Trust Investment Policy Statement

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FBN2014
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Trust Investment Policy Statement

Post by FBN2014 » Thu Aug 09, 2018 1:20 pm

Bogleheads believe in low cost index funds and ETFs. Have you inserted an Investment Policy Statement in any estate planning trusts to reflect your desire to maintain a low cost, passive portfolio and give guidance to successor trustees? Can a trust protector enforce your wishes if the trustee strays and uses a active management approach? What language should be in the IPS to convey the grantor's wishes?
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

bsteiner
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Re: Trust Investment Policy Statement

Post by bsteiner » Thu Aug 09, 2018 1:40 pm

You can include guidelines. Presumably they would apply to the initial trustees as well as the successor trustees.

If you restrict it too tightly (for example, requiring the trustees to invest only in railroad bonds, or requiring the executors and trustees to retain the Kodak stock when most of the estate consists of Kodak stock) it will cause problems, but if you say that you would expect the trustees to invest primarily in low cost index funds there shouldn't be any problem since trustees can easily do that and still diversify.

There's no need for a protector. The beneficiaries can enforce it; and it's unlikely a trustee wouldn't comply since it doesn't make it more difficult for the trustees to diversify. The problems arise when the guideline or restriction conflicts with investing prudently and diversifying.

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FIREchief
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Re: Trust Investment Policy Statement

Post by FIREchief » Thu Aug 09, 2018 2:17 pm

You can place all kinds of things into a trust, but not all are good ideas.

With respect to your question, you absolutely can restrict investments within the trust, although I would insert such language as a requirement, and not a "guideline." Wording such as "the trustee shall invest trust financial assets into low cost, passively managed, index funds to the maximum extent possible." As Bruce suggested, such language should alleviate any concerns that an independent trustee may have regarding prudent investing rules, while also ensuring that the trust assets aren't drained by high priced investment schemes.

Please be aware that such language would be a non-starter with many independent trustees, because their firms only have one approach to investing trust assets, and it's not designed to save the beneficiaries money (i.e. it's where they earn a lot of their profits).

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Re: Trust Investment Policy Statement

Post by bsteiner » Thu Aug 09, 2018 3:21 pm

FIREchief wrote:
Thu Aug 09, 2018 2:17 pm
...
Please be aware that such language would be a non-starter with many independent trustees, because their firms only have one approach to investing trust assets, and it's not designed to save the beneficiaries money (i.e. it's where they earn a lot of their profits).
It wouldn't affect their profits. A bank or trust company's commissions (fees) are based on the value of the trust, usually about 1%, often a bit higher on small trusts and often lower on large trusts. Their fee would be the same regardless of whether they invest in individual securities or index funds.

If you're considering naming a bank or trust company as a trustee, you might give them a draft of your proposed Will so they can review it and confirm that they'll be able to act under it.

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Re: Trust Investment Policy Statement

Post by FIREchief » Thu Aug 09, 2018 3:32 pm

bsteiner wrote:
Thu Aug 09, 2018 3:21 pm
FIREchief wrote:
Thu Aug 09, 2018 2:17 pm
...
Please be aware that such language would be a non-starter with many independent trustees, because their firms only have one approach to investing trust assets, and it's not designed to save the beneficiaries money (i.e. it's where they earn a lot of their profits).
It wouldn't affect their profits. A bank or trust company's commissions (fees) are based on the value of the trust, usually about 1%, often a bit higher on small trusts and often lower on large trusts. Their fee would be the same regardless of whether they invest in individual securities or index funds.
I understand this, but there are certainly scenarios where it can be gamed to the advantage of the company. You mention individual securities and index funds, and I understand that for either of those it could work out as you say. However, there is a much broader world of investment options that a trustee with "total discretion" may choose to utilize. The fact that some proprietary investments carry fees in excess of 1% alone demonstrates that the trust assest may take much more than a 1% annual hit.
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Re: Trust Investment Policy Statement

Post by bsteiner » Thu Aug 09, 2018 4:57 pm

FIREchief wrote:
Thu Aug 09, 2018 3:32 pm
...there are certainly scenarios where it can be gamed to the advantage of the company. You mention individual securities and index funds, and I understand that for either of those it could work out as you say. However, there is a much broader world of investment options that a trustee with "total discretion" may choose to utilize. The fact that some proprietary investments carry fees in excess of 1% alone demonstrates that the trust assets may take much more than a 1% annual hit.
If they invest in their own mutual funds (which they'll sometimes do if the allocation to a particular asset is too small to be able to diversify with individual securities), they'll credit their management fee (though not the other expenses) at the fund level against their trustee's commissions.

They're not likely to invest in alternative investments unless the trust is large and the beneficiaries want them to invest in alternative investments.

If it makes you more comfortable, you could make it stronger. In that case, you may want to give the bank or trust company a draft of your proposed Will, to be sure that they'll be able to serve as a trustee under it. (It's generally a good idea to give them a draft of your proposed Will in any event if you're naming them as an executor or trustee, or as a successor executor or trustee.) You should make sure it's not so restrictive that it might prevent the trustees from diversifying.

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FIREchief
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Re: Trust Investment Policy Statement

Post by FIREchief » Thu Aug 09, 2018 5:06 pm

bsteiner wrote:
Thu Aug 09, 2018 4:57 pm
FIREchief wrote:
Thu Aug 09, 2018 3:32 pm
...there are certainly scenarios where it can be gamed to the advantage of the company. You mention individual securities and index funds, and I understand that for either of those it could work out as you say. However, there is a much broader world of investment options that a trustee with "total discretion" may choose to utilize. The fact that some proprietary investments carry fees in excess of 1% alone demonstrates that the trust assets may take much more than a 1% annual hit.
If they invest in their own mutual funds (which they'll sometimes do if the allocation to a particular asset is too small to be able to diversify with individual securities), they'll credit their management fee (though not the other expenses) at the fund level against their trustee's commissions.

They're not likely to invest in alternative investments unless the trust is large and the beneficiaries want them to invest in alternative investments.

If it makes you more comfortable, you could make it stronger. In that case, you may want to give the bank or trust company a draft of your proposed Will, to be sure that they'll be able to serve as a trustee under it. (It's generally a good idea to give them a draft of your proposed Will in any event if you're naming them as an executor or trustee, or as a successor executor or trustee.) You should make sure it's not so restrictive that it might prevent the trustees from diversifying.
Thanks Bruce. I know you're describing the actions of a responsible, reputable independent trustee and hopefully that describes the vast majority in this business. That said, we have seen horror stories of independent trustees run amuck. I believe we recently had a thread where the poster described an actual scenario where the trustee took his 1%, and then hired an "independent" financial advisor who proceeded to churn the portfolio and rack up large expenses. Granted, this is (hopefully) the exception, but without language in the trust to prevent it, I'm guessing it would likely be up to the beneficiaries to challenge the trustee's actions in court (which might be difficult and expensive in a scenario as he had described).

Due to the laws of the state in which I and my beneficiaries reside, it is unlikely that my estate will ever require support from an independent trustee; so a lot of this is just contingency planning for me.
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 Investment Policy Statement

Post by bsteiner » Fri Aug 10, 2018 7:52 am

FIREchief wrote:
Thu Aug 09, 2018 5:06 pm
... we have seen horror stories of independent trustees run amuck. I believe we recently had a thread where the poster described an actual scenario where the trustee took his 1%, and then hired an "independent" financial advisor who proceeded to churn the portfolio and rack up large expenses. Granted, this is (hopefully) the exception, but without language in the trust to prevent it, I'm guessing it would likely be up to the beneficiaries to challenge the trustee's actions in court (which might be difficult and expensive in a scenario as he had described). ...
That could happen with an individual trustee. The trustee might think he/she is doing the right thing by hiring an investment advisor.

If it's any consolation, individual trustees usually get less than 1%. In New York, they would get 1.05% on the first $400,000, 0.45% on the next $600,000, and 0.3% over $1 million. Most states don't have a statutory schedule for trustees' commissions (fees), which means that the trustees and beneficiaries have to agree, or else the court will decide.

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Re: Trust Investment Policy Statement

Post by smackboy1 » Fri Aug 10, 2018 4:35 pm

FBN2014 wrote:
Thu Aug 09, 2018 1:20 pm
Bogleheads believe in low cost index funds and ETFs. Have you inserted an Investment Policy Statement in any estate planning trusts to reflect your desire to maintain a low cost, passive portfolio and give guidance to successor trustees? Can a trust protector enforce your wishes if the trustee strays and uses a active management approach? What language should be in the IPS to convey the grantor's wishes?
Trying to strictly define Boglehead investing is problematic. Things change. Index funds and Vanguard were invented during the lifetime of many of us. ETFs did not exist until recently. Financial theories are forever being discovered and debated. What is "low cost"? Imagine if your grandparents wrote a trust which strictly defined the investment policy based solely on the best financial practices at the time. Also, what is and is not a "low cost index fund and ETF"?

Vanguard tax exempt bond funds = not index funds
Vanguard US treasury bond funds = not index funds
Vanguard Primecap = active fund and is it low cost?
DFA funds = not index funds and are they low cost?
CD, individual bonds = not index funds
Real estate = not index funds

Perhaps a better idea is to write a non-binding letter of instruction that states your recommendations and wishes, but ultimately leave the future generation the ability to make their own informed decisions and choices.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Re: Trust Investment Policy Statement

Post by FIREchief » Fri Aug 10, 2018 5:45 pm

smackboy1 wrote:
Fri Aug 10, 2018 4:35 pm
Trying to strictly define Boglehead investing is problematic. Things change. Index funds and Vanguard were invented during the lifetime of many of us. ETFs did not exist until recently. Financial theories are forever being discovered and debated.
You make some excellent points, but none that hadn't occurred to me or been discussed in these threads before.
What is "low cost"? Imagine if your grandparents wrote a trust which strictly defined the investment policy based solely on the best financial practices at the time.
My Grandparents would have allowed for appointment of a trust protector by the beneficiaries. The trust would allow the trust protector to alter the investment terms of the trust if appropriate for the interest of the beneficiaries.
Also, what is and is not a "low cost index fund and ETF"?
Well, I guess this would be whatever would stand up under the scrutiny of the courts were the trustee to be challenged. I'm guessing if the trustee invested in VTSAX or VTI they would sleep just fine at night (after cashing their annual 1% paycheck). If they were invested in "cousin Joe's Bank of Podunk hog belly index fund," they likely would expect some problems. I think it would be very straightforward to make a judgement regarding whether or not the trustee was properly executing the terms of the trust.
Vanguard tax exempt bond funds = not index funds
Vanguard US treasury bond funds = not index funds
My original example was purposely simplistic, but in a real world application I would certainly also have the language allow "investments in US treasuries." Also note that funds such as VBTLX (VG total bond) are in fact low cost index funds, which hold a large percentage of treasuries.
Vanguard Primecap = active fund and is it low cost?
DFA funds = not index funds and are they low cost?
CD, individual bonds = not index funds
Real estate = not index funds
I would be fine with not allowing the trustee to invest in these types of things. You may have to chose your poison.
Perhaps a better idea is to write a non-binding letter of instruction that states your recommendations and wishes, but ultimately leave the future generation the ability to make their own informed decisions and choices.
This is often suggested but likely would not to be worth any more than the paper it is written on when it comes to an independent, paid trustee. Such a person will follow/hide behind state prudent investor rules unless the trust specifically REQUIRES them to invest in something more specific. The prudent investor rules may actually provide more "protection" to unscrupulous for-profit trustees than they provide meaningful protection to the beneficiaries.

You mention allowing the future generation the ability to make their own informed decisions and choices. Please note that my suggestions were entirely directed toward paid, independent trustees. In the more desirable scenario where the primary beneficiary is allowed to serve as their own trustee, then this all becomes much less important. In fact, one could reasonably ask "who will care" if the beneficiary/trustee decides to deviate from the trust investment rules.

Please note, there is no easy answer here. If we all could hire Bruce or Gill to act as independent trustee for our beneficiaries, then none of this would likely be necessary. But, we can't. We may have a "well trusted local bank," but they could be merged into Megabank the day after I die and who knows what MegaTrustDepartment invests in? If they're Mega, they've likely gotten pretty good at squeezing a bit more profit out of folks then the old First National of Pleasentville was. We could appoint Vanguard, but even they have been mentioned as those who might preach indexing but sell active when it comes to trusts. It may be the lesser of two evils. 1) trust all trustees and hope for the best; 2) place restrictive Boglehead language into the trust and incur the potential future cost of hiring a trust protector to modify the trust to whatever is Bogleheadish thirty years from now. At the end of the day, the world is much simpler (and more sunny) if folks can allow their beneficiaries to act as their own trustees (assuming they are responsible and competent). I think Bruce suggests this at least once in each of these threads, yet we still have folks who want to either hypercontrol from the grave or just say "damn the asset protections, just throw it all out there."
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

FBN2014
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Re: Trust Investment Policy Statement

Post by FBN2014 » Fri Aug 10, 2018 7:28 pm

Please note, there is no easy answer here. If we all could hire Bruce or Gill to act as independent trustee for our beneficiaries, then none of this would likely be necessary. But, we can't. We may have a "well trusted local bank," but they could be merged into Megabank the day after I die and who knows what MegaTrustDepartment invests in? If they're Mega, they've likely gotten pretty good at squeezing a bit more profit out of folks then the old First National of Pleasentville was. We could appoint Vanguard, but even they have been mentioned as those who might preach indexing but sell active when it comes to trusts. It may be the lesser of two evils. 1) trust all trustees and hope for the best; 2) place restrictive Boglehead language into the trust and incur the potential future cost of hiring a trust protector to modify the trust to whatever is Bogleheadish thirty years from now. At the end of the day, the world is much simpler (and more sunny) if folks can allow their beneficiaries to act as their own trustees (assuming they are responsible and competent). I think Bruce suggests this at least once in each of these threads, yet we still have folks who want to either hypercontrol from the grave or just say "damn the asset protections, just throw it all out there."
I am particularly hypersensitive to the issues that I originally posted about and the issues that have been raised by others. I have seen these problems in my own family and friends, i.e. elderly person over age 80 having assets placed in a high commission variable annuity sold by your "friendly banker", sibling losing life savings to a gold digger after his first wife died from complications of diabetes, age 62 male with ALS being sold a variable annuity with a grandchildren's trust as beneficiary where all assets are distributed to grandchildren at age 18. I want to get this right so these types of financial abuse didn't happen to my beneficiaries. Probably the only way to do that is not to name the beneficiaries as trustee of their own trust and have a trust protector. I've thought that having a directed trustee may also be a good idea where the administration of the trust is separate from the management of the assets.
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FIREchief
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Re: Trust Investment Policy Statement

Post by FIREchief » Fri Aug 10, 2018 8:38 pm

FBN2014 wrote:
Fri Aug 10, 2018 7:28 pm
Please note, there is no easy answer here. If we all could hire Bruce or Gill to act as independent trustee for our beneficiaries, then none of this would likely be necessary. But, we can't. We may have a "well trusted local bank," but they could be merged into Megabank the day after I die and who knows what MegaTrustDepartment invests in? If they're Mega, they've likely gotten pretty good at squeezing a bit more profit out of folks then the old First National of Pleasentville was. We could appoint Vanguard, but even they have been mentioned as those who might preach indexing but sell active when it comes to trusts. It may be the lesser of two evils. 1) trust all trustees and hope for the best; 2) place restrictive Boglehead language into the trust and incur the potential future cost of hiring a trust protector to modify the trust to whatever is Bogleheadish thirty years from now. At the end of the day, the world is much simpler (and more sunny) if folks can allow their beneficiaries to act as their own trustees (assuming they are responsible and competent). I think Bruce suggests this at least once in each of these threads, yet we still have folks who want to either hypercontrol from the grave or just say "damn the asset protections, just throw it all out there."
I am particularly hypersensitive to the issues that I originally posted about and the issues that have been raised by others. I have seen these problems in my own family and friends, i.e. elderly person over age 80 having assets placed in a high commission variable annuity sold by your "friendly banker", sibling losing life savings to a gold digger after his first wife died from complications of diabetes, age 62 male with ALS being sold a variable annuity with a grandchildren's trust as beneficiary where all assets are distributed to grandchildren at age 18. I want to get this right so these types of financial abuse didn't happen to my beneficiaries. Probably the only way to do that is not to name the beneficiaries as trustee of their own trust and have a trust protector. I've thought that having a directed trustee may also be a good idea where the administration of the trust is separate from the management of the assets.
Be careful with the trust protector language. In the worst case scenario, it might just become one more perpetual layer of expenses on top of the independent trustee expenses. I mentioned only a very specific use where a trust could allow the beneficiaries to appoint a trust protector for a specific task, for a specific period of time.

You'll note my prevous post qualified the mention of beneficiary as trustee with "assuming they are responsible and competent." That can obviously be a big assumption. There are ways to mitigate the concerns, but there is no perfect solution (at least not one without costs involved). If your heirs are adult children and they are reponsible enough listen to your thoughts and honor your wishes (for their own good), then it can work. There also is an educational component. Those with decision making authority have to understand that almost everything that anybody will try to sell them in this realm is a bad idea.
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Re: Trust Investment Policy Statement

Post by FBN2014 » Fri Aug 10, 2018 9:11 pm

You'll note my prevous post qualified the mention of beneficiary as trustee with "assuming they are responsible and competent." That can obviously be a big assumption. There are ways to mitigate the concerns, but there is no perfect solution (at least not one without costs involved). If your heirs are adult children and they are reponsible enough listen to your thoughts and honor your wishes (for their own good), then it can work. There also is an educational component. Those with decision making authority have to understand that almost everything that anybody will try to sell them in this realm is a bad idea.
You've raised a good point about added layers of costs and complexity. My adult children are responsible and I will be giving them some books to read by many of the authors that contribute to Bogleheads and then have some frank discussions on what I would expect from them and why. I may also allow them to "manage" on paper what I would expect them to inherit to see how they do, sort of like on the job training. I will need to check with my attorney to determine if the trust language can be written with enough flexibility to incorporate the extra layers of protection as an option if required in the future.
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Re: Trust Investment Policy Statement

Post by FIREchief » Fri Aug 10, 2018 10:55 pm

FBN2014 wrote:
Fri Aug 10, 2018 9:11 pm
My adult children are responsible and I will be giving them some books to read by many of the authors that contribute to Bogleheads and then have some frank discussions on what I would expect from them and why.
I wouldn't start with reading assignments. Do they understand index funds? Do they understand active versus passive? These are concepts that might better be explained in a short conversation while looking at a few screens on your brokerage's website. Mine allows me to hide all balances, so I could show them "real" world examples.

Editorial comment for those readers who have kids in high school working low paying jobs: consider offering to match $1000 in a Roth IRA if they'll let you help them set up a brokerage account and show them how to invest in a stock mutual fund. Look at the performance with them once or twice a year (they're not allowed to pull it out of stocks unless it's down to just "their" $1000). Show them what active funds charge for ER. Compare their index fund's returns with the active funds. Let them see what real investing is and isn't (and how much it is NOT like what they're hearing on the "news" channels). A simple start like that can result in twenty year olds who are Bogleheadish and better understand investing than many fifty year olds. When my kids were very young, I taught them to count to ten. When they were sixteen, I taught them "S&P 500 index fund." Works great! :sharebeer
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Re: Trust Investment Policy Statement

Post by afan » Sat Aug 11, 2018 9:49 am

Bsteiner,

Have things changed? When I went through an attempt to find a corporate trustee a few years ago Vanguard was the only one that would even discuss investing in index funds. Other banks and trust companies would immediately launch into a sales pitch about how great their active management was. They made it clear that they would invest in individual securities and maybe their own active funds.

Going to the market and buying a mutual fund or ETF from any other company was completely out of the question. One trust company rep went so far as to claim that investing in mutual funds at all would violate Prudent Investor laws.

When discussing it with a large number of companies I said I would pay their fees but did not want them trying to beat the market on my behalf. They were aggressively not interested.

Have these companies given up on that pitch more recently? Would any of them, other than Vanguard, agree to stick with low cost index funds? Do you know of any that will?
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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Re: Trust Investment Policy Statement

Post by FBN2014 » Sat Aug 11, 2018 12:08 pm

afan wrote:
Sat Aug 11, 2018 9:49 am
Bsteiner,

Have things changed? When I went through an attempt to find a corporate trustee a few years ago Vanguard was the only one that would even discuss investing in index funds. Other banks and trust companies would immediately launch into a sales pitch about how great their active management was. They made it clear that they would invest in individual securities and maybe their own active funds.

Going to the market and buying a mutual fund or ETF from any other company was completely out of the question. One trust company rep went so far as to claim that investing in mutual funds at all would violate Prudent Investor laws.

When discussing it with a large number of companies I said I would pay their fees but did not want them trying to beat the market on my behalf. They were aggressively not interested.

Have these companies given up on that pitch more recently? Would any of them, other than Vanguard, agree to stick with low cost index funds? Do you know of any that will?
You could use a directed trustee that only does the administrative tasks, i.e. tax returns, accounting reports, distributions. Then you can specify in the trust document a low cost, passive advisor, such as Portfolio Solutions, to do the portfolio management. As a contingency if either the trustee or the portfolio manager goes out of business you could have a trust protector appoint a new trustee and portfolio manager with the approval of the beneficiaries and in accordance with your Investment Policy Statement or Letter of Instructions. I have found several directed trustees who have said they are fine with this arrangement. Here are some articles by Daniel Solin that address this issue.

https://money.usnews.com/money/blogs/on ... th-adviser

https://www.huffingtonpost.com/dan-soli ... 42539.html

https://www.huffingtonpost.com/dan-soli ... 83450.html
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

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FIREchief
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Re: Trust Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 2:24 pm

afan wrote:
Sat Aug 11, 2018 9:49 am
Going to the market and buying a mutual fund or ETF from any other company was completely out of the question. One trust company rep went so far as to claim that investing in mutual funds at all would violate Prudent Investor laws.
The following links to a pdf copy of the uniform trust code. This document also includes commentary on the various sections. I found the following commentary on page 136, and it somewhat aligns with what you were told.

http://www.uniformlaws.org/shared/docs/ ... ev2010.pdf
Mutual fund investment also has a number of potential disadvantages. It adds another
layer of expense to the trust, and it causes the trustee to lose control over the nature and timing of
transactions in the fund. Trustee investment in mutual funds sponsored by the trustee, its affiliate,
or from which the trustee receives extra fees has given rise to litigation implicating the trustee’s
duty of loyalty, the duty to invest with prudence, and the right to receive only reasonable
compensation. Because financial institution trustees ordinarily provide advisory services to and
receive compensation from the very funds in which they invest trust assets, the contention is
made that investing the assets of individual trusts in these funds is imprudent and motivated by
the effort to generate additional fee income. Because the financial institution trustee often will
also charge its regular fee for administering the trust, the contention is made that the financial
institution trustee’s total compensation, both direct and indirect, is excessive.
It is hosted on the website for the Uniform Law Commission, which sounds pretty legit but I'm not a lawyer.

http://www.uniformlaws.org/Act.aspx?title=Trust%20Code
Last edited by FIREchief on Sat Aug 11, 2018 2:40 pm, edited 1 time in total.
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Re: Trust Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 2:39 pm

smackboy1 wrote:
Fri Aug 10, 2018 4:35 pm
Perhaps a better idea is to write a non-binding letter of instruction that states your recommendations and wishes, but ultimately leave the future generation the ability to make their own informed decisions and choices.
Just a bit more on this. The Uniform Trust Code is not law, but many states have either incorporated it into their own laws or mirrored its provisions in their unique state trust codes (this is my understanding, I am not a lawyer). The Uniform Trust Code invokes the Uniform Prudent Investor Act in it's entirety.

http://www.uniformlaws.org/shared/docs/ ... nal_94.pdf

The Uniform Prudent Investor Act states the following:
SECTION 1. PRUDENT INVESTOR RULE.
(a) Except as otherwise provided in subsection (b), a trustee who invests
and manages trust assets owes a duty to the beneficiaries of the trust to comply with
the prudent investor rule set forth in this [Act].
(b) The prudent investor rule, a default rule, may be expanded, restricted,
eliminated, or otherwise altered by the provisions of a trust.
A trustee is not liable to
a beneficiary to the extent that the trustee acted in reasonable reliance on the
provisions of the trust.
Please note the bolded/underlined text. This is the point I was trying to convey earlier in this thread. A non-binding letter of instructions (or even Warrant Buffet's "recommendation" to his trustee) will not override the prudent investor rules, and each independent trustee is free to interpret the rules as they wish (obviously subject to court challenge). Specific text within the trust WILL override the prudent investor rule if your state's laws so require. If you want to impose Boglehead investing approaches onto your independent trustee, the ONLY way to create a legal requirement is likely to put the language into the trust.

See my signature and check your specific state laws.
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Re: Trust Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 2:56 pm

FBN2014 wrote:
Sat Aug 11, 2018 12:08 pm
You could use a directed trustee that only does the administrative tasks, i.e. tax returns, accounting reports, distributions. Then you can specify in the trust document a low cost, passive advisor, such as Portfolio Solutions, to do the portfolio management. As a contingency if either the trustee or the portfolio manager goes out of business you could have a trust protector appoint a new trustee and portfolio manager with the approval of the beneficiaries and in accordance with your Investment Policy Statement or Letter of Instructions
Are you suggesting that the trust include the instructions or only that the trust specifies a specific investment advisory firm?
I have found several directed trustees who have said they are fine with this arrangement. Here are some articles by Daniel Solin that address this issue.

https://www.huffingtonpost.com/dan-soli ... 83450.html
This is an interesting article. Please note the following quote:
Here’s some language you could consider including in your trust documents that will provide the necessary guidance to the trustee and the advisor engaged to manage your assets
I think the following is way too complicated, but it's actually the first published "suggested trust text" I have ever seen:
The investment manager shall be guided by the basic principle known as modern portfolio theory. The investment manager should make no effort to ‘beat the markets.’ The investment manager shall focus on the asset allocation of the portfolio. The portfolio shall be globally diversified, using low management fee stock and bond index funds, exchange-traded funds or passively managed funds. The investment manager shall be guided by the principles set forth in ‘The Intelligent Asset Allocator’ by William Bernstein, ‘A Random Walk Down Wall Street’ by Burton Malkiel, ‘The Little Book of Common Sense Investing’ by John Bogle and ‘The Smartest Investment Book You’ll Ever Read’ by Daniel R. Solin. If appropriate, the investment manager may invest in a laddered bond portfolio, following the guidelines set forth in ‘The Only Guide to a Winning Bond Strategy You’ll Ever Need’ by Larry Swedroe and Joseph H. Hempen.
I would dumb it down to something like:
The investment manager shall invest trust financial assets using low management fee stock and bond index funds, exchange-traded funds or passively managed funds to the maximum extend possible. If appropriate, the investment manager may also invest in US treasuries.
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 Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 3:03 pm

Interesting:
The real money in trust administration is not in the administration fees. It’s in the advisory fees generated by the arm of the trustee that manages the assets in the trust. Well in excess of 90% of institutional trustees also manage trust assets. Not only does this create a conflict of interest (how carefully is one division of the trust administrator really going to review the conduct of another division?), but it practically insures under performance of trust assets.
Thanks for posting these links. They are great reading for somebody just entering this realm. :beer
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 Investment Policy Statement

Post by afan » Sat Aug 11, 2018 7:49 pm

Directed trustee would separate administration from investment management. I looked at that option and found some firms that would manage an all index 3 fund portfolio for flat fees of $2,000-5,000. But having to deal with two companies, one for administration and one for investment, went against my goal of simplicity. I also got no reassurance from either conventional or directed trustees about the quality of their beneficiary service- the only thing I actually wanted them to do.

Some of the people with whom I spoke cheerfully agreed that the goal of the trust division was to gather assets under management and they charged low prices for administration and high fees for investment management. Of course, THEIR investment managers were way better than the market...


I did look up the model act on Prudent Investor and found similar langauge. I did not interpret it as arguing against buying index funds. It was more about a trustee charging a fee for investment management and another fee for it's propietary mutual funds. At that point I had served on the boards of two non-profits, both of which, at my urging, were invested in index funds. I told the guy claiming that a fiduciary could not do this that both non-profits had passed their annual audits, year after year, with no mention of this as a problem. The attorneys on the boards had not objected and each non-profit had turned over accountants at least once with the new firm not batting an eye at the index funds. "That being the case, can you refer me to the provisions of the Act that prohibit investing in index funds?". Suddenly the guy decided that maybe mutual funds just might be OK.

For now, I have told my successor trustees about the directed trustee option, if they wanted someone to do it for them. I suspect they would be happier with one stop shopping at Vanguard.

Although the flat fee plus directed trustee approach would save a little money vs Vanguard, the amount would not be much by the time the trust had paid for administration and investment management.

But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.

Fidelity would serve as trustee but would not invest in it's own index funds. The investment managers for the trust would put the money in Fidelity active funds with ERs well north of 1.5%.

Schwab would serve as administrator and let you pick from advisors on the Schwab network for investment management. But Schwab would not help find low cost, index fund managers. Yes I did ask Schwab whether they could help with this. Yes, Schwab did say no. Later Schwab got into the one stop shop business, serving as administrator and investment advisor. But as far as I could tell, not for a 3-fund portfolio.

My experience discourages me from assuming that a corporate trustee would agree to serve if the trust document required them to invest in only low cost total market index funds. Hence my hesitance about saddling my successors with a trust that no corporate trustee will accept.
Last edited by afan on Sun Aug 12, 2018 8:30 am, edited 1 time in total.
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Re: Trust Investment Policy Statement

Post by FBN2014 » Sat Aug 11, 2018 8:13 pm

But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.
Interesting that Vanguard said they would use an index fund portfolio for you. They told me that although they could use index funds, they would not be bound by any restrictions and would also use actively managed mutual funds as their managers thought to be appropriate. In addition, Vanguard does not manage any real estate assets so there would need to be a co-trustee for that purpose.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

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Re: Trust Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 8:13 pm

afan wrote:
Sat Aug 11, 2018 7:49 pm
My experience discourages me from assuming that a corporate trust would agree to serve if the trust document required them to invest in only low cost total market index funds. Hence my hesitance about saddling my successors with a trust that no corporate trustee will accept.
I think this is a very valid point. It may be that only a local bank or similar may have the "flexibility" to do this. I'm guessing that the right attorney might also agree to serve as trustee with such a requirement. From a high level, it looks very attractive as the index fund requirement would shield whoever is managing the investments from most/all risk of being challenged. They just need to do what the trust says. I would hope there is somebody out there who would see .5% to 1.0% per year for doing this as good business, especially for a larger trust. They might spend an hour a year on investment management, and then just perform the rest of the trustee duties for the remainder. Unfortunately, we're up against a money-making business model that is likely deeply ingrained. :annoyed
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Re: Trust Investment Policy Statement

Post by FIREchief » Sat Aug 11, 2018 8:15 pm

FBN2014 wrote:
Sat Aug 11, 2018 8:13 pm
But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.
Interesting that Vanguard said they would use an index fund portfolio for you. They told me that although they could use index funds, they would not be bound by any restrictions and would also use actively managed mutual funds as their managers thought to be appropriate.
Yes, reports regarding VG have been consistently inconsistent on this topic. If the trust defaults to the prudent investor rule, then my suspicion is that ultimately the investments would be actively managed to the benefit of Vanguard (or any other independent trustee).
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 Investment Policy Statement

Post by Luckywon » Sat Aug 11, 2018 9:29 pm

afan wrote:
Sat Aug 11, 2018 7:49 pm

But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.

Schwab would serve as administrator and let you pick from advisors on the Schwab network for investment management. But Schwab would not help find low cost, index fund managers. Yes I did ask Schwab whether they could help with this. Yes, Schwab did say no. Later Schwab got into the one stop shop business, serving as administrator and investment advisor. But as far as I could tell, not for a 3-fund portfolio.
afan, I am still in the process of working out these issues in my estate plan. May I ask a couple of follow up questions?

-You state that Vanguard was willing to discuss investing in index funds. How far were they willing to go with this? Were there other issues that made you decide against going this route with Vanguard?
-When did Schwab say no to this issue? If it was not recently, I may broach this with them.

Thank you in advance for any information.

Luckywon

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Re: Trust Investment Policy Statement

Post by afan » Sun Aug 12, 2018 8:33 am

FBN2014 wrote:
Sat Aug 11, 2018 8:13 pm
But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.
Interesting that Vanguard said they would use an index fund portfolio for you. They told me that although they could use index funds, they would not be bound by any restrictions and would also use actively managed mutual funds as their managers thought to be appropriate. In addition, Vanguard does not manage any real estate assets so there would need to be a co-trustee for that purpose.
I should have been clearer.

Vanguard did agree that indexing was the way to go. They did not bore me with the usual pitch for active management. But they did say they would not legally obligate themselves to do a 3 fund index portfolio. I came away with the strong impression that a good simple portfolio is what I would get, but they did not want to be trapped if something more suitable came along.
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Re: Trust Investment Policy Statement

Post by afan » Sun Aug 12, 2018 8:49 am

Luckywon wrote:
Sat Aug 11, 2018 9:29 pm
afan wrote:
Sat Aug 11, 2018 7:49 pm

But my earlier comments were about the difficulty of finding trustees who would run an index fund portfolio. Vanguard was the only one stop shop I found that would do this.

Schwab would serve as administrator and let you pick from advisors on the Schwab network for investment management. But Schwab would not help find low cost, index fund managers. Yes I did ask Schwab whether they could help with this. Yes, Schwab did say no. Later Schwab got into the one stop shop business, serving as administrator and investment advisor. But as far as I could tell, not for a 3-fund portfolio.
afan, I am still in the process of working out these issues in my estate plan. May I ask a couple of follow up questions?

-You state that Vanguard was willing to discuss investing in index funds. How far were they willing to go with this? Were there other issues that made you decide against going this route with Vanguard?
-When did Schwab say no to this issue? If it was not recently, I may broach this with them.

Thank you in advance for any information.

Luckywon

Lucky,

It was the same sort of conversation as when Vanguard pitches its PAS or gives recommendations in the free annual financial plan. All I have ever seen is index funds. When I have had them generate a plan I start by showing how my money is invested now and they have not suggested a fund of funds of futures on options on hedge funds debt or any other crazy ideas. They don't propose any changes to what I have.

When I told them how the trust is invested now they said they would maintain that. They did say they would review the beneficiary's situation to make sure the risk/return characteristics were appropriate, which is what a trustee should do.

Schwab was frank about how the business operates. They have relationships with thousands of investment management firms in their advisor network and a handful of firms that Schwab will propose when asked about management. Schwab makes money on these relationships.

They make more money of course from the larger firms that charge higher fees and engage in active management. To cooperate in a search for the lowest cost index manager would threaten the relationships with the more profitable companies.

If I found on my own a company that would run a 3 fund portfolio for $2k then Schwab would be happy to do the, minimal, administration work. But to direct clients to such a shop would be crazy Schwab's point of view.

I have not talked to them since they opened their own one stop shop. I read the information they post online and did not see an all index option. By that time I had been running the trust myself long enough to realize I did not need any help.

With the rusty old trust business gradually entering the 20th century, I an hoping it becomes more useful by the time I actually need it.

My successors are perfectly capable of running the trust themselves. The option of hiring a corporate trustee would be to relieve them of the hassle. The goal of avoiding hassle is not likely to be advanced by having two independent companies involved. So, for now, that would most likely be Vanguard.
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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Re: Trust Investment Policy Statement

Post by afan » Sun Aug 12, 2018 9:01 am

If I were in the market for a trustee now I would contact Vanguard and Schwab and see how they reacted to a binding commitment to an all index 3 fund portfolio.

With Vanguard, even if they will not commit to it, I suspect that is close to what I would get. With Schwab, I have not checked lately so I don't know how they invest. They would use Schwab mutual funds and collect the expense ratios on top of the trustee fees. But I don't know whether they will stick with the low cost funds.
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Re: Trust Investment Policy Statement

Post by FIREchief » Sun Aug 12, 2018 12:29 pm

afan wrote:
Sun Aug 12, 2018 9:01 am
If I were in the market for a trustee now I would contact Vanguard and Schwab and see how they reacted to a binding commitment to an all index 3 fund portfolio.
Hopefully somebody will do this and report back. I am really curious what VG would say.
With Vanguard, even if they will not commit to it, I suspect that is close to what I would get.


Without a legal requirement, I would not share your confidence. If they won't commit to it in a binding manner, I would expect the worst (which is the largest revenue generator for VG). The fact that they sell PAS to the living suggests to me that they would take it as far as they could after death. These are businesses, for-profit and non-profit alike.
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 Investment Policy Statement

Post by FBN2014 » Sun Aug 12, 2018 1:52 pm

FIREchief wrote:
Sun Aug 12, 2018 12:29 pm
afan wrote:
Sun Aug 12, 2018 9:01 am
If I were in the market for a trustee now I would contact Vanguard and Schwab and see how they reacted to a binding commitment to an all index 3 fund portfolio.
Hopefully somebody will do this and report back. I am really curious what VG would say.
With Vanguard, even if they will not commit to it, I suspect that is close to what I would get.


Without a legal requirement, I would not share your confidence. If they won't commit to it in a binding manner, I would expect the worst (which is the largest revenue generator for VG). The fact that they sell PAS to the living suggests to me that they would take it as far as they could after death. These are businesses, for-profit and non-profit alike.
The lowest cost that I have found to have a directed trustee and a separate portfolio manager is approximately 1% combined. This excludes the expense ratio fees for the index funds and ETFs that would be in the portfolio. Additional fees may be charged by the trustee for services associated with other tasks, such as related to maintaining or selling real estate assets. I suspect as time goes by that the trustee industry could push costs lower as the use of technology becomes more widespread as it has with the advent of robo advisors.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

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Re: Trust Investment Policy Statement

Post by FIREchief » Sun Aug 12, 2018 4:25 pm

FBN2014 wrote:
Sun Aug 12, 2018 1:52 pm
The lowest cost that I have found to have a directed trustee and a separate portfolio manager is approximately 1% combined. This excludes the expense ratio fees for the index funds and ETFs that would be in the portfolio. Additional fees may be charged by the trustee for services associated with other tasks, such as related to maintaining or selling real estate assets. I suspect as time goes by that the trustee industry could push costs lower as the use of technology becomes more widespread as it has with the advent of robo advisors.
Thanks for sharing that. This about what I would expect in today's market. Unfortunately, there probably just isn't a big enough group of trust granting Bogleheads to really create an attractive market. If there were one million Boglehead investors who wanted trustees to just invest in index funds, then we might see a shift to a more attractive (for us) business model. A one million dollar trust written to require only index investing could generate $5000 per year for a trustee at a 0.5% fee. $5000 is a pretty good payout for a couple hours of work each year (hire somebody to prep the tax return, make monthly or quarterly distributions to beneficiaries, rebalance an index portfolio). Unfortunately, as long as each independent trustee or trust company is only getting requests from you, me and afan; we're likely just perceived as noise (and also as customers who will ultimately just hire them under their normal, more profitable, business model).
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 Investment Policy Statement

Post by Luckywon » Mon Aug 13, 2018 12:12 am

afan wrote:
Sun Aug 12, 2018 8:49 am
Lucky,

It was the same sort of conversation as when Vanguard pitches its PAS or gives recommendations in the free annual financial plan. All I have ever seen is index funds. When I have had them generate a plan I start by showing how my money is invested now and they have not suggested a fund of funds of futures on options on hedge funds debt or any other crazy ideas. They don't propose any changes to what I have.

When I told them how the trust is invested now they said they would maintain that. They did say they would review the beneficiary's situation to make sure the risk/return characteristics were appropriate, which is what a trustee should do.

Schwab was frank about how the business operates. They have relationships with thousands of investment management firms in their advisor network and a handful of firms that Schwab will propose when asked about management. Schwab makes money on these relationships.

They make more money of course from the larger firms that charge higher fees and engage in active management. To cooperate in a search for the lowest cost index manager would threaten the relationships with the more profitable companies.

If I found on my own a company that would run a 3 fund portfolio for $2k then Schwab would be happy to do the, minimal, administration work. But to direct clients to such a shop would be crazy Schwab's point of view.



I have not talked to them since they opened their own one stop shop. I read the information they post online and did not see an all index option. By that time I had been running the trust myself long enough to realize I did not need any help.

With the rusty old trust business gradually entering the 20th century, I an hoping it becomes more useful by the time I actually need it.

My successors are perfectly capable of running the trust themselves. The option of hiring a corporate trustee would be to relieve them of the hassle. The goal of avoiding hassle is not likely to be advanced by having two independent companies involved. So, for now, that would most likely be Vanguard.
afan wrote:
Sun Aug 12, 2018 9:01 am
If I were in the market for a trustee now I would contact Vanguard and Schwab and see how they reacted to a binding commitment to an all index 3 fund portfolio.

With Vanguard, even if they will not commit to it, I suspect that is close to what I would get. With Schwab, I have not checked lately so I don't know how they invest. They would use Schwab mutual funds and collect the expense ratios on top of the trustee fees. But I don't know whether they will stick with the low cost funds.
afan,

Thanks! I am trying to restructure my estate plan with an eye on how to handle the case of my disability (which i fear more than death!). What I have come up with, since I have no children, is that I will have a Corporate Trustee and will nominate a friend to serve as a Trust Protector and Medical Power of Attorney. Possibly, that friend may also hire a Professional Fiduciary (I am in California) to manage my day to day needs/medical care. Based on your information, I will investigate further whether Vanguard and Schwab are amenable to acting as a directed trustee working with a low cost passive advisor. Thank you so much!!

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Re: Trust Investment Policy Statement

Post by afan » Mon Aug 13, 2018 7:01 am

Lucky,

The last time I looked, which was several years ago, Vanguard would only serve as trustee if it also managed the investments.

At that time Schwab would only serve as trustee if you had a firm in their advisor network as investment manager. Schwab will now serve as one stop shopping trustee and investment manager,. I assume, but have not checked, that they will still work with members of their advisor network as manager while Schwab does the administration.

FBN,

When I was looking I found combinations of administrative trustee and outside investment manager that would be way less than 1%. At that time I looked at two investment managers that would run simple index portfolios for a flat fee. One was 2k, the other said the price would depend on exactly what was in the trust and what they had to manage, but not more than 5k. I found companies that would do the administration for under 0.5%. So the cost would have been nothing close to 1% altogether.

By the time I learned about the directed trustee route I was running out of interest in hiring a trustee at all. The whole process was worse than pulling teeth. If you wanted a shiny brochure filled with pictures of prosperous older people beaming at their grandchildren under the watchful eyes of trust officers, they had those to spare. If you wanted straight answers to simple questions about costs and services you had to corner them in a dark alley.

I definitely liked the flat fee approach since it costs no more to hold $2M of index funds than $1M,. However, the flat fee advisors I found were tiny operations and I was not at all ready to assume they would be around for the long term. I did not want to leave successor trustees forced to find another company. The whole point of a corporate trustee was to reduce hassle.

There are some traditional banks and trust companies that will serve as administrator while some other entity does the investing. Finding that out took about an hour on the phone with each company. They wanted me to make an appointment to come in and talk. In the 21st century! Something that should have taken 5 minutes at a computer was going to take 3 hours between getting to their office, having a meeting and getting back to work.

It was insane. Not only would they not simply post services and fees online (again, lots of pretty pictures) but I needed tongs to pull the information out over the phone.

That lead me to wonder what I would be setting my successors up to tolerate. If they make it that hard to hire them, what must it be like to have to work with them?

But if you want to chase this option, I would start by asking your estate planning attorney for suggestions. They should know of at least some companies that would be interested in a trust of your size and that would work with you on investment management or directed trustee.

My overall impression was of an industry that was fighting tooth and nail to remain in the 19th century. It had seen what Vanguard had done to retail money management and it had no interest in competing on price.
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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Re: Trust Investment Policy Statement

Post by afan » Mon Aug 13, 2018 3:40 pm

A few other points.

Gill, who spent his career as a trust officer, brings an expertise that none of us can match. He shopped for trustees as about as educated a consumer as it is possible to be. He concluded that he wanted Vanguard. That carries a lot of weight, coming from someone qualified to evaluate aspects of the relationship that I know nothing about.

To an extent, I hope, my frustrations arose because I was looking for a trustee for a relatively small trust. Well above the minimums for these banks but still small.

Say you brought to a bank a relationship that, considering assets owned outright, in various trusts and rolled over retirement accounts, totalling $20M. The experience, at least at some places, would be entirely different. Then the fees as a percentage of assets would be well under 1%. Everything would be negotiated. You would describe what assets you had and how you wanted them managed. The bank would look at the situation, the exposure to disgruntled beneficiaries and remainder people, the nature of the assets (marketable securies vs privately held businesses) and other factors on which Gill could expound. Based on that the bank would estimate what it would cost them and give you a proposal that was competitive with other banks and gave them a profit.

The expenses would not necessarily be higher than Vanguard if all they had to do was manage a simple portfolio of mutual funds. Such a bank would also be able to manage real estate, which Vanguard will not, and investments other than securities. If you needed these capabilities you would have to go to a traditional bank.

The trust I was managing was nowhere close to this size and it held only mutual funds. So I did not need a trustee who could do more and I was mainly interested in price and services for the beneficiary.
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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Re: Trust Investment Policy Statement

Post by afan » Mon Aug 13, 2018 3:55 pm

Another point.
If your estate plan will lead to creation of irrevocable trusts on your death, you may want to consider where (what state) they will be. You will have the option to make them based in states with no income taxes. The laws around this, like everything else, are complicated and you will need someone who knows what they are doing. But avoiding state income taxes is a simple way to increase the returns to the trust with no increase in investment risk. Depending on the laws applicable, if you pay income out to beneficiaries then it would taxed to them at their state rates, if any. But money that remained in the trusts or that was paid to beneficiaries who lived in states without income taxes on such income could save a lot.

I don't know how much freedom you would have to choose situs with Vanguard. Schwab, I think, offers Nevada and maybe Delaware, which have no income taxes. These states and others are also good for asset protection.

Although the bank down the street might have friendly trust officers, choosing an in state bank if it has an income tax could be very costly.
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Re: Trust Investment Policy Statement

Post by CaliJim » Mon Aug 13, 2018 4:07 pm

Here are some snips from the IPS we included as an appendix to our trust docs. We had it reviewed by the bank's trust department.

"Purpose

The purpose of this document is to set investment guidelines to be followed by the Trustee and any investment managers involved in the administration of the xxxxxxxxx Trusts. The intention is to establish parameters for administering investments in such a way as to achieve total returns that are close to market index averages for the given asset allocation, with minimal administrative expenses.

Investment Philosophy

1. Buy and hold market index funds (keep turnover low)
2. Use only passively managed indexed mutual funds and ETFs
3. Diversify broadly (minimize non-systemic risk)
4. Keep costs low (minimize fund expense ratios, minimize administrative fees)
5. Avoid speculation (ie: no options and futures trading)
6. Avoid reacting to fear, greed, current events, political and economic news
7. Minimize taxes
8. Eliminate ‘stock picking’ and ‘market timing’
9. Eliminate chasing past performance
10. Avoid active investment management
11. Avoid investments with high expense ratios, fees, front or back end charges.
12. Minimize investment management expenses other than minimal mutual fund fees

Investment Goals

In accordance with the investment philosophies above,

• Exceed the retirement income needs of the primary beneficiaries (xxxxxxxxxx) during their lifetimes, and provide basic income support, as needed, for the Secondary Beneficiaries (xxxxxxxxx).

• Assure portfolio longevity for the eventual distribution of assets to the secondary beneficiaries


Risk Taking: Moderate to Conservative

General Asset Allocation Targets 50% Risky Assets (ie: Stocks) / 50% Fixed Income (ie: Bonds)

US Equity: 30%
International Equity: 20%

Long Term Fixed Income: 0%
Intermediate Term Fixed Income: 40%
Short Term Fixed Income and Cash: 10%

Rebalancing

Rebalancing activity shall be minimized as much as possible, generally occurring when holdings exceed +/- 5% of targets, or when the asset allocations change significantly.

Rebalancing needs should be considered when planning to sell securities to meet cash withdrawal needs.

Trustee and Investment Manager Discretion

The Trustee shall take care to plan for the lifetime financial needs of the primary beneficiaries.

In times of severe portfolio stress (ie: high projected withdrawal rates, extremely adverse market conditions, etc) the Trustee may deviate temporarily from asset allocation targets for the defensive purpose of asset protection only (and not for the speculative purpose of improving returns.)

To avoid buying into a market sell-off during inevitable market downturns, the trustee may, in times of high market volatility, allow Risky Assets (equities, real estate, high yield bonds) to temporarily fluctuate outside the normal asset allocation range, and gradually rebalance back to the target asset allocation range over 12 to 24 months.

The assets allocated to risky equity investments may be diminished in the later years of xxxxxxxxxxxx lifetimes if doing so is needed to improve the probability of adequately supporting their projected lifetime expenses.

Longevity Insurance

In the unfortunate event of projected portfolio failure (ie: the projection that the portfolio value may be insufficient to protect the long-term retirement income needs of xxxxxxxx) the Trustee may, if in the best interest of the beneficiaries, liquidate all or part of the Trust’s investment portfolio in order to purchase one or more Single Premium Immediate Annuities (SPIA) on behalf of the primary beneficiaries. No other forms of annuities (variable, deferred, equity indexed, etc) should be considered."
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Re: Trust Investment Policy Statement

Post by FIREchief » Mon Aug 13, 2018 4:22 pm

CaliJim wrote:
Mon Aug 13, 2018 4:07 pm
Here are some snips from the IPS we included as an appendix to our trust docs. We had it reviewed by the bank's trust department.
What did the bank's trust department say? Did they have it reviewed by their legal department? Did they provide any formal response (written or otherwise)?

Does your trust fomally refer to this appendix (i.e. is it officially part of the trust document)?
Last edited by FIREchief on Mon Aug 13, 2018 5:02 pm, edited 1 time in total.
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Re: Trust Investment Policy Statement

Post by CaliJim » Mon Aug 13, 2018 4:36 pm

FIREchief wrote:
Mon Aug 13, 2018 4:22 pm
CaliJim wrote:
Mon Aug 13, 2018 4:07 pm
Here are some snips from the IPS we included as an appendix to our trust docs. We had it reviewed by the bank's trust department.
What did the bank's trust department say? Did they have it reviewed by their legal department? Did they provide any formal response (written or otherwise)?

Does you trust fomally refer to this appendix (i.e. is it officially part of the trust document)?
I got a 'verbal' that it was acceptable from the successor trustee (bank trust dept). I don't know if their 'legal' reviewed it.

It IS formally referred to in the trust document.

"INVESTMENTS: The trustee may, in keeping with the intentions delineated in the
Investment Policy Statement attached hereto as Exhibit "A", in the trustee's discretion, invest and
reinvest trust funds in every kind of property...blah blah blah"

It's all "intentions" and "guidelines", it gives 'discretion'. It is not 'requirements'. It doesn't name funds that may or may not exist in 10 or 20 years. It tightens the belt a bit on them without putting them in a corset or dictating how to invest in some future unforeseen unusual circumstance. It is intended to give beneficiaries something to grab on to if they need to ask a court to review how well the trustee is carrying out their fiduciary duties. But it is not so restrictive that bank would decline to act as a commercial trustee.
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Re: Trust Investment Policy Statement

Post by FIREchief » Mon Aug 13, 2018 5:17 pm

CaliJim wrote:
Mon Aug 13, 2018 4:36 pm
FIREchief wrote:
Mon Aug 13, 2018 4:22 pm
CaliJim wrote:
Mon Aug 13, 2018 4:07 pm
Here are some snips from the IPS we included as an appendix to our trust docs. We had it reviewed by the bank's trust department.
What did the bank's trust department say? Did they have it reviewed by their legal department? Did they provide any formal response (written or otherwise)?

Does you trust fomally refer to this appendix (i.e. is it officially part of the trust document)?
I got a 'verbal' that it was acceptable from the successor trustee (bank trust dept). I don't know if their 'legal' reviewed it.

It IS formally referred to in the trust document.

"INVESTMENTS: The trustee may, in keeping with the intentions delineated in the
Investment Policy Statement attached hereto as Exhibit "A", in the trustee's discretion, invest and
reinvest trust funds in every kind of property...blah blah blah"
Thanks for the response. I'm guessing that the use of the word "may" instead of "shall" gives the bank's trust department whatever wiggle room they might want (as is typical of most legal documents). In the absence of the word "shall," the trust document probably won't supersede the prudent investor rule; which will likely allow the independent trustee to safely invest in whatever the bank's trust department normally uses.
It's all "intentions" and "guidelines", it gives 'discretion'. It is not 'requirements'. It tightens the belt a bit on them without putting them in a corset or dictating how to invest in some future unforeseen unusual circumstance.


It may not accomplish any "tightening" at all if it is not a clear requirement. That is the challenge we're dealing with in this thread. See my prior posts linking to the uniform trust code and the prudent investor act.
It doesn't name funds that may or may not exist in 10 or 20 years.
I don't believe that anybody has advocated requiring any specific fund by name. That would clearly be overkill, although perhaps better than nothing at all if an independent trustee was really bad.
It is intended to give beneficiaries something to grab on to if they need to ask a court to review how well the trustee is carrying out their fiduciary duties. But it is not so restrictive that bank would decline to act as a commercial trustee.
This may or may not work. To your point, it is likely better than nothing, but if it gets to the point where the beneficiaries have to pay money to hire a lawyer (and the trustee can rightfully spend trust funds defending themselves), it has already gone way too far. Unless the trust clearly supersedes them, your state's prudent investor rules would likely override any trust "suggestions" and provide a simple and easy defense for the trustee.

(see my signature)
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Re: Trust Investment Policy Statement

Post by Luckywon » Mon Aug 13, 2018 8:42 pm

This morning I spoke to the Trust Departments at Schwab and Vanguard. A few points I gleaned:

-Both Vanguard and Schwab profess to have a strong preference to invest in low cost passive index funds/ETFs. They would both be amenable to guidance within the Trust documents (as long as it is not too controlling) in the Trust documents, although it would be vetted by their legal department. They do manage Trusts with holdings other than low cost index funds, as often the Trusts come with such holding and they have to consider tax implications and the implied or stated preferences of the grantor.

-Vanguard requires that, if trustee, it act as both trust administrator and investment manager. Schwab would be able to act as trust administrator alone with another company as portfolio manager. (I did not ask whether Schwab's fee schedule would go down in that case.) In any case, after speaking with both companies, my sense is that either company would manage my portfolio in a manner consistent with my investment preferences and I would not be interested in nominating a separate portfolio manager.

-Vanguard will not accept administration of a Trust that includes real estate. Schwab would ($3000/property). I asked bu still not quite clear on what the options would be if you were to have a continuing Trust with real estate but it would be something along the lines of the property being sold (Vanguard would not even handle the sale) or administrated by another entity reporting to Vanguard.

-Schwab Trust company is located in Nevada, which may be beneficial for some Trusts, and would never be detrimental, per the Trust officer I spoke with.

-Vanguard pointed out that it would be highly advisable to either nominate several alternate successor trustees or have a trust protector with power to appoint a new trustee. This because, per Vanguard, even if the trust documents are deemed acceptable initially, Vanguard may decline to accept the role of successor trustee at the time it is called upon to actually become trustee. I was told there are many reasons Vanguard may decline but the example given was that if Vanguard deems your incapacity is likely temporary Vanguard will decline to become trustee. Vanguard is not interested in assuming the role of trustee if it does not think it will remain trustee until termination of the Trust. The trust officer at Vanguard told me this is an industry standard for most large banks, but that a smaller local trust company may be willing to accept the role of successor trustee under such circumstances.

-Schwab Trust Services was very easy to reach, with a trust officer answering quickly following one telephone transfer. Vanguard required a message to be left which stated that "their goal was to respond to all messages within 3-5 business days". I was actually called back about 3 hours later by Vanguard.

Sorry for such randomness and not sure whether this helps OP or anyone in this thread but thought I would share everything I learned.

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Re: Trust Investment Policy Statement

Post by FIREchief » Mon Aug 13, 2018 8:52 pm

Luckywon wrote:
Mon Aug 13, 2018 8:42 pm
This morning I spoke to the Trust Departments at Schwab and Vanguard. A few points I gleaned:

-Both Vanguard and Schwab profess to have a strong preference to invest in low cost passive index funds/ETFs. They would both be amenable to guidance within the Trust documents (as long as it is not too controlling) in the Trust documents, although it would be vetted by their legal department.
Thanks for the report Luckywon. I don't really understand what would constitute "too controlling," although that would very likely be up to their legal department. That's probably much better than butting up against some blanket corporate policy. Hopefully, one of these days, we'll receive an actual report of Vanguard acting as current trustee and investing in 100% index funds. I've yet to see such a report.
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Re: Trust Investment Policy Statement

Post by CaliJim » Mon Aug 13, 2018 8:54 pm

FIREchief wrote:
Mon Aug 13, 2018 5:17 pm
This may or may not work.
Thanks. I get it.

I was torn between making the language too restrictive, in which case the commercial trustees would decline to serve, and giving no guidance what-so-ever, which is like throwing money into the wind.

With any luck... we will live long enough that our scion will be fully mature and able to handle a windfall without the successor trustees getting involved.
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Re: Trust Investment Policy Statement

Post by FIREchief » Mon Aug 13, 2018 10:15 pm

CaliJim wrote:
Mon Aug 13, 2018 8:54 pm
I was torn between making the language too restrictive, in which case the commercial trustees would decline to serve, and giving no guidance what-so-ever, which is like throwing money into the wind.

With any luck... we will live long enough that our scion will be fully mature and able to handle a windfall without the successor trustees getting involved.
That is the conundrum. I don't think we know, and until we see some reports of success, we likely won't.

I think your second comment is spot on. Any time that an adult beneficiary is responsible and understands the value of both long term investment and asset protection, the game is likely close to "won" (assuming that the trust is written correctly). I hope my heirs are never put into a situation where an independent trustee is charging a trust and investing in expensive, non-Boglehead investments. Unfortunately, that appears to be the default outcome in far too many situations.
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Re: Trust Investment Policy Statement

Post by afan » Tue Aug 14, 2018 10:15 am

Calijim,
This is very helpful. I hope Gill or bsteiner will comment on the likely effect of that investment language.

If it were me, I might have worded the prohibition on options and futures a bit differently. Index funds use these routinely to better match their benchmarks. One would not want to come up with something that could make it impossible to invest in an index fund.

Delighted to hear that the bank gave an informal OK to the language. Did you propose this to more than one bank? Would you be willing to say which one?

If Schwab will go an all index portfolio for slightly less than Vanguard then this would be a good alternative.

Lucky,

Did Vanguard say what would be the situs of the trust?

Did either of you discuss just what services the trustee would perform? I was looking for a trustee who would handle all financial needs of an elderly beneficiary. Pay routine bills, renew insurance, and so forth. Not an issue for young adults who may not be ready to make big financial decisions but who are quite capable of paying their rent.
Last edited by afan on Wed Aug 15, 2018 3:21 pm, edited 1 time in total.
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Re: Trust Investment Policy Statement

Post by Luckywon » Tue Aug 14, 2018 8:49 pm

FIREchief wrote:
Mon Aug 13, 2018 8:52 pm


Thanks for the report Luckywon. I don't really understand what would constitute "too controlling," although that would very likely be up to their legal department. That's probably much better than butting up against some blanket corporate policy. Hopefully, one of these days, we'll receive an actual report of Vanguard acting as current trustee and investing in 100% index funds. I've yet to see such a report.
FIREchief,

The trust officer I spoke with said that the concern would be language in the Trust that may conflict with their fiduciary duties as Trustee. For example, an inappropriate asset allocation or other restriction on their ability to manage risk. Restriction on their ability to manage tax considerations. It sounded very reasonable. But you are right, the proof will be in the pudding.

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Re: Trust Investment Policy Statement

Post by Luckywon » Tue Aug 14, 2018 9:07 pm

afan wrote:
Tue Aug 14, 2018 10:15 am

Lucky,

Did Vanguard say what would be the situation of the trust?

Did either of you discuss just what services the trustee would perform? I was looking for a trustee who would handle all financial needs of an elderly beneficiary. Pay routine bills, renew insurance, and so forth. Not an issue for young adults who may not be ready to make big financial decisions but who are quite capable of paying their rent.
afan,

Not sure I understand your question "Did Vanguard say what would be the situation of the trust?" Could you elaborate?

Regarding what services the trustee would perform, my discussion was limited. For me, if I died, the Trust would disburse assets and terminate. If I was incapacitated, the Trust would continue and funds would be used to pay for my care. I would have a medical power of attorney/trust protector who would hire a professional fiduciary to manage my care on a day to day basis. Vanguard said that as trustee they would assign a trust officer to work with these individuals to disburse funds as provided in the Trust. Vanguard did say they would prepare tax returns for the Trust (if needed, see my next paragraph). Beyond that, I did not discuss what services they would provide. It sounds like you and I would be using the Trust for different purposes so I am not sure I got much information in this regard relevant to you.

An point regarding taxes was brought up by Schwab. Schwab Trust Services would prepare tax returns for the Trust if they became trustee upon my death, in which case the Trust would get its own tax ID number and be required to file returns. If I was still alive, tax returns would not need to be filed as the Trust would not have its own tax ID number. I would need to file personal returns and the normal arrangement would be that an accountant be engaged to prepare these and my power of attorney would sign.

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Re: Trust Investment Policy Statement

Post by FIREchief » Tue Aug 14, 2018 10:54 pm

Luckywon wrote:
Tue Aug 14, 2018 8:49 pm
FIREchief wrote:
Mon Aug 13, 2018 8:52 pm


Thanks for the report Luckywon. I don't really understand what would constitute "too controlling," although that would very likely be up to their legal department. That's probably much better than butting up against some blanket corporate policy. Hopefully, one of these days, we'll receive an actual report of Vanguard acting as current trustee and investing in 100% index funds. I've yet to see such a report.
FIREchief,

The trust officer I spoke with said that the concern would be language in the Trust that may conflict with their fiduciary duties as Trustee. For example, an inappropriate asset allocation or other restriction on their ability to manage risk. Restriction on their ability to manage tax considerations. It sounded very reasonable. But you are right, the proof will be in the pudding.
Thanks. I believe that this is what he said but I don't believe it is accurate, unless your state has some laws that differ significantly from the Prudent Investor Act, which clearly states:
(b) The prudent investor rule, a default rule, may be expanded, restricted,
eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to
a beneficiary to the extent that the trustee acted in reasonable reliance on the
provisions of the trust.
I'm not a lawyer, but that text seems to clearly state that as long as a trustee follows the provisions of the trust, they will not be liable for any claims of "mismanagement." If a trust states 100% bonds, or 100% stocks, and the trustee follows that, then they can't be accused of an inappropriate asset allocation. I suspect that trust officers who say things like this don't really understand what their state's laws require or are just pushing back against an arrangement that will limit their firms ability to generate revenue. Perhaps a combination of both.

Regardless, it does serve to reinforce the position that, without clear investment directions within the trust document itself, most/all independent trustees will likely just ignore any "recommendation" and follow whatever standard practices that their firm uses.

I am aware of one real world situation where a trust protector had to alter the investment terms of a trust in order for a chosen independent trustee to agree to serve. As others have suggested, requiring "Boglehead" investing might severely limit the options for an independent trustee. That doesn't mean it is the wrong approach, just that this business isn't what we would like it to be.
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Re: Trust Investment Policy Statement

Post by Luckywon » Wed Aug 15, 2018 12:07 am

FIREchief wrote:
Tue Aug 14, 2018 10:54 pm


Thanks. I believe that this is what he said but I don't believe it is accurate, unless your state has some laws that differ significantly from the Prudent Investor Act, which clearly states:
(b) The prudent investor rule, a default rule, may be expanded, restricted,
eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to
a beneficiary to the extent that the trustee acted in reasonable reliance on the
provisions of the trust.
I'm not a lawyer, but that text seems to clearly state that as long as a trustee follows the provisions of the trust, they will not be liable for any claims of "mismanagement." If a trust states 100% bonds, or 100% stocks, and the trustee follows that, then they can't be accused of an inappropriate asset allocation. I suspect that trust officers who say things like this don't really understand what their state's laws require or are just pushing back against an arrangement that will limit their firms ability to generate revenue. Perhaps a combination of both.

Regardless, it does serve to reinforce the position that, without clear investment directions within the trust document itself, most/all independent trustees will likely just ignore any "recommendation" and follow whatever standard practices that their firm uses.

I am aware of one real world situation where a trust protector had to alter the investment terms of a trust in order for a chosen independent trustee to agree to serve. As others have suggested, requiring "Boglehead" investing might severely limit the options for an independent trustee. That doesn't mean it is the wrong approach, just that this business isn't what we would like it to be.
Point well taken. I think the examples he gave were not great and I am sure you are correct that Schwab would be largely shielded from liability as long as it followed the provisions of the Trust. However, I can imagine that trusts may be poorly drafted and contain provisions and directives that a corporate trustee would not be wise to accept, so I am sympathetic to their assertion that they must review each Trust's investment directives. I agree wholeheartedly that Schwab's real motives and priorities with respect to such reviews are an unknown to us. And, even if elucidated through some real life reports, they may not be consistent or may change in the future. So regardless of what we hear now about their policies, a trust protector who can appoint a new successor trustee if necessary seems a prudent safeguard.

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Re: Trust Investment Policy Statement

Post by CaliJim » Wed Aug 15, 2018 1:44 pm

afan wrote:
Tue Aug 14, 2018 10:15 am
...Index funds use these routinely to better match their benchmarks. One would not want to come up with something that could make it impossible to invest in an index fund....Did you propose this to more than one bank?
Thanks for the suggestion.

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Re: Trust Investment Policy Statement

Post by afan » Wed Aug 15, 2018 3:28 pm

I meant the "situs" of the trust. Autocorrect did not like that, so changed it to situation.

Did Vanguard discuss the situs of the trust?
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