conservative allocation might be appropriate.
Your trustee should be checking on your financial situation, since your ability to tolerate risk should be a consideration in the investment style. If I correctly guess a high risk tolerance, then you might be best off with a more aggressive asset allocation, more stock, small, value, foreign, etc.
If you will rely on the trust for living expenses then a more conservative allocation might be appropriate.
Re: allocating trust fund money
This was a scary statement. I suppose I will now discount what any CFA charterholder says from now on.wheretoputmymoney wrote:...
I do have a strong background theoretically in finance (passed the CFA level 1 and 2), but I do not have any applied knowledge managing people's money.
Read 4 or 5 of the books on the recommended reading list. It should only take you a couple of days to get through them.Any other suggestions on how to look out for myself and be aware of would be greatly appreciated.
One cannot manage a $2 million portfolio based on a few responses on an anonymous internet forum.
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Re: allocating trust fund money
All the CFA teaches you is THEORY. How to put that THEORY into PRACTICE is another question. It does not give you the confidence to do that. The CFA program is worthwhile though.livesoft wrote:This was a scary statement. I suppose I will now discount what any CFA charterholder says from now on.wheretoputmymoney wrote:...
I do have a strong background theoretically in finance (passed the CFA level 1 and 2), but I do not have any applied knowledge managing people's money.
Read 4 or 5 of the books on the recommended reading list. It should only take you a couple of days to get through them.Any other suggestions on how to look out for myself and be aware of would be greatly appreciated.
One cannot manage a $2 million portfolio based on a few responses on an anonymous internet forum.
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- Joined: Sun Sep 04, 2011 2:37 pm
Trustee is a relative...afan wrote:You need to find out whether you have any influence on the decisions made by the trustee, and whether there is a provision to replace the trustee. Unfortunately, many traditional trustee arrangements charge extremely high prices for very simple services. This has nothing to do with whether any principal or income can be distributed to you before age 40. Given your educational background, you should be able to support yourself quite well without the money in the trust. But you don't want to waste a lot of what will be your money on overpriced investment services.
Your trustee should be checking on your financial situation, since your ability to tolerate risk should be a consideration in the investment style. If I correctly guess a high risk tolerance, then you might be best off with a more aggressive asset allocation, more stock, small, value, foreign, etc.
If you will rely on the trust for living expenses then a more conservative allocation might be appropriate.
I just want to make sure Trustee is doing a good job and to monitor that. Doesn't have to be an A+++ job, but as long as A job with no exotic/risky investments then I am fine with that.
"trustee is a relative"
That is very good news. That suggests, unlike what most have been assuming, that the trustee will listen to your ideas, individualize investments for you, and respect your growing knowledge.
You should be in index funds for stocks, and you may have a fairly aggressive portfolio if you are earning a good income. With your background, you should be able to design your own asset allocation over time, as you gain a real world perspective. For now, go for low cost funds, you can adjust your allocation as you gain understanding of the issues.
Managing a portfolio of individual bonds sounds like a lot of trouble, considering the diversification and record keeping you get for a very low price from a mutual fund company. For treasuries this might not matter. For munis the time spent evaluating individual issues does not make it seem worth it.
That is very good news. That suggests, unlike what most have been assuming, that the trustee will listen to your ideas, individualize investments for you, and respect your growing knowledge.
You should be in index funds for stocks, and you may have a fairly aggressive portfolio if you are earning a good income. With your background, you should be able to design your own asset allocation over time, as you gain a real world perspective. For now, go for low cost funds, you can adjust your allocation as you gain understanding of the issues.
Managing a portfolio of individual bonds sounds like a lot of trouble, considering the diversification and record keeping you get for a very low price from a mutual fund company. For treasuries this might not matter. For munis the time spent evaluating individual issues does not make it seem worth it.
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That is interesting you say that about the munis. You think it is more worthwhile to invest in a fund rather than separate issues? When I get a chance to look at the trust statements, I will know more. As far as I know from a family member, there is a heavy investment in munis from many of the surrounding counties from where we live. I know that munis have significant tax benefits... I suppose that the grantor of the trust also wanted to invest his money in local counties to support them while getting a safe return on principal. That is my educated guess.afan wrote:"trustee is a relative"
That is very good news. That suggests, unlike what most have been assuming, that the trustee will listen to your ideas, individualize investments for you, and respect your growing knowledge.
You should be in index funds for stocks, and you may have a fairly aggressive portfolio if you are earning a good income. With your background, you should be able to design your own asset allocation over time, as you gain a real world perspective. For now, go for low cost funds, you can adjust your allocation as you gain understanding of the issues.
Managing a portfolio of individual bonds sounds like a lot of trouble, considering the diversification and record keeping you get for a very low price from a mutual fund company. For treasuries this might not matter. For munis the time spent evaluating individual issues does not make it seem worth it.
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Get a copy of the trust document and read it. If the trustee won't give it to you talk to a lawyer (without making a fuss). Pay special attention to the provisions on removing the trustee. If the trustee ever starts seriously messing up, or failing to report to you (as required by the trust document read against state trust law), or charging exorbitant fees, you want to know what your options are. You may have a say in choosing the successor trustee. The trustee has a fiduciary obligation to you that gives you a substantial set of rights.
Know what your rights are, but do everything you can to stay on reasonable and friendly terms with the trustee. The trustee would be a fool to not be interested in your (reasonable) views about investment strategy.
(I am the trustee of a family trust. I am very much aware of which constellations of family members can have me removed. I am also aware of the tolerance for risk of each of the beneficiaries. My legal risk as a trustee is to a large extent a function of how satisfied the beneficiaries are with what I'm doing. If the beneficiaries are (reasonably and knowingly) happy with a certain amount of risk, I definitely take that into account.)
SA
Know what your rights are, but do everything you can to stay on reasonable and friendly terms with the trustee. The trustee would be a fool to not be interested in your (reasonable) views about investment strategy.
(I am the trustee of a family trust. I am very much aware of which constellations of family members can have me removed. I am also aware of the tolerance for risk of each of the beneficiaries. My legal risk as a trustee is to a large extent a function of how satisfied the beneficiaries are with what I'm doing. If the beneficiaries are (reasonably and knowingly) happy with a certain amount of risk, I definitely take that into account.)
SA
The problem with individual munis is that the trustee is forced to do extensive analysis of each issue in order to know what they are buying. Munis come in all flavors, call provisions, credit risk... Plus, they have a terrible record of disclosure, so often no one outside the managers of that particular issue know the financial status of the entity that stands behind the bond. To invest in individual munis someone has to work through all of this for every single bond in the portfolio. They have to do it when they buy and they have to keep doing it to determine whether any bonds no longer are sufficiently credit worthy to hold. This is time consuming, and rarely brings in enough extra interest to make it worth the effort. Muni funds from low cost providers like Vanguard do all of this for you, and charge a very reasonable fee.
In treasuries the situation is much simpler. There are no call provisions, there are no credit quality concerns, and all enjoy the same full faith and credit. Then the difference between a fund and individual bonds is simply which is more convenient.
In treasuries the situation is much simpler. There are no call provisions, there are no credit quality concerns, and all enjoy the same full faith and credit. Then the difference between a fund and individual bonds is simply which is more convenient.