Trust Fund Hell

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

Post by Pacific » Tue Jun 13, 2017 4:12 pm

My adopted daughter’s deceased father left her a trust fund which paid out at 25, 30, and 35 years of age. The trustee is her uncle. He is a very nice guy and a tax attorney in New York (unfortunately, however, he is not Bruce Steiner).

About 18 years ago I happened to see how the uncle was investing the funds. In several polite emails I (and my daughter) tried to reason with him to switch the investments to Vanguard Total Stock, Total International, Small-Cap Value, and Total Bond, and how much easier his job would be to track the investments if he did that (the deceased father also set up trust funds for my other two adopted daughters). I also told him that he was very bright and he didn't need no stinkin' financial advisors (Smith Barney at the time). He was very stubborn about it and would not change. I figured it wasn’t my money and no sense causing any inter (or intra) family problems. So, I let the matter drop and hoped that once I stopped with my suggestions, he might see the light. LOL

Fast forward. My daughter will turn 35 in October and will receive the last (1/3) distribution.

Take a look at how her trust has been “invested” and the remaining amounts (and I am NOT making this up):

AMG Yacktman Class I (YACKX) $4,517
Aberdeen US Small Cap Eq Inst Class I (GSCIX) $2,094
Deutsche Secs Tr Enhanced Commodity Strat Instl Class (SKIRX) $1,632
Cohen & Steers Instl Realty Shs Inc (CSRIX) $3,172
Delaware Group Equity FDS II-Value Instl Cl (DDVIX) $4,423
First Eagle SOGEN Overseas Cl I (SGOIX) $4,226
Metropolitan West Total Return Bd Cl I (MWTIX) $2,680
Principia Inc Midcap Fund Instl Class (PCBIX) $4,496
Oppenheimer Intl Growth Fd Cl Y Shs (OIGYX) $4,219
JPMorgan 100% Treasury Securities Money Market Instl (JTSXX) $134
JPMorgan Mid Cap Value Cl I (FLMVX) $4,501
PIMCO Pac Invt Mgmt Ser Total Return Fd Instl Cl (PTTRX) $2,721
Prudential Short-Term Corporate Bd Fd Inc Class Z (PIFZX) $2,737
Royce Spl Equity Investment (RYSEX) $2,189
T Rowe Price Blue Chip Growth (TRBCX) $5,807
Virtus Opportunities Tr Emerging Markets Opptys (HIEMX) $1,649
Vanguard Equity Income Admiral Cl (VEIRX) $6,041
TOTAL = $57,239

Unbelievable. Now, which would you all prefer for a $60,000 investment? Taylor’s 3-Fund Portfolio (or a variation of it) or the Wells Fargo Advisors 17-Fund Portfolio above?

At the time of the October last distribution of the trust fund, do all the funds have to be sold and taxes paid on them, or can any of the funds be simply exchanged for a similar Vanguard fund without incurring taxes at that time?

delamer
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Re: Trust Fund Hell

Post by delamer » Tue Jun 13, 2017 4:19 pm

What was done with the two previous distributions?

cadreamer2015
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Re: Trust Fund Hell

Post by cadreamer2015 » Tue Jun 13, 2017 4:19 pm

Depending on the wording of the trust, my understanding is that the funds don't have to be sold. They could be transfered in kind to a different brokerage firm (Vanguard, Fido, Schwab, etc.). But if you/she want to invest them in different funds like VTI, the existing funds would be sold to purchase the different fund, and that would create capital gains and/or losses.
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Avo
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Re: Trust Fund Hell

Post by Avo » Tue Jun 13, 2017 4:39 pm

This is pretty standard for an advisor-based account. At least you appear to have the lowest-cost share class of each fund, though there is undoubtedly an AUM fee for the advisor.

Gill
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Re: Trust Fund Hell

Post by Gill » Tue Jun 13, 2017 4:43 pm

At the time of termination I would direct the trustee to see all the funds and distribute cash.
Gill

Avo
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Re: Trust Fund Hell

Post by Avo » Tue Jun 13, 2017 5:03 pm

Be careful with selling before distributing! There could be sales charges, like $50 per fund.

J295
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Re: Trust Fund Hell

Post by J295 » Tue Jun 13, 2017 5:11 pm

I suspect that the terms of the trust agreement terms and state law willmanswer your question about whether in kind distribution is permitted. I suggest the beneficiary take the trust agreement and prior 1041s/K-1s and other pertinent information to her accountant for assistance in next steps. I suggest this noting that even if in kind distributions are permitted your daughter will want to have basis information, etc. on any assets received going forward and it seems prudent to handle obtaining that information now now rather than try and figure out years down the road.

And, don't be too hard on Uncle ..... you state he's a nice guy and let's assume he loves his niece and has her best interests at heart, regardless of the BH perspective on how these things might have been done differently.

NotWhoYouThink
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Re: Trust Fund Hell

Post by NotWhoYouThink » Tue Jun 13, 2017 5:17 pm

This may not be trust fund heaven, but it's not that bad. We are kind of 5%-ers here on BH, but this would probably be in the top quintile of trust funds. I hope she thanks him for his work and planning over the years, then listens to you for the way forward.

livesoft
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Re: Trust Fund Hell

Post by livesoft » Tue Jun 13, 2017 5:29 pm

Avo wrote:Be careful with selling before distributing! There could be sales charges, like $50 per fund.
There could be sales charges at Vanguard, too, since these are not Vanguard products.

In other words, there is lots to think about before simply selling. OTOH, a 35-year-old should be able to figure this out.
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Theoretical
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Re: Trust Fund Hell

Post by Theoretical » Tue Jun 13, 2017 5:32 pm

NotWhoYouThink wrote:This may not be trust fund heaven, but it's not that bad. We are kind of 5%-ers here on BH, but this would probably be in the top quintile of trust funds. I hope she thanks him for his work and planning over the years, then listens to you for the way forward.
Pretty much this. It is chaotic and not terribly tax-efficient, but there's actually a number of thoughtful choices in the portfolio. The bigger problem is the likely AUM fee.

Capital gains could be a serious problem.

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Rager1
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Re: Trust Fund Hell

Post by Rager1 » Tue Jun 13, 2017 5:52 pm

I just assisted a friend who transferred everything to Vanguard from a UBS account. UBS took exit fees (of course) and when the holdings were sold at Vanguard, the mutual funds cost $35 each and the stocks and ETFs were $7 each. My friend came in to Vanguard at the Voyager level so total costs from Vanguard to exit from the 13 mutual funds, 9 ETFs, and 30 individual stocks was just under $600. However, my friend will recoup those costs in just over 2 months from what UBS was charging monthly (in addition to the outrageous expense ratios).

All of this was in a tax deferred account so there were no capital gains/losses to deal with.

Ed

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Re: Trust Fund Hell

Post by bayview » Tue Jun 13, 2017 6:40 pm

livesoft wrote:
Avo wrote:Be careful with selling before distributing! There could be sales charges, like $50 per fund.
There could be sales charges at Vanguard, too, since these are not Vanguard products.

In other words, there is lots to think about before simply selling. OTOH, a 35-year-old should be able to figure this out.
--after encouraging her to sign up on BH with her own username, do the recommended reading, and then post her situation on the Personal Investing forum (using the recommended template, of course!)

It sounds like you've done a wonderful job as her adoptive parent. You are now in the stage of showing her how to transition to full and informed independence. There's nothing so awful in the trust that can't coast along for another 3-6 months while she develops the chops to handle it.

Neither of you can undo past investment choices. Give her the power to make smart decisions for the future. Kudos to you for your concern for her welfare! :beer

And +1 to the post recommending that she thank her trustee. It could have been much, much worse.

eta: but lol at the $134 in the Treasury MM fund, plus all the other slice-and-dice. I do wonder if brokerage firms have anything at all to offer any more other than their secret sauce algorithms.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Carefreeap
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Re: Trust Fund Hell

Post by Carefreeap » Tue Jun 13, 2017 6:55 pm

As someone who inherited an upside down estate ( -$400,000) I think having $50k as the third installment is a nice thing to have. :wink:

I do understand where you're coming from. When DH got his inheritance it was frustrating to deal with some of the incompetence we saw. Inappropriate investments, expensive fees and lost assets. This was an old style by-pass Trust which over a 20 year period of time had 13 changes of Trustees. The lesson learned was that small Trusts do not generate the fees and therefore the attention you would think.

Keep that in mind when you set up your own estate plan.

ResearchMed
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Re: Trust Fund Hell

Post by ResearchMed » Tue Jun 13, 2017 8:19 pm

He is/was a trustee, with some fiduciary responsibilities.

He may have wanted to have a managed account so that he would not be "blamed" if there were any problems (e.g., losses/complaints).
Using a "big name" manager would presumably help with this, as long as any AUM/etc., fees weren't out of line with norms.

I wouldn't at all consider this "Trust Fund Hell", unless there were also outrageous fees every year.

RM
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bayview
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Re: Trust Fund Hell

Post by bayview » Tue Jun 13, 2017 8:25 pm

ResearchMed wrote:He is/was a trustee, with some fiduciary responsibilities.

He may have wanted to have a managed account so that he would not be "blamed" if there were any problems (e.g., losses/complaints).
Using a "big name" manager would presumably help with this, as long as any AUM/etc., fees weren't out of line with norms.


I wouldn't at all consider this "Trust Fund Hell", unless there were also outrageous fees every year.

RM
DH just said the same thing, regarding his family trust and the 100% likelihood of his sister objecting if the trust were switched to a BH-type AA. There's a huge element of CYA with trusts, and until they start lurching toward the fiduciary responsibility that we're starting to see with 401k's and other employer accounts, we're stuck with the "that's what everyone else does" mentality.

My thinking is that a trust is a gift, and even if it isn't perfect (the color is off; it's kinda tacky), it's still a gift, so consider taking the path of gratitude for what came your way and avoid the what-could-have-been regrets.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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FIREchief
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Re: Trust Fund Hell

Post by FIREchief » Tue Jun 13, 2017 8:45 pm

bayview wrote:
ResearchMed wrote:He is/was a trustee, with some fiduciary responsibilities.

He may have wanted to have a managed account so that he would not be "blamed" if there were any problems (e.g., losses/complaints).
Using a "big name" manager would presumably help with this, as long as any AUM/etc., fees weren't out of line with norms.


I wouldn't at all consider this "Trust Fund Hell", unless there were also outrageous fees every year.

RM
DH just said the same thing, regarding his family trust and the 100% likelihood of his sister objecting if the trust were switched to a BH-type AA. There's a huge element of CYA with trusts, and until they start lurching toward the fiduciary responsibility that we're starting to see with 401k's and other employer accounts, we're stuck with the "that's what everyone else does" mentality.
Aren't independent trustees already bound to a fiduciary standard?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

ResearchMed
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Re: Trust Fund Hell

Post by ResearchMed » Tue Jun 13, 2017 9:14 pm

FIREchief wrote:
bayview wrote:
ResearchMed wrote:He is/was a trustee, with some fiduciary responsibilities.

He may have wanted to have a managed account so that he would not be "blamed" if there were any problems (e.g., losses/complaints).
Using a "big name" manager would presumably help with this, as long as any AUM/etc., fees weren't out of line with norms.


I wouldn't at all consider this "Trust Fund Hell", unless there were also outrageous fees every year.

RM
DH just said the same thing, regarding his family trust and the 100% likelihood of his sister objecting if the trust were switched to a BH-type AA. There's a huge element of CYA with trusts, and until they start lurching toward the fiduciary responsibility that we're starting to see with 401k's and other employer accounts, we're stuck with the "that's what everyone else does" mentality.
Aren't independent trustees already bound to a fiduciary standard?
EIther way, including if/when the new Fiduciary regs become fully in place, a non-professional trustee (especially) - meaning someone who is helping with this responsibility rather than doing it as a full time profession - may well want to pass along that responsibility to a "professional".
And a "big name", even if it costs a bit more (but not if it costs a *lot* more), can provide a buffer of protection.

In this litigious society (USA), I'd be very reluctant to take on the role of trustee or any other fiduciary responsibility.
Even if I were to genuinely "do my best" in careful investment management, IF things turned out badly, regardless of reason, there is an awful lot of second guessing that could take place...
And there is also the chance that things turn out "well", but "not as good as some other strategy".

RM
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baw703916
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Re: Trust Fund Hell

Post by baw703916 » Tue Jun 13, 2017 9:29 pm

With 17 active funds...well, at least you've diversified away a lot of the manager risk! :twisted:
Most of my posts assume no behavioral errors.

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Taylor Larimore
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Re: Trust Fund Hell

Post by Taylor Larimore » Tue Jun 13, 2017 9:33 pm

Pacific:

Thank you for your post regarding the danger of trust fund investment managers.

In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund. This is a portion of the suit:

"During the period of time (17 years) that the trust funds were being managed and invested by Southeast Bank, the corpus of the trusts experienced an increase in value of approximately one-half percent a year--meanwhile, The Dow Jones Industrial Average rose approximately three hundred percent."

We live and learn.

Best wishes
Taylor
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FIREchief
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Re: Trust Fund Hell

Post by FIREchief » Tue Jun 13, 2017 10:07 pm

Taylor Larimore wrote: In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund. This is a portion of the suit:

"During the period of time (17 years) that the trust funds were being managed and invested by Southeast Bank, the corpus of the trusts experienced an increase in value of approximately one-half percent a year--meanwhile, The Dow Jones Industrial Average rose approximately three hundred percent."
Ouch!!! Another friendly reminder that the only reason professional trustees exist is to make money, and the safest way to do that is probably setting up a portfolio like the OP outlined (i.e. ten to twenty fancy sounding funds that all likely provide a meaningful financial benefit to either the trustee or his/her employer).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by Avo » Tue Jun 13, 2017 10:10 pm

Taylor Larimore wrote:In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund.
Did you win??

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Re: Trust Fund Hell

Post by bsteiner » Tue Jun 13, 2017 10:14 pm

FIREchief wrote:
Taylor Larimore wrote: In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund. ...
Another friendly reminder that the only reason professional trustees exist is to make money, and the safest way to do that is probably setting up a portfolio like the OP outlined (i.e. ten to twenty fancy sounding funds that all likely provide a meaningful financial benefit to either the trustee or his/her employer).
A bank or trust company gets paid the same (about 1% a year, a bit more on small trusts and less on large trusts) regardless of how they invest the assets. They'll generally diversify in an appropriate manner. They'll usually use individual securities for large cap U.S. stocks, and low-cost mutual funds or ETFs for other asset classes, though that will vary somewhat depending on the size of the trust.

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Taylor Larimore
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Re: Trust Fund Hell

Post by Taylor Larimore » Tue Jun 13, 2017 10:18 pm

Avo wrote:
Taylor Larimore wrote:In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund.
Did you win??
Avo:

No. The bank (Southeast Bank) went bankrupt and my attorney failed to file a claim in time.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Trust Fund Hell

Post by Dottie57 » Tue Jun 13, 2017 10:19 pm

Avo wrote:
Taylor Larimore wrote:In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund.
Did you win??

Hopefully the answer is "Yes"!

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FIREchief
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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 12:04 am

bsteiner wrote:
A bank or trust company gets paid the same (about 1% a year, a bit more on small trusts and less on large trusts) regardless of how they invest the assets. They'll generally diversify in an appropriate manner. They'll usually use individual securities for large cap U.S. stocks, and low-cost mutual funds or ETFs for other asset classes, though that will vary somewhat depending on the size of the trust.
This does not appear to be what was happening for the original poster. I didn't take the time to review each of the seventeen(!) funds that held the trust assets, but they appear to be mostly higher ER funds that may or may not provide incentives to whoever is selling them.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by Avo » Wed Jun 14, 2017 1:28 am

Taylor Larimore wrote:
Avo wrote:
Taylor Larimore wrote:In 1990 I brought suit against the largest bank in Miami for mishandling the investments of my grandmother's trust fund.
Did you win??
Avo:

No. The bank (Southeast Bank) went bankrupt and my attorney failed to file a claim in time.
Argh! How frustrating!

Very sorry to hear it. But many thanks for making the effort, and for all your efforts to educate those of us who are fortunate enough to find our way here ...

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Re: Trust Fund Hell

Post by bsteiner » Wed Jun 14, 2017 9:07 am

FIREchief wrote:
bsteiner wrote:
A bank or trust company gets paid the same (about 1% a year, a bit more on small trusts and less on large trusts) regardless of how they invest the assets. They'll generally diversify in an appropriate manner. They'll usually use individual securities for large cap U.S. stocks, and low-cost mutual funds or ETFs for other asset classes, though that will vary somewhat depending on the size of the trust.
This does not appear to be what was happening for the original poster. I didn't take the time to review each of the seventeen(!) funds that held the trust assets, but they appear to be mostly higher ER funds that may or may not provide incentives to whoever is selling them.
The trustee was an individual, not a bank or trust company. The individual trustee worked with a retail stockbroker.

I would have expected the trustee to have given consideration to the beneficiary's proposal to use Vanguard Total Stock, Total International, Small-Cap Value, and Total Bond.

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Re: Trust Fund Hell

Post by stimulacra » Wed Jun 14, 2017 9:56 am

Trust Fund Hell in blue.

Boglehead 3-fund in red.

The trust fund outperformed the S&P 500 during the time frame that matches your adopted daughter's time window… It could have been worse.

Image

deltaneutral83
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Re: Trust Fund Hell

Post by deltaneutral83 » Wed Jun 14, 2017 10:25 am

stimulacra wrote:Trust Fund Hell in blue.

Boglehead 3-fund in red.

The trust fund outperformed the S&P 500 during the time frame that matches your adopted daughter's time window… It could have been worse.
Did you bake in any AUM? Nonetheless, that is still very solid on the "TFH" and that is a nice chart. Did TFH have bonds, is the BH 3 fund 80/20?

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Re: Trust Fund Hell

Post by dbr » Wed Jun 14, 2017 11:04 am

bsteiner wrote:
FIREchief wrote:
bsteiner wrote:
A bank or trust company gets paid the same (about 1% a year, a bit more on small trusts and less on large trusts) regardless of how they invest the assets. They'll generally diversify in an appropriate manner. They'll usually use individual securities for large cap U.S. stocks, and low-cost mutual funds or ETFs for other asset classes, though that will vary somewhat depending on the size of the trust.
This does not appear to be what was happening for the original poster. I didn't take the time to review each of the seventeen(!) funds that held the trust assets, but they appear to be mostly higher ER funds that may or may not provide incentives to whoever is selling them.
The trustee was an individual, not a bank or trust company. The individual trustee worked with a retail stockbroker.

I would have expected the trustee to have given consideration to the beneficiary's proposal to use Vanguard Total Stock, Total International, Small-Cap Value, and Total Bond.
One might hope, but I guess I would have expected the trustee to adhere to the advice given by the investment company he hired to meet his fiduciary duty to invest according to "prudent" standards or "professional advice" or however that might be construed. If I were a trustee in a case like this I would hire an investment company and pay them 1% AUM for management out of pure self protection. And you know how I feel about AUM robbery by investment companies.

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Re: Trust Fund Hell

Post by stimulacra » Wed Jun 14, 2017 11:07 am

No I didn't bake in AUM, I figured a trust fund is a trust fund and the AUM fees would be similar regardless of the asset allocation or fund makeup.

The Boglehead 3-fund model I used:

VTSMX: 50%
VGTSX: 30%
VBMFX: 20%

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Re: Trust Fund Hell

Post by dbr » Wed Jun 14, 2017 11:16 am

stimulacra wrote:No I didn't bake in AUM, I figured a trust fund is a trust fund and the AUM fees would be similar regardless of the asset allocation or fund makeup.

The Boglehead 3-fund model I used:

VTSMX: 50%
VGTSX: 30%
VBMFX: 20%
No, a trustee could place the money at a brokerage or fund company other than a trust account and not pay an AUM fee. Of course then there is even more burden on the trustee for fiduciary responsibility. But there is a question of what the trust document actually says.

Am I off base about this?

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Re: Trust Fund Hell

Post by bsteiner » Wed Jun 14, 2017 11:28 am

dbr wrote:... I would have expected the trustee to adhere to the advice given by the investment company he hired to meet his fiduciary duty to invest according to "prudent" standards or "professional advice" or however that might be construed. If I were a trustee in a case like this I would hire an investment company and pay them 1% AUM for management out of pure self protection. ....
There is more than one way a trustee can comply with the prudent investor rule.

The prudent investor rule on the one hand permits a trustee to delegate investments and on the other hand requires a trustee to consider costs.

More specifically, the New York statute (the statutes are similar in other states but I have the New York one handy) says in EPTL § 11-2.3(b)(4):

"(4) The prudent investor standard authorizes a trustee:
...
(C) to delegate investment and management functions if consistent with the duty to exercise skill, including special investment skills; and

(D) to incur costs only to the extent they are appropriate and reasonable in relation to the purposes of the governing instrument, the assets held by the trustee and the skills of the trustee."
stimulacra wrote:... I figured a trust fund is a trust fund and the AUM fees would be similar regardless of the asset allocation or fund makeup. ...
A bank or trust company will usually charge about 1%, a bit more on smaller trusts and less on larger trusts, though this one was so small that it's unlikely that a bank or trust company would want it.

An individual trustee is entitled to compensation for acting as trustee, though a family member might voluntarily choose not to take compensation. I doubt that very many uncles or aunts would take compensation for acting as trustee for their niece or nephew. A few states have a statutory schedule (for example, in New York, it would be 1.05% on the first $400,000, 0.45% on the next $600,000, and 0.3% over $1 million). In most states, individual trustees are entitled to reasonable compensation (which means that if the trustee and beneficiary don't agree, the court will decide). The investment expenses, which will vary depending on how the trustee invests the assets or whether and how the trustee delegates the investments, are additional.
Last edited by bsteiner on Wed Jun 14, 2017 1:13 pm, edited 1 time in total.

sschoe2
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Re: Trust Fund Hell

Post by sschoe2 » Wed Jun 14, 2017 12:55 pm

I thought Vanguard was $7-8 per trade?

I may have to do this some day soon with my Mom's RBC account. She has a bunch of obscure funds I figured transfer it all to Vanguard and sell it for $7 per trade per fund.

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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 3:20 pm

bsteiner wrote:
FIREchief wrote:
bsteiner wrote:
A bank or trust company gets paid the same (about 1% a year, a bit more on small trusts and less on large trusts) regardless of how they invest the assets. They'll generally diversify in an appropriate manner. They'll usually use individual securities for large cap U.S. stocks, and low-cost mutual funds or ETFs for other asset classes, though that will vary somewhat depending on the size of the trust.
This does not appear to be what was happening for the original poster. I didn't take the time to review each of the seventeen(!) funds that held the trust assets, but they appear to be mostly higher ER funds that may or may not provide incentives to whoever is selling them.
The trustee was an individual, not a bank or trust company. The individual trustee worked with a retail stockbroker.

I would have expected the trustee to have given consideration to the beneficiary's proposal to use Vanguard Total Stock, Total International, Small-Cap Value, and Total Bond.
I do see that the trustee was an uncle, but he also mentioned that he was a tax attorney and I (perhaps wrongly) assumed that the trustee was acting as a professional (i.e. paid) trustee and not as an individual. That said, I can certainly understand why many individuals who for some reason have agreed to act as a trustee for family/friends would just want to hand off the investing to an independent FA (generally not the best financial move, but definitely a good cya move). If the cost is 1% either way, it appears much more desirable to give that 1% to a legitimate bank or trust company than Joe's Lucrative Investments Co. in the nice office up the street.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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FIREchief
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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 3:30 pm

bsteiner wrote: There is more than one way a trustee can comply with the prudent investor rule.

The prudent investor rule on the one hand permits a trustee to delegate investments and on the other hand requires a trustee to consider costs.

More specifically, the New York statute (the statutes are similar in other states but I have the New York one handy) says in EPTL § 11-2.3(b)(4):

"(4) The prudent investor standard authorizes a trustee:
...
(C) to delegate investment and management functions if consistent with the duty to exercise skill, including special investment skills; and

(D) to incur costs only to the extent they are appropriate and reasonable in relation to the purposes of the governing instrument, the assets held by the trustee and the skills of the trustee."
As some will likely recall, I feel the best/safest way to comply with the prudent investor rule is to supersede it with specific investment directions within the trust document. If the trust requires the trustee to invest trust financial assets in a "Boglehead Three Fund Portfolio," (not in those exact words, but more generically), then the trustee can and must do just that without fear of being sued for violating the prudent investor rule. In any other scenario, they almost have to do something more complicated to demonstrate the exercise of special skills. As we see in the OP, "special skills" can quickly translate to "complicated and expensive."
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by Afull » Wed Jun 14, 2017 3:52 pm

FIREchief wrote:As some will likely recall, I feel the best/safest way to comply with the prudent investor rule is to supersede it with specific investment directions within the trust document. If the trust requires the trustee to invest trust financial assets in a "Boglehead Three Fund Portfolio," (not in those exact words, but more generically), then the trustee can and must do just that without fear of being sued for violating the prudent investor rule. In any other scenario, they almost have to do something more complicated to demonstrate the exercise of special skills. As we see in the OP, "special skills" can quickly translate to "complicated and expensive."
That solution could hurt just as much or more than what the OP has. I used to think the way you do 30+ years ago, but heaven forbid if I had done so. I totally disagree with my early methods for todays environment. A well thought out trust has to have balance between control and flexibility.

One solution, if the trust allows, a majority of the beneficiaries can elect to change trustees if they desire. In my families case we are talking about corporate trustees only and none of the beneficiaries are allowed to be trustee.

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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 3:56 pm

Afull wrote:
FIREchief wrote:As some will likely recall, I feel the best/safest way to comply with the prudent investor rule is to supersede it with specific investment directions within the trust document. If the trust requires the trustee to invest trust financial assets in a "Boglehead Three Fund Portfolio," (not in those exact words, but more generically), then the trustee can and must do just that without fear of being sued for violating the prudent investor rule. In any other scenario, they almost have to do something more complicated to demonstrate the exercise of special skills. As we see in the OP, "special skills" can quickly translate to "complicated and expensive."
That solution could hurt just as much or more than what the OP has. I used to think the way you do 30+ years ago, but heaven forbid if I had done so. I totally disagree with my early methods for todays environment. A well thought out trust has to have balance between control and flexibility.
No disagreement. If not done properly, it could "hurt." Not sure how you used to think, and how that would apply to what I stated, but a trust can provide specific investment direction without meaningful loss of control or flexibility. It just needs to transfer the investment flexibility away from the currently serving trustee. Replace "conflict of interest" with "checks and balances."
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 3:58 pm

Afull wrote: One solution, if the trust allows, a majority of the beneficiaries can elect to change trustees if they desire. In my families case we are talking about corporate trustees only and none of the beneficiaries are allowed to be trustee.
Unfortunately, switching from one corporate trustee to another will likely never get you to a Bogleheads investment strategy. They are all bound by prudent investor rules and will feel compelled to demonstrate special skills (i.e. make it complicated and expensive).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by Afull » Wed Jun 14, 2017 9:49 pm

Unfortunately, switching from one corporate trustee to another will likely never get you to a Bogleheads investment strategy. They are all bound by prudent investor rules and will feel compelled to demonstrate special skills (i.e. make it complicated and expensive).[/quote]

Even Vanguard's?? https://personal.vanguard.com/us/whatwe ... stservices

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Re: Trust Fund Hell

Post by FIREchief » Wed Jun 14, 2017 10:32 pm

They may be our best chance, but I don't recall us ever hearing success stories here on the forum. Do you? Also, despite the fact that VG is likely the lowest cost option out there (for a professional trustee), the cost still isn't justified if all the trustee has to do is invest in a three fund portfolio (or similar).
Last edited by FIREchief on Thu Jun 15, 2017 5:25 pm, edited 2 times in total.
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Re: Trust Fund Hell

Post by Afull » Thu Jun 15, 2017 12:23 pm

FIREchief wrote:
Afull wrote:Unfortunately, switching from one corporate trustee to another will likely never get you to a Bogleheads investment strategy. They are all bound by prudent investor rules and will feel compelled to demonstrate special skills (i.e. make it complicated and expensive).
Even Vanguard's?? https://personal.vanguard.com/us/whatwe ... stservices
They may be our best chance, but I don't recall us ever hearing success stories here on the forum. Do you? Also, despite the fact that VG is likely the lowest cost option out there (for a professional trustee), the cost still isn't justified if all the trustee has to do is invest in a three fund portfolio (or similar).[/quote]

I just can't ascribe to one size fits all in investing, trust management, etc. To your question about success stories, one thing I've noticed on this forum and every other place I've been, never a consensus. Keeps me interested in looking for new ideas and learning.

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Re: Trust Fund Hell

Post by dbr » Thu Jun 15, 2017 12:36 pm

Don't forget to account for services received. A trust company, for example, may be preparing the trust tax return, K-1 forms for beneficiaries, and providing basis data for assets distributed, if that applies.

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Re: Trust Fund Hell

Post by FIREchief » Thu Jun 15, 2017 5:30 pm

Afull wrote:
(multiple mucked up quotes removed - Afull being quoted as FIREchief and FIREchief being quoted as Afull)

I just can't ascribe to one size fits all in investing, trust management, etc. To your question about success stories, one thing I've noticed on this forum and every other place I've been, never a consensus. Keeps me interested in looking for new ideas and learning.
True enough. We've heard that Vanguard is willing to use low cost index funds for Trust investments, we just haven't heard any reports of actual successful experiences (several of us have asked for them in multiple threads). Since Vanguard will be bound in most/all states by the prudent investor rules (which require exercise of special skills), they may not be able to just use a simple two or three fund approach.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Taylor Larimore
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Trusts at Vanguard

Post by Taylor Larimore » Thu Jun 15, 2017 8:51 pm

We've heard that Vanguard is willing to use low cost index funds for Trust investments, we just haven't heard any reports of actual successful experiences.
FIREchief:

I have a friend who has nine trusts with Vanguard. All nine are invested in The Three-Fund Portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Trusts at Vanguard

Post by FIREchief » Thu Jun 15, 2017 9:52 pm

Taylor Larimore wrote:
We've heard that Vanguard is willing to use low cost index funds for Trust investments, we just haven't heard any reports of actual successful experiences.
FIREchief:

I have a friend who has nine trusts with Vanguard. All nine are invested in The Three-Fund Portfolio.

Best wishes.
Taylor
Thanks Taylor. A few questions/clarifications:

a) Are these all irrevocable trusts (i.e. not a living trust during the lifetime of the Grantor)?
b) Is the trustee your friend, Vanguard or another independent trustee?
c) Is your friend the beneficiary of the trust? If so, are there other beneficiaries?
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Re: Trusts at Vanguard

Post by Taylor Larimore » Thu Jun 15, 2017 9:59 pm

FIREchief wrote:
Taylor Larimore wrote:
We've heard that Vanguard is willing to use low cost index funds for Trust investments, we just haven't heard any reports of actual successful experiences.
FIREchief:

I have a friend who has nine trusts with Vanguard. All nine are invested in The Three-Fund Portfolio.

Best wishes.
Taylor
Thanks Taylor. A few questions/clarifications:

a) Are these all irrevocable trusts (i.e. not a living trust during the lifetime of the Grantor)?
b) Is the trustee your friend, Vanguard or another independent trustee?
c) Is your friend the beneficiary of the trust? If so, are there other beneficiaries?
FIREchief:

I do not know the terms of the trusts.

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Trusts at Vanguard

Post by FIREchief » Thu Jun 15, 2017 10:07 pm

Taylor Larimore wrote:
FIREchief wrote:
Taylor Larimore wrote:
We've heard that Vanguard is willing to use low cost index funds for Trust investments, we just haven't heard any reports of actual successful experiences.
FIREchief:

I have a friend who has nine trusts with Vanguard. All nine are invested in The Three-Fund Portfolio.

Best wishes.
Taylor
Thanks Taylor. A few questions/clarifications:

a) Are these all irrevocable trusts (i.e. not a living trust during the lifetime of the Grantor)?
b) Is the trustee your friend, Vanguard or another independent trustee?
c) Is your friend the beneficiary of the trust? If so, are there other beneficiaries?
FIREchief:

I do not know the terms of the trusts.

Taylor
Thanks. Depending upon the answers to those questions, we may not have a success data point. If you friend (or another non-professional) is the trustee and he is the one who manages the trust accounts, then it's not VG's willingness to go simple, it would be your friend's. Also, if one or more are your friend's living trust(s), then this would not be the situation we are interested in.

The question remains is if Vanguard, as the apparent low cost leader for provision of independent trustee service, would be willing to simply invest the trust funds in a three fund portfolio. My suspicion is that they would cite the prudent investor rules and insist on something more complicated, which would likely introduce at least some higher ER funds.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Trust Fund Hell

Post by dbr » Fri Jun 16, 2017 9:13 am

I see no reason to imagine Vanguard would not invest in a model similar to their target retirement funds or their lifestrategy funds. The only addition to the traditional three fund portfolio they seem to acknowledge is international bonds and maybe TIPS. It seems unlikely they would jump to Managed Payout or put everything in the W's. A trust account involves more than just what to invest in but also handling distributions and also tax management.

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Re: Trust Fund Hell

Post by David Jay » Fri Jun 16, 2017 9:35 am

sschoe2 wrote:I thought Vanguard was $7-8 per trade?

I may have to do this some day soon with my Mom's RBC account. She has a bunch of obscure funds I figured transfer it all to Vanguard and sell it for $7 per trade per fund.
$7 trades only applies to exchange traded products (i.e. ETFs, individual stocks). Mutual funds from other companies often have higher sales charges.

Of course, Vanguard products are always free.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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