Trust Services

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
rigoodma
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Trust Services

Postby rigoodma » Mon Apr 17, 2017 3:29 pm

My wife and I just finished setting up our will and trust after long procrastination with it. Our trust is basically a grantor revocable trust in which both my wife and I are trustees of it while we are alive and then it becomes irrevocable if something happens to both of us. Probably very similar to what others have on this site.

After reading through "Beyond the Grave" (thanks for the book suggestion by the way) and as many posts I can find on BH, I'm reconsidering who the trustee should be if something should happen to both my wife and me. Currently, we have it set to the guardians of our kids (people who we do trust and are wealthy in their own right), as it made sense for them to control it, since they were the ones who are taking care of our children. But, reading through the book, I am thinking about changing that to a trust company, instead of individuals for multiple reasons.

All that being said, I have a couple of questions for people who do use trust services:

1. Who do you currently use for investment trust services? I've read through the board and have seen a lot of different options (regional bank, Northern Trust, Private Trust Company, Vanguard, Fidelity). At first, I would of chosen Vanguard but recently saw a post that mentioned some of their language they require to administrate the trust (specifically how to manage the assets). Not something I would be fond of, unless I'm misreading what it means.

2. How do you manage the non-investment inheritance, such as real estate or other personal property? Do you have a different trust company to manage that for you? Just keep it simple and give it to your kids? Or do you just sell it all and put it in investments?

3. What are some things you found when researching trust services that would be good to know?

I'm probably not going to make any changes to the trust for a couple of years, as we just completed it. But, with all the things I read in the book, something I will definitely look at down the road.

Thanks in advance.

Gill
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Re: Trust Services

Postby Gill » Mon Apr 17, 2017 3:41 pm

I spent my career in the trust business but I won't attempt to answer all your questions other than to urge you to have a professional trustee manage your assets separate from the guardian of your children. Any of the options you mention could be good depending on your needs and the size of the trust. Banks such as Northern have very high minimums as well as fees (trust me, I worked there!). The same firm should be named as your personal representative to handle assets such as your real estate, although Vanguard and possibly others won't act in that capacity.
Gill

rigoodma
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Re: Trust Services

Postby rigoodma » Mon Apr 17, 2017 3:45 pm

Gill wrote:I spent my career in the trust business but I won't attempt to answer all your questions other than to urge you to have a professional trustee manage your assets separate from the guardian of your children. Any of the options you mention could be good depending on your needs and the size of the trust. Banks such as Northern have very high minimums as well as fees (trust me, I worked there!). The same firm should be named as your personal representative to handle assets such as your real estate, although Vanguard and possibly others won't act in that capacity.
Gill


I guess some more detail would help you and others. Right now, if something happened to my wife and me, the trust would be in the $5-5.5 million range when you include retirement, taxable investments, and life insurance policies.

I have come to the same conclusion with professional trustee, hence the question.

rfowler
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Re: Trust Services

Postby rfowler » Mon Apr 17, 2017 4:18 pm

riggoodma,

I am so glad you posted your questions -- they are the exact ones I came up with, also from just finishing "Beyond the Grave."
We too had set up a revocable trust and thought we had everything squared away with a family member serving as trustee for our young adult children, all our real estate in LLCs that could be split easily into separate LLCs etc.

Like you, the book has caused me to seriously rethink many assumptions, including what to do with current real estate holdings and who to have as a trustee. Right now I am considering a 180-change in our approach (i.e. possibly establishing a process for selling real estate when the time comes, and also using a corporate/professional trustee).

As a first step, we are going to "upgrade" our estate attorney to someone who can handle some more advanced estate planning. Our current attorney does "package" estate planning and has referred us to the next level of complexity.

I look forward to learning form any input offered on your questions.

afan
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Re: Trust Services

Postby afan » Mon Apr 17, 2017 6:02 pm

I have not used trust services, but I have shopped a lot.

As of the last time I checked, Vanguard would not manage real estate as trustee. You would need someone else to do that. This is a problem for us, since there is real estate that would need to be sold when we pass. If that is still the case, then you would either need to have a separate trust company manage the real estate, or at least have a personal representative sell it, then give the money to Vanguard to manage.

I did not quite follow the OP comments about Vanguard wanting to manage the investments. That is what most trust companies will want to do. That is where they make their money. There are trust companies that will do only the administrative parts of managing the trust- preparing statements, even doing distributions, but will let someone else manage the investments. Some of the large companies will do this, others will not. It seems to be a common feature of the asset protection trust companies in those states. The fees are less, since they are not managing the investments, but you need someone to manage the investments, since you will be dead. So the total cost might not be any lower- unless you have a friend or relative do it until the kids are old enough to manage this themselves.

I doubt you have enough assets to interest Northern Trust. If they would take your business at all, the fees would be enormous.

When our children were minors we did not provide for a separate company to manage the assets. We left that to the guardians. They were perfectly capable of managing the investments. They could have hired someone if they wanted help.

I looked at Fidelity and my conclusion was "not ready for prime time". Endless confusion about their fees and services. Run around from office to office as they tried to figure out whether they did trust management at all!! "Yes, you do, I have a URL where you describe it" When I did get someone who at least claimed to work in the trust department, she said that although Fidelity has index funds, they absolutely would not invest trust assets in them. It would be high cost active funds only. That is how they make their money.

Schwab has a service that will do trust administration for a pretty low fee, but you must assign the investment management to a firm that is part of the Schwab advisor network. So you would need to shop them in addition to hiring Schwab. You MIGHT be able to find a firm that would do a simple low cost portfolio, but it would take some digging.

Ultimately, we decided that Vanguard would be a suitable company for our successor trustees to hire if they did not want to manage the money themselves. Our (individual, family member) personal representative would handle disposing of the real estate, then the proceeds would go into our trust. Our successor trustees are perfectly capable of managing the money themselves, without "professional" help. If they decide it is too much bother, then they can hire Vanguard, or someone else.

The hard part about shopping for trustees was not finding a company that would manage the money. They were all eager to do that, but only Vanguard seemed aware of the advantages of passive investing. Everyone else wanted to claim that their analysts were so brilliant that they would beat the markets.

The hard part was getting any idea of how they performed on client service. I was shopping for a company that would do much or all of the work for a trust for which I am trustee. Everyone wanted to talk about their brilliant investment teams, but almost no one had anything useful to say about dealing with distribution requests from the beneficiary, planning for disability or nursing home needs, paying bills... One company said that they had a set of elder care services. After painfully pursuing this, through multiple people who had no idea what they were talking about, I discovered that all they did was hire a separate firm, at additional cost. One company did say they had a distribution committee that would meet weekly and review requests across the trusts they manage. I got a good feeling about them, but their prices were astronomical.
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

rigoodma
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Re: Trust Services

Postby rigoodma » Mon Apr 17, 2017 6:41 pm

afan wrote:I have not used trust services, but I have shopped a lot.

As of the last time I checked, Vanguard would not manage real estate as trustee. You would need someone else to do that. This is a problem for us, since there is real estate that would need to be sold when we pass. If that is still the case, then you would either need to have a separate trust company manage the real estate, or at least have a personal representative sell it, then give the money to Vanguard to manage.


Yes, this is what I found too.

I did not quite follow the OP comments about Vanguard wanting to manage the investments. That is what most trust companies will want to do. That is where they make their money. There are trust companies that will do only the administrative parts of managing the trust- preparing statements, even doing distributions, but will let someone else manage the investments. Some of the large companies will do this, others will not. It seems to be a common feature of the asset protection trust companies in those states. The fees are less, since they are not managing the investments, but you need someone to manage the investments, since you will be dead. So the total cost might not be any lower- unless you have a friend or relative do it until the kids are old enough to manage this themselves.


I have not issue with someone managing the investments, but I would want to keep them with my asset allocation and how I would want it to be managed. From my reading and what people implied on BH, Vanguard would want to manage it and make the decisions on how it is invested. If I am mistaken about that, please let me know. I would want the ability to say keep my asset allocation X%/Y%, rebalance at Z time, etc.

I doubt you have enough assets to interest Northern Trust. If they would take your business at all, the fees would be enormous.


OK

When our children were minors we did not provide for a separate company to manage the assets. We left that to the guardians. They were perfectly capable of managing the investments. They could have hired someone if they wanted help.


Did you leave any instructions on how to invest?

I looked at Fidelity and my conclusion was "not ready for prime time". Endless confusion about their fees and services. Run around from office to office as they tried to figure out whether they did trust management at all!! "Yes, you do, I have a URL where you describe it" When I did get someone who at least claimed to work in the trust department, she said that although Fidelity has index funds, they absolutely would not invest trust assets in them. It would be high cost active funds only. That is how they make their money.

Schwab has a service that will do trust administration for a pretty low fee, but you must assign the investment management to a firm that is part of the Schwab advisor network. So you would need to shop them in addition to hiring Schwab. You MIGHT be able to find a firm that would do a simple low cost portfolio, but it would take some digging.

Ultimately, we decided that Vanguard would be a suitable company for our successor trustees to hire if they did not want to manage the money themselves. Our (individual, family member) personal representative would handle disposing of the real estate, then the proceeds would go into our trust. Our successor trustees are perfectly capable of managing the money themselves, without "professional" help. If they decide it is too much bother, then they can hire Vanguard, or someone else.


Ok, that's an interesting option.

The hard part about shopping for trustees was not finding a company that would manage the money. They were all eager to do that, but only Vanguard seemed aware of the advantages of passive investing. Everyone else wanted to claim that their analysts were so brilliant that they would beat the markets.


So, can you confirm what I mentioned below? Can we leave instructions for Vanguard on how to manage the money or are they able to invest as they see fit?

The hard part was getting any idea of how they performed on client service. I was shopping for a company that would do much or all of the work for a trust for which I am trustee. Everyone wanted to talk about their brilliant investment teams, but almost no one had anything useful to say about dealing with distribution requests from the beneficiary, planning for disability or nursing home needs, paying bills... One company said that they had a set of elder care services. After painfully pursuing this, through multiple people who had no idea what they were talking about, I discovered that all they did was hire a separate firm, at additional cost. One company did say they had a distribution committee that would meet weekly and review requests across the trusts they manage. I got a good feeling about them, but their prices were astronomical.

FoolStreet
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Re: Trust Services

Postby FoolStreet » Mon Apr 17, 2017 9:34 pm

I remember a thread on this and paraphrasing bsteiner, he said, do you want the low cost investing approach? Or do you want the arms-length benefit of trust asset protection from creditors and spouses?

If the former then select an individual trustee. If the latter, pick a firm. He also seems to be recommend language that allows the beneficiary to make management choices at certain ages (vs giving % of assets at certain ages), like 25, 30 and 35.

At 25, allow trustee selection/replacement. And 30, approve disbursements.

I am sure I am over generalizing, and need to re read his posts. It is time for me to lock this down. He is a gem.

This topic can't be discussed too much. I am in pretty much the exact same situation.

I was going to have a close friend act as guardian and trustee, and VAnguard as co-trustee. Real estate is an open switch. Someone mentioned above that the guardian/trustee could sell and add proceeds to the trust. That is probably the easiest option. But we do live in a high cost of living area, so keeping for a long time is not unreasonable. I don't have a crystal bal It might be good to give them a turn-key option.

Would love to hear more of others experiences.

afan
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Re: Trust Services

Postby afan » Tue Apr 18, 2017 5:04 am

We do not have Vanguard serve as trustee so I don't know the extent to which they would follow your instructions on investment. For the most part I like the Vanguard approach a lot more than any other company I encountered. If you had a very unusual portfolio, say several closely held businesses and needed someone who could deal with that then you have a challenge. There is the option of combining a directed trustee to do the administrative part and a separate investment manager. You would still have to find that manager.

I would not want to carve into stone my favorite asset allocation or particular investments. Things change. In times past that approach might have mandated a low turnover active fund- before there were index funds. Or it might have meant an S&P 500 index fund when that was all there was. You need someone who will make reasonable decisions years from now when you are no longer around to adapt to changing circumstances.

Our successor trustee is perfectly capable of managing the investment tasks. We are familiar with the approach they would use and are comfortable with the ability to adapt to the changes in the future. Also very conscious of cost. We are lucky in that regard.

In fact, our larger problem is a successor to our successor. For reasons that bsteiner or others can explain, if the successor needs to appoint someone else then it would probably be a corporate trustee and it could be difficult to find one that would invest as told. Might resort to a directed trustee at that point. That would leave our individual trustee to manage the investments while the directed trustee does the rest.
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

MikeG62
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Re: Trust Services

Postby MikeG62 » Tue Apr 18, 2017 7:27 am

rigoodma wrote:...So, can you confirm what I mentioned below? Can we leave instructions for Vanguard on how to manage the money or are they able to invest as they see fit?


I am pretty sure (at least at the present time) that Vanguard will only do trust administration if they are also managing the assets. In addition, if Vanguard manages the assets, then they make all decisions as to what investments to use. If someone knows otherwise, I am happy to be corrected.

Like you, part of me does not like it (I have assembled a well diversified portfolio of very low cost index ETF's and own dozens of individual muni bonds on the fixed income side). This would all need to be liquidated if they take over asset management. However, I understand why they operate this way.

I have the same worry as you do. My wife is not able to manage our assets should something happen to me. So she will need someone to manage the assets. Also, our wills provide that my estate be placed in trust when I die. Our wills currently provide for two trustee's (my wife and a corporate co-trustee) and we have identified Vanguard as the corporate entity (although she will have the ability to change the corporate co-trustee any time she pleases). However, given that Vanguard has not covered themselves in glory with their account management abilities (one need look no further than these forums to know this), I worry quite a bit about how painful this relationship might be for my wife should I predecease her. Having said this, I have not identified a better option (so far) so we are leaving our wills as is at the present time.

afan
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Re: Trust Services

Postby afan » Tue Apr 18, 2017 10:31 am

According to people I know who use Vanguard through PAS, not for trusts, they do not incur capital gains taxes by automatically dumping any positions in order to put everything in a few index funds.

However, they might resist if someone wanted to hold a portfolio whose composition was against their passive philosophy.

I have assembled a well diversified portfolio of very low cost index ETF's and own dozens of individual muni bonds on the fixed income side)


From what I gather, Vanguard would leave your low cost index ETFs alone but might reinvest your muni bond interest in tax free mutual funds rather than continue to invest in new individual bonds. But that would be something to ask if you were interested.
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

afan
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Re: Trust Services

Postby afan » Tue Apr 18, 2017 11:31 am

As long as your spouse can change corporate trustees I would not worry about Vanguard's, likely short term, problems with customer service. That is assuming it has hit the trust business at all.

You may well have another reason for your will requiring a corporate cotrustee. If it only for investment management, your spouse could be sole trustee and hire Vanguard or another firm to manage the investments. They would not be the trustee, just the investment manager. It would be less expensive than having them as trustee but the investment management part would be the same.
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

MikeG62
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Re: Trust Services

Postby MikeG62 » Tue Apr 18, 2017 11:31 am

afan wrote:According to people I know who use Vanguard through PAS, not for trusts, they do not incur capital gains taxes by automatically dumping any positions in order to put everything in a few index funds.


I wonder how they are able to pull this off (avoiding capital gains taxes when selling appreciated securities)?

Mikeg62 wrote:I have assembled a well diversified portfolio of very low cost index ETF's and own dozens of individual muni bonds on the fixed income side)


afan wrote:...From what I gather, Vanguard would leave your low cost index ETFs alone but might reinvest your muni bond interest in tax free mutual funds rather than continue to invest in new individual bonds. But that would be something to ask if you were interested.


Note this from Vanguards, "How to establish a relationship with our Trust Services" brochure (http://www.vanguard.com/pdf/eptsb2.pdf):

"Investment responsibility. VNTC shall have the sole authority and responsibility for the investment and reinvestment of the Trust’s financial assets..."

Does not sound to me that Vanguard will have much interest in maintaining historical investment policy (I understand why they would want to do it their way if they are the asset manager).

I did notice from reading this other current Trust Service document (https://personal.vanguard.com/pdf/s341.pdf?2210071322) that Vanguard has increased the fee it charges for Trust services. It had been $2,500 per trust. Now it is a sliding scale % of asset in the trust, starting at 25bps on first $5M. Said another way, its now $2,500 for each million on the first $5 million. That's quite a change from what is was previously, unless I am misinterpreting this somehow. :annoyed
Last edited by MikeG62 on Tue Apr 18, 2017 12:18 pm, edited 1 time in total.

student5
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Re: Trust Services

Postby student5 » Tue Apr 18, 2017 12:09 pm

We too have been looking at possible successor trustees for our revocable trust. Here are the printed costs for Vanguard:

Assets under management First $5 million- Annual administration fee *0.25% -Annual advisory fee** 0.3% Annual total fee*** 0.55%
Next $5 million to below $10 million Annual administration fee 0.10% Annual advisory fee 0.20% Annual total fee 0.30%
etc.

The costs seem better than many other corporate trustees, subject to the limitations already noted by other Bogleheads. We are following this thread with great interest, both to learn, and to help us decide who to go with.

afan
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Re: Trust Services

Postby afan » Tue Apr 18, 2017 2:10 pm

MikeG62 wrote:
I wonder how they are able to pull this off (avoiding capital gains taxes when selling appreciated securities)?



They do not sell off securities without considering the tax implications. I am told that they will invest new money, dividends, capital gains and interest the Vanguard way, but leave low basis positions in place.


MikeG62 wrote:I did notice from reading this other current Trust Service document (https://personal.vanguard.com/pdf/s341.pdf?2210071322) that Vanguard has increased the fee it charges for Trust services. It had been $2,500 per trust. Now it is a sliding scale % of asset in the trust, starting at 25bps on first $5M. Said another way, its now $2,500 for each million on the first $5 million. That's quite a change from what is was previously, unless I am misinterpreting this somehow. :annoyed


It used to be $2,500 per TRUST, PLUS a percent of assets that started at 70 basis points. The rate dropped to 35 bp for the next million. I do not recall whether the rate ever went to 25bp. The fee for the trust is now 0.55% of the first $5 million. You are looking only at the advisory fees, but you have to also look at the administrative fee and add them to get the total.

So a $2M trust would have been $2,500 plus 70 basis points on the first $1M plus 35 bp on the second $1M= 2500 + 7,000 3,500=13,00. Now it is 11,000 for a trust of the same size. Quite a cut in cost.
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

MikeG62
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Re: Trust Services

Postby MikeG62 » Tue Apr 18, 2017 3:00 pm

afan wrote:
MikeG62 wrote:I did notice from reading this other current Trust Service document (https://personal.vanguard.com/pdf/s341.pdf?2210071322) that Vanguard has increased the fee it charges for Trust services. It had been $2,500 per trust. Now it is a sliding scale % of asset in the trust, starting at 25bps on first $5M. Said another way, its now $2,500 for each million on the first $5 million. That's quite a change from what is was previously, unless I am misinterpreting this somehow. :annoyed


It used to be $2,500 per TRUST, PLUS a percent of assets that started at 70 basis points. The rate dropped to 35 bp for the next million. I do not recall whether the rate ever went to 25bp. The fee for the trust is now 0.55% of the first $5 million. You are looking only at the advisory fees, but you have to also look at the administrative fee and add them to get the total.

So a $2M trust would have been $2,500 plus 70 basis points on the first $1M plus 35 bp on the second $1M= 2500 + 7,000 3,500=13,00. Now it is 11,000 for a trust of the same size. Quite a cut in cost.


That is a fair point. However, it does depend on the size of the assets in the trust. By the way, prior fee schedule for asset management did drop to 20bps on amounts above $2 million.

So using a trust size of say $5 million, the comparison is:

Old fee schedule annual cost was 33bps for the asset management plus 5bps for the trust administration - total annual cost of 38bps or $19,000,

New fee schedule annual cost is 55bps (30bps for AM plus 25bps for trust admin) or $27,500 per year.

So while true that for a trust of $5 million the asset management fee did drop by 3bps (33bps to 30bps) the increase in the trust administration of 22bps swamped that decline. Net, net that's a 44% increase by my math.

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celia
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Re: Trust Services

Postby celia » Tue Apr 18, 2017 3:24 pm

When we created our trust 25+ yrs ago, the lawyer strongly recommended ending our list of 6 relatives who would be successor trustee to each other with a trust company. He said "All the relatives could die or move away (they were siblings and parents) while the trust company would always be there."

Fast forward 20 years and all the relatives are still at the same address and only one has died. But the lawyer and trust company are nowhere to be found. The trust company seems to have been bought out by another trust company. That company also no longer exists.

I guess the take-away for the OP is that a trust company may disappear, change their services, their policies, and their fees. I could keep the guardian with trust companies as successors and let the guardian decide if they want to do it or not. Or if you really trust this guardian, let them appoint a trust company if/when the time comes.

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Re: Trust Services

Postby MikeG62 » Tue Apr 18, 2017 3:52 pm

celia wrote:When we created our trust 25+ yrs ago, the lawyer strongly recommended ending our list of 6 relatives who would be successor trustee to each other with a trust company. He said "All the relatives could die or move away (they were siblings and parents) while the trust company would always be there."

Fast forward 20 years and all the relatives are still at the same address and only one has died. But the lawyer and trust company are nowhere to be found. The trust company seems to have been bought out by another trust company. That company also no longer exists.

I guess the take-away for the OP is that a trust company may disappear, change their services, their policies, and their fees. I could keep the guardian with trust companies as successors and let the guardian decide if they want to do it or not. Or if you really trust this guardian, let them appoint a trust company if/when the time comes.


I agree with this. Build in flexibility because the future is unknowable.

IANAL, but it is my understanding that one of the benefits of having a corporate co-trustee is enhanced asset protection (from creditors or divorcing spouses). So having the flexibility for trustee or successor trustee's to add/use a corporate co-trustee or distribution trustee may be a good idea if asset protection is important to you. I do know these laws vary from state to state. So good to get advice from a qualified estate and trust attorney (I am not one).

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Re: Trust Services

Postby afan » Tue Apr 18, 2017 4:48 pm

MikeG62 wrote:
Old fee schedule annual cost was 33bps for the asset management plus 5bps for the trust administration - total annual cost of 38bps or $19,000,


I must have missed an iteration of the schedule. I don't remember them breaking out the asset management separate from the trust services before. It was just $2,500 plus the AUM fee, which included trust and investment management. But maybe there was a period before now when they separated the two fees and it was lower.
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

afan
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Re: Trust Services

Postby afan » Tue Apr 18, 2017 4:51 pm

MikeG62 wrote:my understanding that one of the benefits of having a corporate co-trustee is enhanced asset protection (from creditors or divorcing spouses). So having the flexibility for trustee or successor trustee's to add/use a corporate co-trustee or distribution trustee may be a good idea if asset protection is important to you. I do know these laws vary from state to state. So good to get advice from a qualified estate and trust attorney (I am not one).



It gets complicated quickly and bsteiner has weighed in on this. It depends on state statutory and case law, who established the trust, who the beneficiaries are, the powers of the trustee to distribute trust assets to beneficiaries... If this is a goal, definitely need a lawyer who knows the law in the area where the trust will be as well as where the beneficiaries will be.
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

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FIREchief
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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 1:56 am

Nobody likes this, but I'll post it anyway. You can write your trust to require 100% investment in low cost, passively managed, index based investments. Everybody, including the courts, understands exactly what this means. This will supersede any and all state laws regarding prudent investing. If this does (and likely will) turn off any corporate trustees, then they are likely not who you want managing your estate anyway. I am firmly convinced that if a trust is not written accordingly, any future corporate trustee will invest in a manner that will maximize their profits through elevated expenses.

Even if you use non-corporate trustees (relatives, friends, etc.), such terms will alleviate risk and allow them to invest smartly without worry about being sued by the beneficiaries.

Again, nobody likes this approach for reasons that escape me. Sure, the "world may change," but there are other ways to address that possibility.
Last edited by FIREchief on Wed Apr 19, 2017 2:25 pm, edited 1 time in total.

afan
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Re: Trust Services

Postby afan » Wed Apr 19, 2017 5:18 am

What might those other ways be? If, in the future, there is something better than low cost passively managed index based funds, and your trust forbids investing in them, what does your trustee do? Go to court to change the trust?

Imagine if you had written into a trust the "best, never will change" investment approach 50 years ago. Your trustee would not be able to invest in index funds because they did not exist. It seems a little optimistic to assume that the perfect investment vehicle has now been found and nothing better will ever come along.

It might make a lot more sense to write in some strong language concerning costs, requiring the trustee to demonstrate that the method used was among the lowest available. Sure, they could try to fudge it, but at least you would not have prevented a better investment approach by being too specific about index funds.

From my shopping, the only trustee who would agree now to low cost index funds was Vanguard. All the others, I tried about a dozen, said that their investment managers were much better than the indexes. So cross them off the list. I did manage to find a couple of very small shops that were on the Schwab advisor network who, reluctantly, would run a simple 3- fund portfolio. But they were so small I worried they might not be around next year, let alone for decades.

The solution might be that in the future more companies will do the directed trustee job and your beneficiaries could shop for investment managers who will do simple indexing. The real money in trustee work seems to be the asset management fees, so the companies will not give that up easily. If your business does not make them money, they will not be interested in being trustee.

Writing a trust to require an investment strategy so precisely defined might make it impossible to find a trustee.
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Re: Trust Services

Postby rigoodma » Wed Apr 19, 2017 9:11 am

Afan brings up a great point. What will investments look like 50 years from now and how much detail should be put into the trust on what they can/cannot invest in. Right now, my trust reads as follows:

Without limiting the Trustees’ investment authority in any way, the Trustees shall exercise reasonable care and skill in selecting and retaining trust investments and the Trustees shall take into account the following factors in choosing investments for the Trust:
The potential return from the investment, both in the form of income and appreciation;
The potential income tax consequences of the investment;
The investment’s potential for volatility; and
The role the investment will play in the Trust’s portfolio.

It also gives wide ability to invest in stocks, bonds, investment companies, mutual funds, common trust funds, commodities, options, and other securities.

From everything I read on this thread, I think I am good with naming Vanguard a co-trustee for investment purposes and giving the grantors or beneficiaries ability to change it if needed. But, I guess the question is now what should be included in the wording of trustee powers to make sure it would follow a BH philosophy today and whatever it changes to 50 years in the future. I could see adding:

Trustee would have the ability in mutual funds that cover stock and bonds, not giving the ability for options, commodities, margin, and other securities.
Trustee selected needs to look at minimizing fees on all things including asset management, trust management, and fund fees. As afan said, demonstrate that the method used is one of the lowest options available.

What thoughts do others have with this? I agree with afan that I probably shouldn't be too specific in investment authority, as times do change. But, would prefer having the investments very simple (I use 3 fund portfolio today) and allow the trust to grow.

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Re: Trust Services

Postby afan » Wed Apr 19, 2017 10:09 am

rigoodma wrote:Trustee would have the ability in mutual funds that cover stock and bonds, not giving the ability for options, commodities, margin, and other securities.


Rogoodma,

Great example of the problem. Your typical index fund invests in options and futures as a matter of course. If you were to forbid the trust from investing in funds that do this, then you would have knocked out the Vanguard funds.

I would also worry that, although there is no good argument for the average investor to put money into commodities, that could change. Right now, in my opinion, the only people who should be investing in commodities are those whose livelihoods depend on commodities prices. If you drill for oil, make steel or grow corn then you are already in the commodities market. Investing in commodities futures does what the futures market was intended to do-
permit buyers and sellers to control their exposure to volatile prices. What if a trust beneficiary is in one of these businesses? It might be a very good idea to use the commodities market to control risk. I have no idea what my, yet to be conceived, grandchildren may do for a living.

As for futures, it has long intrigued me that a great way to get exposure to many illiquid parts of the global market would be futures. One could imagine domestic, international and world GDP futures, real estate futures that would open this beyond direct ownership or the very narrow alternative of REITS, futures based on small business profitability. Eventually someone may come up with markets for these types of investments that currently are not readily investible. I don't know what form those broader investments might take, so I don't want to prevent the trustee from taking advantage of them if they are good ideas.

I am a strong believer in market efficiency and a 3-fund portfolio. I don't tilt, I consider a lot of the factor excitement to be interesting as insight into how securities are priced, but not as a way to beat the market. I think a very large portion of the putative excess returns to factor based portfolios, likely all of them, to be market price reward for holding more risky portfolios especially when accounting for higher moments of the return distribution.

But things could change. New studies could come out and I don't know what they would say. Right now I have a younger generation successor trustee who is fully up to date on investing data, extremely skeptical of fads and has the quantitative background to analyze new claims. My successor's successor, hopefully, will be as well prepared, but I have no idea who that will be. I don't want to tie her/his hands with some quaint investing ideas from 2017.
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Re: Trust Services

Postby rigoodma » Wed Apr 19, 2017 10:20 am

afan wrote:Great example of the problem. Your typical index fund invests in options and futures as a matter of course. If you were to forbid the trust from investing in funds that do this, then you would have knocked out the Vanguard funds.


Well...crap. I did not know that with regular index funds. I guess the wordings should more be focused on low fees, volatility, standard deviation, etc., limiting what the trustee can do with margin for the entire account. I would have to think of this.

Suggestions from those who have some type of wording in their trust would be helpful, as would suggestions from others.

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Re: Trust Services

Postby MikeG62 » Wed Apr 19, 2017 11:40 am

afan wrote:...But things could change. New studies could come out and I don't know what they would say. Right now I have a younger generation successor trustee who is fully up to date on investing data, extremely skeptical of fads and has the quantitative background to analyze new claims. My successor's successor, hopefully, will be as well prepared, but I have no idea who that will be. I don't want to tie her/his hands with some quaint investing ideas from 2017.


I agree fully with this. Being too specific may well create unintended issues.

rigoodma wrote:...What thoughts do others have with this? I agree with afan that I probably shouldn't be too specific in investment authority, as times do change. But, would prefer having the investments very simple (I use 3 fund portfolio today) and allow the trust to grow.


I am in the same boat as the two of you. I worry more about this issue (who will manage our assets once I am gone) than just about anything else (retirement is great for stripping away most of the crap I used to worry about when I was working). If I knew 20 years ago what I know now, I would likely have invested in a three fund portfolio and been done with it. I think it would have been much easier for my successor to take over and manage. Not that my portfolio is complex, but it's not as simple as the three fund portfolio. Also, my unrealized gains are too large (high class problem I know) to make any sort of change now (note that 80% of our money is in taxable accounts).

I think a well used phrase "don't let the search for the perfect plan be the enemy of a good plan" is apropos here.

Maybe some words in the trust documents indicating that successor trustees should use good judgement in selecting investments with a strong bias toward very low cost passive (index) type investments. This would memorialize your intent and provide some from of framework for successor trustees to follow (and for your beneficiaries to use in overseeing the investment plan).

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Re: Trust Services

Postby afan » Wed Apr 19, 2017 12:37 pm

The statement of additional information for the Vanguard index funds has a long detailed discussion of futures, options, options on futures, leverage and margin. None of these are inherently bad. The typical boglehead reaction is based on the behavior of people who use these to speculate. Vanguard, and I assume anyone else running an index fund, uses them to more closely match the target index. In part, they let the fund behave as if 100% invested in the index while holding some cash to meet redemption requests.

Since it is entirely possible a responsible index fund manager would use other derivatives, including some of which I have never heard, I don't want to try to rule from the grave and prevent heirs from having good investments. I particularly don't want to do that just because I did not understand how even the funds I like actually are managed.

I am left with hoping that the ability of the beneficiary to change corporate trustees gives them the opportunity to shop for trustees who will behave rationally, whatever that behavior might be in the future.

I suspect that the huge tide towards index investing we are seeing among individual investors will also, eventually, hit the fiduciary world. Just as the active management companies have fought it as hard as they could before giving in, the trust companies will do the same. Now that Vanguard is in the trust space, the other companies will face the same pressure they have on the individual side.

I like to think that, long before I need it, there will be no problem finding a bank or trust company that will handle the administrative work for a reasonable fee, drop the investments into a few index funds at single digit expense ratios and not try to beat the market. Ten years ago Vanguard had no real competition in the index fund world. Shops like Fidelity were doing all they could to support active management. Now they have given up fighting and accepted the new reality. I expect trust companies to do the same, or lose all their business. I like to think that when the time comes my successor will be able to compare several well established companies that do simple low cost investment management, either as a stand alone or as part of comprehensive trustee work.

But I am leaving the ultimate decision of how to invest with the individual trustee. I am not sure what I would do if I had someone who would be susceptible to the siren song of active management.

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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 2:21 pm

afan wrote:What might those other ways be? If, in the future, there is something better than low cost passively managed index based funds, and your trust forbids investing in them, what does your trustee do? Go to court to change the trust?



It's very simple. The trust can allow the beneficiaries to appoint an independent trust protector who is able to modify the investment directions within the trust. There is standard language currently in use that can be incorporated into the trust to allow this. By using this approach, you can have your cake (near term trustees restricted to BH investing) and eat it too.

I've mentioned this multiple times, but for some strange reason I've yet to find anybody who will accept this as a valid approach. That said, nobody has yet provided any reasons why this won't work as intended.

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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 2:24 pm

rigoodma wrote:Without limiting the Trustees’ investment authority in any way, the Trustees shall exercise reasonable care and skill in selecting and retaining trust investments and the Trustees shall take into account the following factors in choosing investments for the Trust:
The potential return from the investment, both in the form of income and appreciation;
The potential income tax consequences of the investment;
The investment’s potential for volatility; and
The role the investment will play in the Trust’s portfolio.

It also gives wide ability to invest in stocks, bonds, investment companies, mutual funds, common trust funds, commodities, options, and other securities.


This looks like standard boilerplate. I believe that most/all independent trustees would, at best, just do what they always do (i.e. invest in a "traditional" non-BH manner).

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Re: Trust Services

Postby rigoodma » Wed Apr 19, 2017 2:48 pm

FIREchief wrote:I've mentioned this multiple times, but for some strange reason I've yet to find anybody who will accept this as a valid approach. That said, nobody has yet provided any reasons why this won't work as intended.


I guess my only comment is using the "low cost, passively managed, index based investments" seem to work for today. I and everyone else just don't know if there might be better options in the future outside index funds that become best, even for BHs. What could they be? I have not idea and doubt there would be anything. So, the only issue I see is with "index based". Even though I like that and would want to put it in there, I'm concerned what might change 20, 30, 40 years down the road. I would just need to figure out what to replace it with that would force any advisor to use index only today and make it good for future options.

Please correct me if you see different.

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Re: Trust Services

Postby rigoodma » Wed Apr 19, 2017 2:49 pm

FIREchief wrote:This looks like standard boilerplate. I believe that most/all independent trustees would, at best, just do what they always do (i.e. invest in a "traditional" non-BH manner).


Which is why I'm looking at this and will change in the future. Thanks for the confirmation

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Re: Trust Services

Postby MikeG62 » Wed Apr 19, 2017 2:54 pm

FIREchief wrote:
afan wrote:What might those other ways be? If, in the future, there is something better than low cost passively managed index based funds, and your trust forbids investing in them, what does your trustee do? Go to court to change the trust?



It's very simple. The trust can allow the beneficiaries to appoint an independent trust protector who is able to modify the investment directions within the trust. There is standard language currently in use that can be incorporated into the trust to allow this. By using this approach, you can have your cake (near term trustees restricted to BH investing) and eat it too.

I've mentioned this multiple times, but for some strange reason I've yet to find anybody who will accept this as a valid approach. That said, nobody has yet provided any reasons why this won't work as intended.


FIREchief, I think the problem is that if your beneficiaries are not investment savvy, what is to prevent them from appointing a slick talking independent trust protector who modifies the investment directions of the grantor into high cost or commission paying investments.

What the OP and afan were trying to drive to was a structure that would prevent this from happening. Short of mandating investments, it just may not be possible to prevent it. This is where I said, maybe we are searching for a perfect plan where one simply does not exist.

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Re: Trust Services

Postby rigoodma » Wed Apr 19, 2017 2:55 pm

I can tell you that I reached out to talk to VNTC. They mentioned that their 4 buckets of investments are total stock, total bond, total international stock, and total international bond. Depending on time frames and other factors, they might also invest in tax efficient options, like muni bonds, etc. If you put anything in the trust that would limit these, then they won't be trustee.

Long story short, they will invest in low cost, passive, index based investments and will talk with the grantors, beneficiaries or trustees on how to do the investments and time frame. But, you can't technically limit them on certain investments with that if they see it best for what you are looking for, as the wording of their administrative provisions prevent that.

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Re: Trust Services

Postby MikeG62 » Wed Apr 19, 2017 3:05 pm

rigoodma wrote:I can tell you that I reached out to talk to VNTC. They mentioned that their 4 buckets of investments are total stock, total bond, total international stock, and total international bond. Depending on time frames and other factors, they might also invest in tax efficient options, like muni bonds, etc. If you put anything in the trust that would limit these, then they won't be trustee.

Long story short, they will invest in low cost, passive, index based investments and will talk with the grantors, beneficiaries or trustees on how to do the investments and time frame. But, you can't technically limit them on certain investments with that if they see it best for what you are looking for, as the wording of their administrative provisions prevent that.


I am not surprised. I would not expect them to act any differently. It's a "you hired us to make the decisions" kind of situation. If you want to self direct, then manage the investments yourselves.

I think the middle ground could be finding a corporate trustee who is willing to do just the trust administration and then using a fee-only financial planner to oversee the investments. Someone like James Osborne from Bason Asset Management, who charges a modest quarterly retainer. This is what I would like to arrange.

However, as afan pointed out, many corporate trustee's really want the asset management. They may be willing to discount the trust services piece, but they really want to charge a fee for assets management as that is where the $ is.
Last edited by MikeG62 on Sun Apr 23, 2017 7:31 am, edited 1 time in total.

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Re: Trust Services

Postby afan » Wed Apr 19, 2017 3:48 pm

FIREchief wrote: The trust can allow the beneficiaries to appoint an independent trust protector who is able to modify the investment directions within the trust. There is standard language currently in use that can be incorporated into the trust to allow this. By using this approach, you can have your cake (near term trustees restricted to BH investing) and eat it too.


Could they do that the day the trust comes into existence? Or observe a decent interlude, say between your funeral and the reception? Or does the trust include a minimum period of time before the trust protector can take that action? If it does include a minimum period, could the trust protector change that?
Last edited by afan on Wed Apr 19, 2017 3:57 pm, edited 1 time in total.
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Re: Trust Services

Postby afan » Wed Apr 19, 2017 3:57 pm

By the time I got this far I had decided to just manage the trust myself. However, while researching I did discover that separating the investment management from trust administration is a standard practice called "directed trustee". Not all trust companies are interested. It seems to be quite common for asset protection trusts. I did not pursue it far enough to learn the fees. Under those designs, you have an investment advisor, who could be an individual or a firm and the administrative trustee does not get involved in the investments. Beyond that I don't know how it works.

For now, my spouse is perfectly prepared to manage the assets. After that, so is my successor trustee. By the time there would need to be a replacement for the successor I hope passive investing will have hit the trust world, or the directed trustee business is bigger.

If you are looking for companies that will serve as directed trustees, you might start with your estate planning attorneys. They should know what trust companies do a good job with trusts of your size and where to look for directed trustees. I found that the more I talked to trust companies the less interested I was in letting any of them near my money (except Vanguard. For them the problems were no doing real estate and fees that seemed a bit high. At the moment, they remain my go to place if the need were to arise soon).
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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 5:34 pm

afan wrote:
FIREchief wrote: The trust can allow the beneficiaries to appoint an independent trust protector who is able to modify the investment directions within the trust. There is standard language currently in use that can be incorporated into the trust to allow this. By using this approach, you can have your cake (near term trustees restricted to BH investing) and eat it too.


Could they do that the day the trust comes into existence? Or observe a decent interlude, say between your funeral and the reception? Or does the trust include a minimum period of time before the trust protector can take that action? If it does include a minimum period, could the trust protector change that?


As with everything else, it all depends upon the terms of the trust document. The point is, there is absolutely no reason that a trust currently has to be written to allow broad discretion by an independent trustee with respect to investments, unless that is what the grantor really wants. Strange that here on the BH forum, there is so much nervousness about restricting a trust's investments to a BH approach.

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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 7:51 pm

rigoodma wrote:
FIREchief wrote:I've mentioned this multiple times, but for some strange reason I've yet to find anybody who will accept this as a valid approach. That said, nobody has yet provided any reasons why this won't work as intended.


I guess my only comment is using the "low cost, passively managed, index based investments" seem to work for today. I and everyone else just don't know if there might be better options in the future outside index funds that become best, even for BHs. What could they be? I have not idea and doubt there would be anything. So, the only issue I see is with "index based". Even though I like that and would want to put it in there, I'm concerned what might change 20, 30, 40 years down the road. I would just need to figure out what to replace it with that would force any advisor to use index only today and make it good for future options.


(I am not a Lawyer)

I don't believe that there is any approach that will result in a paid advisor/trustee using dirt cheap index funds unless that is exactly(!) what the trust clearly requires. As many have correctly pointed out, they want to use funds (and maybe other investments) that make them more money. This is the best case scenario with an independent trustee. I can't imagine the worst case, but am sure that there are horror stories out there (picture Joe slick trustee at the local bank "investing" the trust's funds in real estate that just so happens to be currently owned by his second cousin on his wife's side who happens to have a silent partner - don't say it could never happen....).

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Re: Trust Services

Postby FIREchief » Wed Apr 19, 2017 8:00 pm

MikeG62 wrote:
FIREchief wrote:
afan wrote:What might those other ways be? If, in the future, there is something better than low cost passively managed index based funds, and your trust forbids investing in them, what does your trustee do? Go to court to change the trust?



It's very simple. The trust can allow the beneficiaries to appoint an independent trust protector who is able to modify the investment directions within the trust. There is standard language currently in use that can be incorporated into the trust to allow this. By using this approach, you can have your cake (near term trustees restricted to BH investing) and eat it too.

I've mentioned this multiple times, but for some strange reason I've yet to find anybody who will accept this as a valid approach. That said, nobody has yet provided any reasons why this won't work as intended.


FIREchief, I think the problem is that if your beneficiaries are not investment savvy, what is to prevent them from appointing a slick talking independent trust protector who modifies the investment directions of the grantor into high cost or commission paying investments.

What the OP and afan were trying to drive to was a structure that would prevent this from happening. Short of mandating investments, it just may not be possible to prevent it. This is where I said, maybe we are searching for a perfect plan where one simply does not exist.


(I am not a lawyer)

The approach I described isn't perfect. It just adds checks and balances where many trusts have none. A typical trust that appoints an independent trustee with full discretion over investments only provides protection to the beneficiaries to the extent that the legal system provides. Use of a trust protector who is independent of the current and future trustees, and has no financial incentive other than being paid to modify the trust, would appear to protect the beneficiaries interests much more than an independent trustee who has full investment discretion. Our challenge is that most of this world doesn't see things like Bogleheads. They feel that somebody siphoning off .5% to 1.5% of a trust's funds every year for "financial management" is just fine and does no real harm to the beneficiaries. We on the forum understand differently.

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Re: Trust Services

Postby afan » Thu Apr 20, 2017 9:54 am

Well right now Vanguard will do a pure index low cost portfolio. No active management, no trying to beat the market, no factor bets, no high commission garbage. I don't know of any other trust company that will promise that now. But years ago the other money managers thought Vanguard was crazy for offering these low cost index funds.

If the pattern repeats with trust companies, they will find themselves losing business to Vanguard and be forced to invest rationally. Probably have to lose some lawsuits over excessive fees. Need some bad publicity as compared to Vanguard.

As I said, if you want to go that route you can find trust companies that will handle the non investment part of the administration. Then you could hire a different company to manage the investments. Or have the beneficiaries do it themselves.

I am reminded of the claim, perhaps apocryphal, that someone had proposed closing the patent office in the 19th century because everything had already been invented. I don't have the hubris to think I know all the details of how an index fund is managed today, let alone that I know exactly how investing should be conducted 50 years from now. I would not want to write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding.

There are all sorts of things someone could do in the future that would be bad ideas. There are plenty of things that would be good ideas but I don't realize it. Strange to say on the internet, sometimes I am wrong. I don't want to bet my heirs' assets on the assumption that not only is my knowledge perfect now but that nothing new will come along, ever, that would change my opinion.

For example, I am much less receptive now than I used to be for the value of factor bets, small value tilts or chasing anomalies. The more I look into it, the more these all appear to be artifacts that reflect the undersirable risk characteristics of these portfolios. But research continues and maybe, somewhere, there are factors that are not efficiently priced. Or maybe there are ways to capture the domestic market without buying a lot of illiquid small stocks. Most likely there will be new and better ways to invest that I cannot imagine in 2017.

Some people assume their ideas are right for all times. I assume that, ten years from now, I will look back on what I am doing now, shake my head, and be glad I now know better. The best I can hope for is that future me will understand why I thought what I did at the time.
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Re: Trust Services

Postby Kompass » Thu Apr 20, 2017 1:34 pm

I just want contribute a quick .02 on the subject of Vanguard Trust services on a couple of things I have not yet seen mentioned in this thread. I come at this from the point of view as someone who two months ago moved a trust into Vanguard and is a current client/beneficiary.

Included in the service fee are the prep and filing of the trust 1041 and then they provide a K1. This saves on accounting fees over trusts that do not include it. They have this done for them by Ernst and Young (EY).

It is not administrated through the regular Vanguard website, they currently use TrustPal software.

You don't just set your conditions and they take it. The trust documents will go through a rigorous legal review of anywhere from 2-6 months before they decide whether or not to accept it. This is something to consider since the funds will be in limbo for a while.

afan is correct, they will currently do a low cost index portfolio.
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Re: Trust Services

Postby FIREchief » Thu Apr 20, 2017 1:47 pm

afan wrote: I don't have the hubris to think I know all the details of how an index fund is managed today, let alone that I know exactly how investing should be conducted 50 years from now. I would not want to write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding.

There are all sorts of things someone could do in the future that would be bad ideas. There are plenty of things that would be good ideas but I don't realize it. Strange to say on the internet, sometimes I am wrong. I don't want to bet my heirs' assets on the assumption that not only is my knowledge perfect now but that nothing new will come along, ever, that would change my opinion.


I agree with all of this, which is why I feel that a trust that restricts a trustee to index investing should also have a means to modify that requirement in the event the future is radically different. The Trust Protector approach is one way to do this. There is already appropriate boilerplate language and most (all?) states laws allow for this (I am not a lawyer). If your state doesn't, then maybe you are stuck with hoping that VG (or others in the future) will invest in a manner that maximizes benefits for the beneficiaries.

A trust as I have described does NOT "write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding." I must not be explaining this clearly enough.... :happy

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Re: Trust Services

Postby afan » Fri Apr 21, 2017 11:53 am

I think I get where you are coming from. I just don't see that the trust protector approach solves the problem. If no one can change the trust, then you lock the trustee into whatever investment style.you prescribe. If you permit someone to change the trust, then you have no longer locked in the trustee, but also no longer have any assurance that the trust will be invested as you would want. The trustee could tell the trust protector to either change the terms or the trust would need to find a different trustee.

You could avoid a change you would not like by forbidding any changes in investment policy. As soon as this is permitted you forsake your control and you don't know what some future protector might do. In effect, you have moved from hoping you would approve of the decisions made by the trustee to hoping you would approve of the decisions made by the protector. If the trustee is a trust company you at least have structural and legal limits to how crazy they might get. If the protector is an individual you have a lot less assurance of their behavior.

To the extent that the protector is not getting paid to change the trust, while the trustee could make more money through active management, you could hope to avoid conflicts. But you now have a parallel problem for the future. You don't know who that protector is going to be years from now. You don't know what their motives might be or their beliefs about investing.

Plus, I don't​ want to put my heirs' in the position of having to search high and low for a trustee, get a protector whose identity I don't know to do what they need, or have to go to court. I would rather they can simply find a trustee they want and hire that firm.

Yes, they could make a bad choice. Yes, they could ignore the ancient runes I may have left them about my crackpot investing theories. I will be out of the picture and I am hoping for reasonable behavior on their part. That may not be a correct assumption for heirs' I do not know, but I don't think I can control that.

Right now, you could get what you want from Vanguard, assuming you are ok with the international bonds. In the future they may have competition.

Right now there are definitely investment advisors who will do a low cost, low turnover, non speculative passive portfolio for a low fixed fee. They would be great to pair with a company that would do the other administrative work and leave the investing alone.

As I said, I did not chase this option very far. I found some companies whose fee for directed trustee would be similar to Vanguard's all in fee. No savings there. I found some others who would charge less but by then I had decided not to pursue it further, so I don't know exactly what you got for that lower fee. I was mainly interested in beneficiary service, which does not appear to be something any trust company wants. I assume it is time consuming and expensive, while you can have one person managing the investments for a large number of trusts. Even more if you run a simple 3 fund portfolio on all of them.

I would be interested if anyone has more information about directed trustees or the firm's that do this.
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

MikeG62
Posts: 344
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Location: New Jersey

Re: Trust Services

Postby MikeG62 » Fri Apr 21, 2017 12:25 pm

FIREchief wrote:...I agree with all of this, which is why I feel that a trust that restricts a trustee to index investing should also have a means to modify that requirement in the event the future is radically different. The Trust Protector approach is one way to do this. There is already appropriate boilerplate language and most (all?) states laws allow for this (I am not a lawyer). If your state doesn't, then maybe you are stuck with hoping that VG (or others in the future) will invest in a manner that maximizes benefits for the beneficiaries.

A trust as I have described does NOT "write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding." I must not be explaining this clearly enough.... :happy


It seems to me that your approach adds a layer of possible protection (trust protector looking over the shoulder of corporate trustee). However, this is not without cost. Under this approach you could have three levels of fees: one for trust administration; one for asset management; and a third for the trust protector.

In addition to that, you add the possibility of infighting between the trustee and trust protector, which your beneficiaries would need to deal with.

I see no perfect option here. Like afan, I lean toward a low cost fee-only financial planner to handle the asset management and a corporate co-trustee (serving alongside the beneficiary) to handle the trust administration. Absent the ability to arrange that, giving it all (trust admin and asset management) to Vanguard is the fall back option for me. My issue is the people I would leave my assets to are not in a position to manage the assets. Maybe in the future that could change, but not now and not anytime soon.

FoolStreet
Posts: 389
Joined: Fri Sep 07, 2012 12:18 am

Re: Trust Services

Postby FoolStreet » Fri Apr 21, 2017 12:43 pm

MikeG62 wrote:
FIREchief wrote:...I agree with all of this, which is why I feel that a trust that restricts a trustee to index investing should also have a means to modify that requirement in the event the future is radically different. The Trust Protector approach is one way to do this. There is already appropriate boilerplate language and most (all?) states laws allow for this (I am not a lawyer). If your state doesn't, then maybe you are stuck with hoping that VG (or others in the future) will invest in a manner that maximizes benefits for the beneficiaries.

A trust as I have described does NOT "write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding." I must not be explaining this clearly enough.... :happy


It seems to me that your approach adds a layer of possible protection (trust protector looking over the shoulder of corporate trustee). However, this is not without cost. Under this approach you could have three levels of fees: one for trust administration; one for asset management; and a third for the trust protector.

In addition to that, you add the possibility of infighting between the trustee and trust protector, which your beneficiaries would need to deal with.

I see no perfect option here. Like afan, I lean toward a low cost fee-only financial planner to handle the asset management and a corporate co-trustee (serving alongside the beneficiary) to handle the trust administration. Absent the ability to arrange that, giving it all (trust admin and asset management) to Vanguard is the fall back option for me. My issue is the people I would leave my assets to are not in a position to manage the assets. Maybe in the future that could change, but not now and not anytime soon.


I like your approach. For us, we will have some real estate and would likely leave it to the trustee/guardian to decide whether to keep it or not. If not, it could be sold and the remaining funds managed by The vanguard corporate co-trustee. But if the guardian/co-trustee wants to keep it (because it is easy to manage and a good long term investment in a hi cost of living area), then what?

Should I write the trust to leave this asset out if the purview of the corporate co-trustee and let the guardian handle it? Find a 2nd co-trustee who handles real estate? Or just ditch vanguard and go with a corporate co-trustee who will do everything?

Other suggestions?

smackboy1
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Re: Trust Services

Postby smackboy1 » Fri Apr 21, 2017 2:08 pm

We see this time and time again on BH. I think part of it is that, up till very recently, the BH philosophy has been counter to the mainstream so many on the board have adopted an "BH vs. the world" mentality to the point that they attempt to reach out from beyond the grave. There's often an issue of "missing the forest for the trees". A well intentioned condition may have opposite effect in the future as trustees and beneficiaries expend time and money to either litigate, modify, and/or circumvent the effects of such restrictive language. The larger the trust and the longer the time it is expected to be in existence, the more this may be an issue.

Language has meaning, and it's sometimes not always 100% what the author intends. For example:

"Reasonable care" is a legal term of art. It is a lower standard of care and not the same as "fiduciary duty".

"Low cost" is a matter of opinion. What should the asset manager do if there are 2 similar investments but the lower ER one has marginally higher expected ROI, but higher volatility vs. the higher ER one has lower ROI, but lower volatility. Should lower ER always be the deciding factor?

What is an "index fund"? DFA funds? AQR funds? Vanguard has several popular active, non-index funds such as the tax exempt bond funds, and US Government fixed income funds. Are those investable by the trust? What about a CD ladder?

What if a special needs beneficiary needs a home? Can the trust own real estate?

What if a beneficiary has a fantastic idea for a startup company? Can the trust provide a loan? Can the trust provide startup capital in exchange for equity?

Can the trust own a life insurance policy if the primary purpose is to mitigate taxes?

What if 50 years in the future, the global markets are no longer in the same political and financial position they are today, and coincidentally none of the beneficiaries live or work in the USA anymore? Do the investment restrictions still apply?

Rather than have the long dead hand of the grantor dictating from the past, I prefer to think of a trust as a living breathing system of governance for the wealth of future generations. It should have a solid foundation and a framework for ordinary course of events, but also the flexibility to change if necessary for unanticipated events. The grantor should let go and have faith that long after they are gone, the future generations will have the wisdom and intelligence to make their own choices.

If possible I recommend the grantor sit down and talk to the anticipated future trustees and/or beneficiaries to make their wishes known and maybe write a separate non-binding letter of instruction that could accompany the trust. The trust itself should have broad latitude to make investment decisions either by the trustee or an investment committee. Such a letter could contain all of the grantor's hopes and wishes for the trust - without cluttering up the trust document and handcuffing future generations. It could refer to investment philosophies, books, research papers, authors, companies, advisors etc.. Even though it is non-binding, it could help give the trustee, investment committee, asset manager etc. a sense of what the grantor had in mind.

The reality is that it is difficult to bend a corporate trustee's investment department to the BH philosophy. if they are not already that way inclined. And the number of trustees who will invest in the BH way is small - perhaps only Vanguard. The downside of course is that Vanguard as a trustee has some shortcomings. My preference is to use a directed corporate trustee to handle all trustee responsibilities except investment. Investment decisions can be outsourced to a capable asset manager chosen by the trust's investment committee. It's a relatively simple matter to find an asset manager who espouses the BH way. The investment committee could consist of beneficiaries or family members or friends - pretty much anybody. It's possible to use the same person(s) as the trust protector for this role, but understand that it's 2 very different roles. The trust protector is like the nuclear option for a trust. They have the power to change the trustee, move and perhaps even to modify the trust. Generally, the protector should be a neutral 3rd party not affiliated with the trust in other ways.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

afan
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Re: Trust Services

Postby afan » Fri Apr 21, 2017 4:03 pm

FoolStreet wrote:For us, we will have some real estate and would likely leave it to the trustee/guardian to decide whether to keep it or not. If not, it could be sold and the remaining funds managed by The vanguard corporate co-trustee. But if the guardian/co-trustee wants to keep it (because it is easy to manage and a good long term investment in a hi cost of living area), then what?

Should I write the trust to leave this asset out if the purview of the corporate co-trustee and let the guardian handle it? Find a 2nd co-trustee who handles real estate? Or just ditch vanguard and go with a corporate co-trustee who will do everything?

Other suggestions?


Our attorneys pointed out that it is not just a matter of leaving real estate to be managed by a traditional trust department and everything else by Vanguard.

The traditional trust company will only take the job if there is plenty of money in the trust to pay their fees, the usual costs of the real estate (taxes and insurance) and a generous amount to cover unforseen expenses that may arise. We did not try to figure out how much that might be.

Right now our real estate is not in trust, so our personal representative would dispose of it and then transfer the proceeds to the trust. Right now I am pretty sure our successor trustee would do the investment management and perhaps hire someone to do the taxes. If it got to be too much hassle, the heir/successor could hire Vanguard, or whoever to be trustee.

Note that with this design the successor could offload a lot of work on others without having to appoint a cotrustee or pay trustee fees. With a standard brokerage account and money market fund, one could have automatic monthly payments to beneficiaries, pay someone to prepare the taxes and have little for the individual trustee to do. Once a year sign the tax return and write a check to the IRS.

They would only need a corporate trustee if they wanted discretionary distributions while maintaining asset protection.

I suspect that the usual trustee fees are quite reasonable for trusts that hold real estate. There is more liability and more to do. It is just unconscionable to pay 1-2% of assets to manage the stocks and bonds.

According to bsteiner when trust assets get large enough for the big companies to be interested the fees are negotiable and depend on what they have to do. I gather a Vanguard like trust that held only readily traded financial assets would be a lot cheaper than one that held a series of illiquid and higher liability things.

For now, I am hoping that the trustee market will evolve over time, just as has the market for index funds. Maybe in the future Vanguard will do real estate. Or other banks will invest passively. Or a lot of places will compete to be directed trustees. Or my nonexistent grandchildren will be finance buffs, fully prepared to take over from their parents when the time comes.
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

rigoodma
Posts: 36
Joined: Wed May 21, 2014 12:04 pm

Re: Trust Services

Postby rigoodma » Fri Apr 21, 2017 4:12 pm

smackboy1,

Great thoughts and comments.

After reading through all of this, I am in agreement with what you said at the end. Separate the two into a corporate trustee to handle all trustee responsibilities except investment and an asset manager for investment decisions.

As far as the conditions in the trust for investment strategy, the simple ones the investment advisor should take into consideration are as follows:

The potential return from the investment, both in the form of income and appreciation;
The potential income tax consequences of the investment;
The investment’s potential for volatility; and
The role the investment will play in the Trust’s portfolio

The hard part is you can do that with a wide range of investment options. I would love being able to put in the trust something along the line of choosing investments that meet the following (stealing some from afan): low cost, low turnover, non-speculative, passive, collective investment vehicles. I would hope this would be vague enough where it would allow for index funds, EFTs, or whatever might come up in the future, while still meeting a BH philosophy.

Would it be stated as a mandatory requirement? No, as like you said, what to do with fees vs return. But, it could be stated as advisors should exercise reasonable care and skill in selecting trust investments and should take into consideration the above factors and investment criteria. If you end up with an asset manager that is pushing all active management, high cost, speculative, high turnover investments, I would expect your corporate trustee to speak up and mention that it is not following the trust agreement. And if needed, replace the asset manager.

For real estate, insurance policies, loans for startup companies, etc., I would contend that is outside the investment realm and should be handled in other sections of the trust and by the corporate trustee. I see the asset manager handling all things related to security exchange markets.

100% agree with non-binding letter of instruction. Was already thinking about this too.

Shoot 100 holes in this that you can find.

afan
Posts: 2665
Joined: Sun Jul 25, 2010 4:01 pm

Re: Trust Services

Postby afan » Fri Apr 21, 2017 4:30 pm

rigoodma wrote:
For real estate, insurance policies, loans for startup companies, etc., I would contend that is outside the investment realm and should be handled in other sections of the trust and by the corporate trustee. I see the asset manager handling all things related to security exchange markets.



This part will be a problem. I suspect Vanguard would have nothing to do with any of these as trustee. All they want to do is manage a portfolio of mutual funds/etfs. If you need someone to make these sorts of decisions you would be back to a traditional trust department, with high fees. They would need someone they trust to make these decisions and leave them stuck with bad outcomes. This sounds like work for a corporate trustee only if a last resort.
Last edited by afan on Fri Apr 21, 2017 7:45 pm, edited 1 time in total.
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

rigoodma
Posts: 36
Joined: Wed May 21, 2014 12:04 pm

Re: Trust Services

Postby rigoodma » Fri Apr 21, 2017 7:05 pm

afan wrote:
rigoodma wrote:
For real estate, insurance policies, loans for startup companies, etc., I would contend that is outside the investment realm and should be handled in other sections of the trust and by the corporate trustee. I see the asset manager handling all things related to security exchange markets.



This part will be a problem. I suspect Vanguard would have nothing to do with any of these as trustee. All they want to do is manage a portfolio of mutual funds/etfs. If you need someone to make these sorts of decisions you would be back to a traditional trust department, with high fees. They would need someone they trust to make these decisions and leave them stuck with bad outcomes. This sounds like work for a corporate trustee only if a last resort.


Completely agree. Vanguard would not deal with this.

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FIREchief
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Re: Trust Services

Postby FIREchief » Fri Apr 21, 2017 8:12 pm

MikeG62 wrote:
FIREchief wrote:...I agree with all of this, which is why I feel that a trust that restricts a trustee to index investing should also have a means to modify that requirement in the event the future is radically different. The Trust Protector approach is one way to do this. There is already appropriate boilerplate language and most (all?) states laws allow for this (I am not a lawyer). If your state doesn't, then maybe you are stuck with hoping that VG (or others in the future) will invest in a manner that maximizes benefits for the beneficiaries.

A trust as I have described does NOT "write into my trust a requirement that all investments, for the life of the trust, must follow my current understanding." I must not be explaining this clearly enough.... :happy


It seems to me that your approach adds a layer of possible protection (trust protector looking over the shoulder of corporate trustee). However, this is not without cost. Under this approach you could have three levels of fees: one for trust administration; one for asset management; and a third for the trust protector.

In addition to that, you add the possibility of infighting between the trustee and trust protector, which your beneficiaries would need to deal with.



You seem to be assuming that the trust protector role is always "staffed." There are options for allowing the beneficiaries to appoint and remove a trust protector as needed/desired. (I am not a lawyer) If index funds continue to be the superior equity investment for the next forty years (as they have been for the last forty years,) then there may never be a need to hire/pay a trust protector. If the world changes radically, then as somebody else pointed out the trust protector (nuclear) option can be invoked to the extent and duration needed. There are many other good reasons (besides modification of investment directions) for a trust to allow for a trust protector to be appointed.

If a trust clearly directs an independent trustee to invest only in passively managed index funds, perhaps with specific mention of valid examples, then there is absolutely no need for "asset management." Just do what the trust says!


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