Independent Trustee Actively Managing Trust Account

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afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 6:42 am

celia wrote:
Wed Nov 29, 2017 12:30 am
For a different perspective, I was a trustee and beneficiary of a (childless) relative's trust (and had medical POA). It was a LOT of work, I had a full time job, a family to support, and the relative was sick for several years before passing away. The hardest part was obtaining and following up on the relative's health care. Next hardest was maintaining, clearing out, and selling the property they owned, the third hardest was working with a lawyer to go to court to let a judge decide who the beneficiaries were (the trust had been amended several times, the last time incorrectly).

Investments were simplified and mostly moved to Vanguard. That was the easy part. I never took a fee since I didn't know how long the relative might live. But it felt like a second full time job some days.
But almost none of that work was due to investing the assets of the trust and managing distributions to the beneficiary. That is all the trustee in this post is doing. The trustee in this post has nothing to do with the beneficiary's health care. The trust owns only marketable securities (apparently). There is no house to clear out or real estate to sell. There is no judge involved since all that stuff was taken care of when the testator died. Doing all these other things would take time and a business would charge for this work. If the bank did have to do this I am sure its fee would be more than 1%.

In my period of shopping for corporate trustees I found several that claimed they would handle work of this sort, but this was NOT included in their standard AUM fee. Some would negotiate an all encompassing fee, which was going to be a LOT higher. Others would charge their regular fee for doing almost nothing, then do itemized charges for anything else.

As best we can tell, there are no distributions to the beneficiary. All the trustee here is doing is sitting on a portfolio, actively managing it and charging a lot for this service.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 7:09 am

And to repeat:

An independent trustee need not be a corporate trustee. Sometimes either the legal relationships within the trust, or the capacity of the individuals involved makes a corporate trustee the best choice. But as bsteiner and Gill have explained elsewhere "independent" is a legal term with a specific meaning. Corporate trustees usually qualify as independent. Individuals may or may not be independent. Many trusts use people who are not professional trustees as their independent trustees.

From what the OP has written, it sounds like the trust requires an independent trustee. Not entirely clear on this, but it would make sense. However, nothing quoted would require a corporate trustee. Perhaps there is something in the will that mandated that but not from what we have seen.

To the OP: bsteiner gave you good advice about decanting to a trust that will remain in effect throughout your life. If you can make this happen then you can also arrange more flexibility in the trustee and get lower costs and a more rational portfolio. Because you are almost always better off having this money in trust rather than owning it outright, it would be best to make the change before you turn 25 and get the first distribution.

Doing this could take some time. You will have to figure out who can make these changes, hire an estates and trust attorney to guide you through the process and have the assets transferred to the new trustee. The first distribution occurs at 25. If I were you I would not wait past your age 23.5 to get started.

Among other problems you may face
As you have seen from Gill and bsteiner, estates and trusts attorneys may not find what the bank is doing and charging to be unusual or inappropriate.

At your young age, you may find it hard to get the attorney to take you seriously. If you hire an attorney I suggest you be as clear as you can that you do NOT want the money distributed to you. Instead, you want the trust to remain throughout your life and you want to save money on administration and investment.

The attorney should understand the desire to keep the trust in existence, but they may be surprised to here that you consider active management and 1% fees to be problems.

If the other people who can change trustees are older it would help a lot to have them as involved as possible in the discussions with the attorney.

An estates and trusts attorney who is qualified to handle this will charge hundreds of dollars an hour. Exactly how much seems to depend on location. Much more in Manhattan than in a lower cost of living location, for example. You need to make sure you have enough money to pay them since you may not be able to count on the current trustee to pay the bills.

I have no idea how much time it would take an attorney to review the terms of the trust, identify who can change trustees and what they have to do, discuss with those people the process and prepare the document to decant the trust. Ten hours, maybe?? bsteiner should be able to provide a guess about the hours involved.
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

daveydoo
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Re: Independent Trustee Actively Managing Trust Account

Post by daveydoo » Wed Nov 29, 2017 12:27 pm

Gill wrote:
Tue Nov 28, 2017 8:46 pm
daveydoo wrote:
Tue Nov 28, 2017 8:37 pm
trustquestioner wrote:
Tue Nov 28, 2017 1:38 pm
Many seem to be expressing an attitude that confirms suspicions regarding corporate trustees. Beneficiaries are greedy brats, good thing the old man hired the bank to save them from themselves.

34 individual stocks is terrible management, period. The OP is completely justified in wanting it simplified and changed. And don't assume "that's how the trustor wanted it." Rich people aren't usually trust experts (or investment experts, for that matter), and often rely on their lawyers, who can suffer from selective disclosure of their potential conflicts of interest.
+1. The OP makes good points and they all center on how these assets are invested and managed -- and not how he/she can get a piece of this. Wasting 1% annually for decades is not something that any BH would tolerate. Plus, I suspect that this is 1% for the management plus a high-ER for 34 funds that participate in revenue-sharing with the custodian. The latter part is just a guess, but why would a self-serving custodian leave money on the table? :D
Daveydoo, you’re a bit wide of the mark. No trustee would hold 34 funds. That’s 34 individual securities. Furthermore, a trustee can’t self deal by collecting fees on funds in which it invests. If it does receives fees on self managed funds it is required to reduce its fee accordingly. This is a trustee, not a custodian. Are you familiar with the difference?

Gill
OP said: "In the last statement I counted 34 holdings including individual stocks and two bond funds." I did not infer from this that all 34 holdings were individual stocks.

Are you saying that because the corporate (bank) trustee takes 1% for serving as trustee, that they subtract any ER from their "cut"? :D And if they were to invest in actively-managed international small-cap (for example) that they would pay out-of-pocket for any ER above and beyond 1%? :D

I assumed (perhaps incorrectly) that the corporate trustee and custodian (i.e., where the brokerage account was held) were the same entity -- hence both ultimately benefiting from any revenue-sharing with mutual fund companies. So if TD serves as a corporate trustee, and an asset manager picks a bunch of actively-managed funds, you're telling me that TD crosses out all the ones that they have revenue-sharing arrangements with? Even though these arrangements are not in the public domain? It sounds to me like you have an inflated impression of the integrity of this industry. I assume that trustee takes a cut, asset manager (if there is one) takes a cut, and the investment vehicles take a cut (in the form of ER). Why would this not happen? Apart from VG, are there examples of the financial services industry not maximizing profit at investor expense, unless or until they are constrained by law or competition? :D

And even if the trust held 34 individual stocks (with no opportunity for revenue-sharing with custodian and/or trustee), that is solid evidence of mismanagement, imo; I would not want my life savings or my kids' inheritance jeopardized by a stock-picker.

I have been a trustee, although on a small scale.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Wed Nov 29, 2017 12:32 pm

daveydoo wrote:
Wed Nov 29, 2017 12:27 pm
Are you saying that because the corporate (bank) trustee takes 1% for serving as trustee, that they subtract any ER from their "cut"? :D And if they were to invest in actively-managed international small-cap (for example) that they would pay out-of-pocket for any ER above and beyond 1%? :D
No, I said that if the bank invests in funds managed by that bank they can't double dip. They reduce their trustee fee by the amount they are earning for managing the funds in which they invest.
Gill

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Wed Nov 29, 2017 12:40 pm

daveydoo wrote:
Wed Nov 29, 2017 12:27 pm

It sounds to me like you have an inflated impression of the integrity of this industry.
Hopefully it's a realistic view of the business where I spent a 35-year career. Yes, banks like to make a profit just like anyone else, but as a fiduciary they are held to very high standards which are enforced by internal auditors, independent auditors, state regulators, federal regulators and the courts. When they bank acts in a fiduciary capacity they are held to those standards, i.e., they can't profit through self dealing. What you describe is just that.
Gill

daveydoo
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Re: Independent Trustee Actively Managing Trust Account

Post by daveydoo » Wed Nov 29, 2017 1:15 pm

Gill wrote:
Wed Nov 29, 2017 12:40 pm
When they bank acts in a fiduciary capacity they are held to those standards, i.e., they can't profit through self dealing. What you describe is just that.
Respectfully, no it isn't. By your description, the only excluded instance would be if Vanguard, say, is the corporate trustee and custodian and they are investing trust assets in proprietary Vanguard vehicles. The total Vanguard take -- trust management fee + ER -- is constrained by that pre-specified 1%. If Schwab were the custodian, the trust assets could be in any number of mutual funds that are not Schwab-owned products. Again, do you think the custodian would exclude every other mutual fund company -- since I believe the major custodians have financial arrangements with every fund family on their "no fee" or "low fee" list. And would they not take the $75 fee for trading a security that is not on their preferred list?

The definition of "self-dealing" is sufficiently narrow as to provide no real protection relevant to the OP's concerns.

And "fiduciaries" self-deal all the time. I can't know more about this than you -- I'm an amateur. I've seen this with fee-only advisors who also have arrangements with specific custodians and even fund families. Is Vanguard PAS not a fiduciary? This link to their descriptive brochure says that they are: (https://personal.vanguard.com/pdf/vpabroc.pdf). But do they subtract VG ERs from their 0.3% cut? Do they not self-deal? Smart people create fake (but presumably legal) firewalls and pretend that entities like these are separate. Oh, like the ol' Banc of America arm of Bank of America -- is that one still around? :D

Thank you for clarifying that you have been an industry insider for 35 years.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

NotWhoYouThink
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Re: Independent Trustee Actively Managing Trust Account

Post by NotWhoYouThink » Wed Nov 29, 2017 1:29 pm

Gill, thanks for your expertise and perspective on this and many threads.

At MegaCorp we had government customers who appeared to believe, really believe, that a corporation making a profit on a deal was evil and wrong. Or that only a very small profit was acceptable, and all risk should be carried by the corporation. It was a moral issue with them. Fun times.

I understand that banks have auditors, regulators, and shareholders, and that they have to both cover their cost (including the cost of reporting to all the auditors and regulators) and make a profit.

It's part of the trade-off of naming a financial institution as an independent trustee. You get the security of knowing that they are much less likely to run off with the money than Uncle Fred is (and many people have stories about Uncle Fred and Aunt Sue), and that even if the original trust officer dies of cancer or runs off to Las Vegas there is a suitable replacement available immediately, but you do have to pay for their costs and some earnings, and agree to trust their judgement about investments.

The grantor in this case chose the bank. If the other trustees and voting family members want to change, they probably can. But OP will have to do some research to figure out where they should go (something more specific than "not here") and put together a compelling story for those family members about why his suggestion is superior. And actually listen to their arguments about why it is better to stay with the current trustee. It could be a learning experience.

Carefreeap
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Re: Independent Trustee Actively Managing Trust Account

Post by Carefreeap » Wed Nov 29, 2017 1:39 pm

daveydoo wrote:
Tue Nov 28, 2017 8:37 pm
trustquestioner wrote:
Tue Nov 28, 2017 1:38 pm
Many seem to be expressing an attitude that confirms suspicions regarding corporate trustees. Beneficiaries are greedy brats, good thing the old man hired the bank to save them from themselves.

34 individual stocks is terrible management, period. The OP is completely justified in wanting it simplified and changed. And don't assume "that's how the trustor wanted it." Rich people aren't usually trust experts (or investment experts, for that matter), and often rely on their lawyers, who can suffer from selective disclosure of their potential conflicts of interest.
+1. The OP makes good points and they all center on how these assets are invested and managed -- and not how he/she can get a piece of this. Wasting 1% annually for decades is not something that any BH would tolerate. Plus, I suspect that this is 1% for the management plus a high-ER for 34 funds that participate in revenue-sharing with the custodian. The latter part is just a guess, but why would a self-serving custodian leave money on the table? :D
If you read the OP follow up it's not 34 funds. It's individual stocks and a couple of bond funds. This isn't an unusual set up for a Trust that may have been decades old. Selling blue chip stocks which were purchased many years ago in order to go "all in" for a low cost mutual fund may trigger some substantial tax obligations. DH inherited a similar portfolio. As one of my fellow financial message board posters pointed out, the combination of those individual stocks make up it's own equivalent of a blue chip mutual fund without any monthly expense ratio fees.

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Wed Nov 29, 2017 2:59 pm

daveydoo wrote:
Wed Nov 29, 2017 1:15 pm
Gill wrote:
Wed Nov 29, 2017 12:40 pm
When they bank acts in a fiduciary capacity they are held to those standards, i.e., they can't profit through self dealing. What you describe is just that.
Respectfully, no it isn't. By your description, the only excluded instance would be if Vanguard, say, is the corporate trustee and custodian and they are investing trust assets in proprietary Vanguard vehicles. The total Vanguard take -- trust management fee + ER -- is constrained by that pre-specified 1%. If Schwab were the custodian, the trust assets could be in any number of mutual funds that are not Schwab-owned products. Again, do you think the custodian would exclude every other mutual fund company -- since I believe the major custodians have financial arrangements with every fund family on their "no fee" or "low fee" list. And would they not take the $75 fee for trading a security that is not on their preferred list?

The definition of "self-dealing" is sufficiently narrow as to provide no real protection relevant to the OP's concerns.

And "fiduciaries" self-deal all the time. I can't know more about this than you -- I'm an amateur. I've seen this with fee-only advisors who also have arrangements with specific custodians and even fund families. Is Vanguard PAS not a fiduciary? This link to their descriptive brochure says that they are: (https://personal.vanguard.com/pdf/vpabroc.pdf). But do they subtract VG ERs from their 0.3% cut? Do they not self-deal? Smart people create fake (but presumably legal) firewalls and pretend that entities like these are separate. Oh, like the ol' Banc of America arm of Bank of America -- is that one still around? :D

Thank you for clarifying that you have been an industry insider for 35 years.
Aren't you confusing investment advisors with true fiduciaries, i.e., trustees and executors?
Gill

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 3:18 pm

Gill,

Very interesting. A few questions

What is different about the Vanguard operation that makes management think they can break even or turn a profit while charging much lower rates than traditional banks? Is all the money saved by doing business online and over the phone, without having clients visit physical offices? Or are there other places where Vanguard saves?

For the following assume a bank is charging 1% AUM.

Bank buys a fund that the bank manages. The expense ratios of the fund is 2%. Does the "no double dipping" mean that the bank reduces the expense ratio to zero and charges it's regular 1%, so that the total cost is 1%? Or does the bank keep the expense ratio at 2%, but reduce it's AUM fee to zero so that the total cost is 2%? Or is there some other approach to figuring the total cost?

The bank buys a fund, not managed by the bank, with a 2% expense ratio. Does the bank continue to charge it's 1% while the fund charges 2% and the total cost is 3%?

Bank buys a fund not managed by the bank, with a 2% expense ratio but the fund sends 0.5% to the bank or broker who holds the fund. Does the bank reduce it's AUM fee on this holding to 0.5%, so the total cost is 2.5% rather than 3%?

Bank buys a load fund, say 5%, that sends the load to the bank or broker who sold it. Does the bank subtract the dollar value of the load from it's quarterly fee?

Does the bank take into account the range of costs of mutual funds and favor low cost providers, like 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

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 3:23 pm

Carefreeap wrote:
Wed Nov 29, 2017 1:39 pm

If you read the OP follow up it's not 34 funds. It's individual stocks and a couple of bond funds. This isn't an unusual set up for a Trust that may have been decades old. Selling blue chip stocks which were purchased many years ago in order to go "all in" for a low cost mutual fund may trigger some substantial tax obligations. DH inherited a similar portfolio. As one of my fellow financial message board posters pointed out, the combination of those individual stocks make up it's own equivalent of a blue chip mutual fund without any monthly expense ratio fees.
OP said that these were new holdings, purchased by the bank in the less than 1 year the trust has been in existence. Of course the market is up over that time, so there could be short term gains from selling now. But there would have been gains in total stock market as well.
Last edited by afan on Wed Nov 29, 2017 3:31 pm, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Wed Nov 29, 2017 3:31 pm

afan wrote:
Wed Nov 29, 2017 3:18 pm
Gill,

Very interesting. A few questions

What is different about the Vanguard operation that makes management think they can break even or turn a profit while charging much lower rates than traditional banks? Is all the money saved by doing business online and over the phone, without having clients visit physical offices? Or are there other places where Vanguard saves?

For the following assume a bank is charging 1% AUM.

Bank buys a fund that the bank manages. The expense ratios of the fund is 2%. Does the "no double dipping" mean that the bank reduces the expense ratio to zero and charges it's regular 1%, so that the total cost is 1%? Or does the bank keep the expense ratio at 2%, but reduce it's AUM fee to zero so that the total cost is 2%? Or is there some other approach to figuring the total cost?

The bank buys a fund, not managed by the bank, with a 2% expense ratio. Does the bank continue to charge it's 1% while the fund charges 2% and the total cost is 3%?

Bank buys a fund not managed by the bank, with a 2% expense ratio but the fund sends 0.5% to the bank or broker who holds the fund. Does the bank reduce it's AUM fee on this holding to 0.5%, so the total cost is 2.5% rather than 3%?

Bank buys a load fund, say 5%, that sends the load to the bank or broker who sold it. Does the bank subtract the dollar value of the load from it's quarterly fee?

Does the bank take into account the range of costs of mutual funds and favor low cost providers, like Vanguard?
I worked for several major national trust institutions and am not entirely familiar with smaller trust operations. The banks who I represented never purchased mutual funds managed by anyone else but themselves, and on those they rebated the fee earned on the fund. I can't imagine a bank buying a fund with an ER of 1-2% and expecting to charge their trustee fee on top of that.
Gill

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 3:34 pm

Are all of Vanguard's economies on the lack of physical branches? Or do they save money elsewhere, behind the scenes? Would the places you worked have been able to compete with Vanguard 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

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Wed Nov 29, 2017 5:30 pm

afan wrote:
Wed Nov 29, 2017 3:34 pm
Are all of Vanguard's economies on the lack of physical branches? Or do they save money elsewhere, behind the scenes? Would the places you worked have been able to compete with Vanguard on price?
The reason for Vanguard's low costs have been discussed extensively on Bogleheads. As for my prior affiliations, they operated in a completely different market than Vanguard and its trust company. I've been out of touch for a few years, but I believe their minimum account is around $5 million and fees certainly run 1% or so on that size account with lower rates on larger accounts. Obviously, they don't attempt to compete with Vanguard on price. As full disclosure, I've mentioned before on this forum that Vanguard is named in my estate plan.
Gill

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Wed Nov 29, 2017 5:50 pm

I have seen lots of discussions of the difference for asset management. But I was asking specifically about the trustee side of the business.

A $5M trust at Vanguard would be charged much less than 1% and the Vanguard funds in which it would be invested would have very low expense ratios. Assuming Vanguard is breaking even, I don't know, is the difference all in the lack of in-person services?

Can one administrative trust officer handle many more accounts under the Vanguard model? No in person meetings. Anything else contribute to lower costs?

I assume the investment management is much cheaper as Vanguard seems to use a standard approach for PAS and I assume trusts. With no individual stocks to deal with I would think one investment manager could handle many more accounts. I have no idea whether it is any harder for a beneficiary to speak with an investment manager with Vanguard than with a conventional bank.

I realize that Vanguard does not manage more time consuming assets, like real estate. But I thought banks who will handle real estate charge more than just the 1% rate that they may apply for marketable securities.
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

daveydoo
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Re: Independent Trustee Actively Managing Trust Account

Post by daveydoo » Thu Nov 30, 2017 1:56 am

Gill wrote:
Wed Nov 29, 2017 2:59 pm
daveydoo wrote:
Wed Nov 29, 2017 1:15 pm
Gill wrote:
Wed Nov 29, 2017 12:40 pm
When they bank acts in a fiduciary capacity they are held to those standards, i.e., they can't profit through self dealing. What you describe is just that.
Respectfully, no it isn't. By your description, the only excluded instance would be if Vanguard, say, is the corporate trustee and custodian and they are investing trust assets in proprietary Vanguard vehicles. The total Vanguard take -- trust management fee + ER -- is constrained by that pre-specified 1%. If Schwab were the custodian, the trust assets could be in any number of mutual funds that are not Schwab-owned products. Again, do you think the custodian would exclude every other mutual fund company -- since I believe the major custodians have financial arrangements with every fund family on their "no fee" or "low fee" list. And would they not take the $75 fee for trading a security that is not on their preferred list?

The definition of "self-dealing" is sufficiently narrow as to provide no real protection relevant to the OP's concerns.

And "fiduciaries" self-deal all the time. I can't know more about this than you -- I'm an amateur. I've seen this with fee-only advisors who also have arrangements with specific custodians and even fund families. Is Vanguard PAS not a fiduciary? This link to their descriptive brochure says that they are: (https://personal.vanguard.com/pdf/vpabroc.pdf). But do they subtract VG ERs from their 0.3% cut? Do they not self-deal? Smart people create fake (but presumably legal) firewalls and pretend that entities like these are separate. Oh, like the ol' Banc of America arm of Bank of America -- is that one still around? :D

Thank you for clarifying that you have been an industry insider for 35 years.
Aren't you confusing investment advisors with true fiduciaries, i.e., trustees and executors?
Gill
Wow -- a second "straw-man" attack. :D

No. In my example, Vanguard PAS is the advisor and the fiduciary (according to their own literature -- the link I provided). Vanguard is the custodian of the assets. Vanguard PAS invests in Vanguard funds. No self-dealing there! Vanguard PAS and Vanguard are just. separate. enough.

Wait -- or are there really "true fiduciaries" as you call them and, oh, maybe-just-on-paper fiduciaries? :D I didn't know fiduciaries came in varying levels of commitment -- this is a fuzzy business.

I admire that you can maintain that banks are noble in their service, would not take unfair advantage of clients (especially deceased or incapacitated ones), and are the true guardians of the public trust. I'm looking forward to "It's a Wonderful Life" season again. Of course, in the world you describe, there would be no need for this forum at all. :D

Not sure where this came from first but I recently enjoyed it on Mr. Robot: "Give a man a gun -- he'll rob a bank; give a man a bank and he'll rob the world."
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

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FIREchief
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Re: Independent Trustee Actively Managing Trust Account

Post by FIREchief » Thu Nov 30, 2017 2:35 am

(In the context of corporate trustees) I don't believe a "true fiduciary" really exists. At it's strictest interpretation, this would mean that such a person/institution would place the highest priority on what is best for the customer. This directly conflicts with the business 101 "rule" that a company exists solely to produce profits for its shareholders.

Charging anybody 1% for AUM is hardly the equivalent of placing the highest priority on the customer's returns. Instead, we fall back to "accepted common practice," where 1% is accepted because that is the minimum that (almost) everybody charges.

*Edit
Last edited by FIREchief on Thu Nov 30, 2017 3:13 pm, edited 1 time in total.
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UpperNwGuy
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Re: Independent Trustee Actively Managing Trust Account

Post by UpperNwGuy » Thu Nov 30, 2017 8:57 am

longleaf wrote:
Wed Nov 29, 2017 12:45 am
this split trust has not existed for a year
If the trust is less than a year old, you are premature in rocking the boat. Give it a year or two to establish a track record.

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 10:36 am

I would not go so far as to say there are no true fiduciaries. In this thread at least two people have reported serving as individual trustees on trusts of which they are not beneficiaries, for free. Other than living up to promises made to friends and relatives, it is not clear how these people are gaining anything, certainly not money, but doing this.

"Advice only" financial advisors, who charge an hourly rate for their advice and do not profit from investment management would appear to me to be true fiduciaries. Portfolio managers who charge a simple flat fee, put the money in index funds and do not offer their own funds also act as fiduciaries as far as I can tell.

I think the point about banks is that they do not steal. Individuals serving as trustees have been known to do that. For the banks, the combination of the culture, the internal controls and the external supervision make that, apparently, extremely rare. I am sure someone, somewhere at a trust department must have made off with trust money because there are always people who will try. But given the deep pockets and the controls I suspect that these rare cases do not go on for long and the trusts end up made whole.

The real problems with banks as trustees are the cost and the fixation on active management. In my search for a corporate trustee for a trust of which I am trustee the prices were depressing. Vanguard and Schwab were the only ones I found that I could even remotely consider hiring and not feel that I was letting the beneficiary down by wasting trust assets. I know that there are other banks that will serve as directed trustee- handling the administrative work but not investment management. By the time I learned of their existence I had lost interest. It was surprisingly difficult to get a list of such banks.

With the exception of Vanguard, representatives of every other corporate trustee launched into a speech about their brilliant portfolio managers. Not that they could provide any audited reports of risk adjusted returns. They had never heard of (or pretended they had never heard of) efficient markets. There was absolutely no way they were going to invest in index funds. It was somewhere between comical and sad.

I did find some firms on the Schwab advisor network that would run a pure index portfolio for a flat fee of under $5,000/year. That plus the Schwab administrative fee was conscionable. But by the time I got that far I had been serving as trustee myself long enough to realize how little there was to it.

It was interesting to see just how little it costs for a firm to break even managing an index fund portfolio.

For trusts with assets that require more attention- real estate, illiquid investments, businesses and so forth- a bank may be the only option. They will charge a lot more than 1%, but it will be worth it if you don't have an individual to do the job.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 10:42 am

UpperNwGuy wrote:
Thu Nov 30, 2017 8:57 am
If the trust is less than a year old, you are premature in rocking the boat. Give it a year or two to establish a track record.
It is early, but the active management is clear as are the high costs. The OP is right that the bank is not doing right by the trust. The only question is whether the beneficiary can arrange to move to a better trustee.
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

technovelist
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Re: Independent Trustee Actively Managing Trust Account

Post by technovelist » Thu Nov 30, 2017 10:46 am

Carefreeap wrote:
Tue Nov 28, 2017 10:49 am
Gill wrote:
Mon Nov 27, 2017 9:44 pm
longleaf wrote:
Mon Nov 27, 2017 9:38 pm
Gill wrote:
Mon Nov 27, 2017 9:08 pm
If you were meant to have control of the trust assets the testator would have left them to you outright. The trust was established for good reason by the decedent and the trustee is being compensated a very normal trustee’s fee. You have no authority to direct investment of the trust. Quite likely the trustee is earning its fee just listening to your objections. I also suspect the assets will perform far better in its hands than yours. Why don’t you just forget this mission and seek to do your best with the income and principal as it is eventually distributed to you.
Gill
The point is not to obtain control of the funds; I do not need/want them now anyway. I want to decrease the expense ratio and hold VTSAX solely in the trust. Seems like a good deal for the bank if they half their fee and hold what I request for decades rather than lose the trust to a different independent trustee.
I can assure you the bank won’t halve their fee. Investing a trust is only one of their many responsibilities as you will see in the future, not the least of which will be acting on your requests for discretionary invasions of principal.
Gill
I've often thought this was the real work of a professional Trustee; listening to the whining and complaining of people living beyond their means. Those "mean" Trustees who won't let them have access to their money! :wink:

And it can get worse with the greedy spouses who don't/won't understand that the Trust is not their money to spend either. FIL's 3rd wife and her adult children had a hard time with the concept that once FIL died the gravy train and monthly invasions to the Trust's principle were over. DH's grandmother did not intend for FIL's third wife to "live in the style to which SHE had been accustomed." I assume this is a common problem Trustees have when the income beneficiary passes and the assets pass to the remainderman.
I am expecting to be appointed in my mother's will as the trustee for her bequest to one of my brothers; she is still alive and could change her will, but that's what the most recent one says.

The will also gives me the power to appoint another trustee. I may see about appointing a bank trust department, if he is too annoying in his requests for invasion of the principal.

Hopefully that won't happen, but you never know...
In theory, theory and practice are identical. In practice, they often differ.

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Thu Nov 30, 2017 10:51 am

afan wrote:
Thu Nov 30, 2017 10:42 am
UpperNwGuy wrote:
Thu Nov 30, 2017 8:57 am
If the trust is less than a year old, you are premature in rocking the boat. Give it a year or two to establish a track record.
It is early, but the active management is clear as are the high costs. The OP is right that the bank is not doing right by the trust. The only question is whether the beneficiary can arrange to move to a better trustee.
I would argue that it is doing right by the testator who selected the bank to act as trustee. Further, we have heard your tirades against bank trustees. I realize you can't be persuaded otherwise. Can we move on, please?
Gill

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 11:03 am

Gill,

Wow. I apologize if I hit a nerve.

I don't consider my comments to be "tirades" any more than similar statements, many far more vehement than mine, about active managers or high price non-trustee asset managers.

If the trustee is engaging in active management- against an enormous amount of evidence demonstrating that this is a losing approach- I don't see how one can consider it to be doing right by the trust.

If the trustee is charging a lot more money than managing an index fund portfolio would cost then I don't see how this could be considered doing right by the trust.

I am not a lawyer or a trust officer, but I thought the duty of the trustee was to the TRUST and through the trust to the BENEFICIARIES? Is that not correct? Is the duty of the trustee to the grantor, instead? With the grantor being deceased how is that interpreted? The trustee must follow the terms of the trust as set by the person who created it. But I thought that, beyond that, the trustee was supposed to act in the interests of the trust and beneficiaries?

If not, then this does open up again the question of what it means to be a fiduciary. The trustee might have a fiduciary responsibility to someone, but not to the trust or beneficiaries??

My interest in the economics of running a trust department is simple: I have read that trust departments often lose money. I had assumed this was a combination of the extensive compliance activities you noted and the practice of having nice offices in which administrative trust officers meet with clients. Therefore, I was curious about the apparent ability of Vanguard to charge a lot less and stay in business- assuming it is at least breaking even on the trust work. The only obvious difference is the lack of the pretty offices. But I wondered whether there might be other economies of scale in the back office. Vanguard has clearly figured out how to run mutual funds at rock bottom prices. The cost of PAS seems high in comparison, but much lower than traditional management companies. If Vanguard uses the same approach for trusts as it does for PAS, which I believe to be the case, then there are savings on that side of the business.

I assume Vanguard has the same compliance responsibilities as any other trust company, so it is not clear how it could save much as compared to a large bank.

Given your background, I thought you would be uniquely able to comment on the differences between the way a traditional trust department operates and what Vanguard does.

If you don't want to talk about it, free county. But no need to get testy. I appreciate your contributions on estate planning discussions and will keep reading what you have to say, even if this is not something you want to discuss.

Thanks
Last edited by afan on Thu Nov 30, 2017 11:23 am, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Carefreeap
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Re: Independent Trustee Actively Managing Trust Account

Post by Carefreeap » Thu Nov 30, 2017 11:17 am

technovelist wrote:
Thu Nov 30, 2017 10:46 am
Carefreeap wrote:
Tue Nov 28, 2017 10:49 am
Gill wrote:
Mon Nov 27, 2017 9:44 pm
longleaf wrote:
Mon Nov 27, 2017 9:38 pm
Gill wrote:
Mon Nov 27, 2017 9:08 pm
If you were meant to have control of the trust assets the testator would have left them to you outright. The trust was established for good reason by the decedent and the trustee is being compensated a very normal trustee’s fee. You have no authority to direct investment of the trust. Quite likely the trustee is earning its fee just listening to your objections. I also suspect the assets will perform far better in its hands than yours. Why don’t you just forget this mission and seek to do your best with the income and principal as it is eventually distributed to you.
Gill
The point is not to obtain control of the funds; I do not need/want them now anyway. I want to decrease the expense ratio and hold VTSAX solely in the trust. Seems like a good deal for the bank if they half their fee and hold what I request for decades rather than lose the trust to a different independent trustee.
I can assure you the bank won’t halve their fee. Investing a trust is only one of their many responsibilities as you will see in the future, not the least of which will be acting on your requests for discretionary invasions of principal.
Gill
I've often thought this was the real work of a professional Trustee; listening to the whining and complaining of people living beyond their means. Those "mean" Trustees who won't let them have access to their money! :wink:

And it can get worse with the greedy spouses who don't/won't understand that the Trust is not their money to spend either. FIL's 3rd wife and her adult children had a hard time with the concept that once FIL died the gravy train and monthly invasions to the Trust's principle were over. DH's grandmother did not intend for FIL's third wife to "live in the style to which SHE had been accustomed." I assume this is a common problem Trustees have when the income beneficiary passes and the assets pass to the remainderman.
I am expecting to be appointed in my mother's will as the trustee for her bequest to one of my brothers; she is still alive and could change her will, but that's what the most recent one says.

The will also gives me the power to appoint another trustee. I may see about appointing a bank trust department, if he is too annoying in his requests for invasion of the principal.

Is her Trust going to be a by-pass Trust whereby your brother is supposed to live on the income and the corpus of the Trust is to go to a grandchild?

My mother's Trust was only intended to avoid probate. My job as Trustee for her Trust was to distribute the Trust assets to the beneficiaries (my brother and me) as efficiently and quickly as possible. My brother was still a PITA with all of his schemes but I got through it. I'm grateful that my mother actually listened to me and didn't appoint us as co-Trustees. His personal financial problems would have made a difficult situation even worse.

Hopefully that won't happen, but you never know...

Gill
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Re: Independent Trustee Actively Managing Trust Account

Post by Gill » Thu Nov 30, 2017 11:32 am

afan wrote:
Thu Nov 30, 2017 11:03 am
Given your background, I thought you would be uniquely able to comment on the differences between the way a traditional trust department operates and what Vanguard does.
I'll tell you one huge difference, and that is the people. At my last employer, a major and centuries old financial institution with offices worldwide, all the senior officers of the trust company were lawyers, many of them also held CPA designations and many with previous experience in New York City or similar law firms. Furthermore, most of the investment officers were CFA's. You can imagine the size of the payroll and that's a lot to lug on a 1% AUM fee. With that kind of overhead it is necessary to restrict business to only the largest accounts. Vanguard's trust company certainly can't boast of such well qualified people nor can most trust institutions. Rightly or wrongly, they feel confident they can bring talent to bear on a trust that will benefit the trust far more than the passive investing in mutual funds and little else.
Gill

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 11:34 am

While serving as trustee for a beneficiary who has had lifelong problems managing money, I was pleasantly surprised that working out a set monthly distribution was enough to keep that person happy.

There have been a few "emergencies" running out of funds and the beneficiary carries a high credit card balance while at the same time speculating on stocks in a brokerage account. But for the most part, it has not been stressful.

Getting the beneficiary to start taking required distributions from an inherited IRA before the IRS imposed a penalty was more work, but that was not a trustee responsibility.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 11:45 am

Gill wrote:
Thu Nov 30, 2017 11:32 am
I'll tell you one huge difference, and that is the people. At my last employer, a major and centuries old financial institution with offices worldwide, all the senior officers of the trust company were lawyers, many of them also held CPA designations and many with previous experience in New York City or similar law firms. Furthermore, most of the investment officers were CFA's. You can imagine the size of the payroll and that's a lot to lug on a 1% AUM fee. With that kind of overhead it is necessary to restrict business to only the largest accounts. Vanguard's trust company certainly can't boast of such well qualified people nor can most trust institutions. Rightly or wrongly, they feel confident they can bring talent to bear on a trust that will benefit the trust far more than the passive investing in mutual funds and little else.
Gill
That could well be true for the trusts that needed that expertise. Again, if the trust contains illiquid assets, which Vanguard will not do, or has to manage real estate or other more demanding investments, which Vanguard will not do, I could see the need. If the trust has multi generational beneficiaries, as I assume is more common for the larger trusts, then the bank has to consider competing interests and having lawyers could be essential to get it right. Large numbers of beneficiaries with widely differing financial situations could also make it challenging.

CPAs probably count for a lot when there are complicated tax implications of the investment decisions and they need to be coordinated with the tax situations of the beneficiaries.

The CFAs could, in theory at least, earn their keep by matching the risk exposure of the trust to that of the beneficiaries. If there are large undiversified holdings between the trust and the individual beneficiaries, then there would be a need to attempt to control the overall risk.

For a simple situation, without these complications, then it would appear one would not need all that expertise. So no need to pay for it.

Since you picked Vanguard, evidently you did not think your estate needed these higher level services. Assuming you have some provision for changing trustees if necessary, your heirs could move to a traditional bank if they found that Vanguard was in over its head.

In my search for a trustee only one gave any meaningful answer when I asked how they handled beneficiary requests for distributions. That answer was thorough, detailed and inspired a lot of confidence that they were prepared to deal with this. The description of their process- an internal committee of trust officers that met weekly to review distribution requests- sounded both reliable and expensive. Unfortunately, it was one of the banks that was going to charge over 2%, which was not worth it to relieve myself of the hassle.
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

mnecon
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Re: Independent Trustee Actively Managing Trust Account

Post by mnecon » Thu Nov 30, 2017 11:51 am

longleaf wrote:
Sun Nov 26, 2017 5:22 pm
NotWhoYouThink wrote:
Sun Nov 26, 2017 4:57 pm

What does it say about appointing a different independent trustee?
If the x bank fails or ceases to serve as co-trustee for any reason, a successor independent trustee shall be appointed in writing by a majority of my children then living and if none, or for want of a majority, by a majority of my descendants then living who have attained the legal age of majority, and if none or for want of a majority, by court competent jurisdiction.

What other duties does the trustee have?
The independent trustee shall distribute 1/3 of trust at age x, 1/2 at age x, remaining at age x. Authorized to purchased life insurance on person eligible to receive income from trust. May distribute from principal of trust to beneficiary before age x to buy home, gain education, start business, etc. if it is deemed in the best interest by independent trustee.

Tax reporting?
I have no information on this; it is generation-skipping

Are there other trustees?
There are two other co-trustees
I think you still need more information. You say it is generation skipping. Are there living members of the middle generation that are income beneficiaries? It seems contradictory that there could be with the age distributions but someone who is more expert can weigh in on how that works. If there are income beneficiaries they may have very different incentives for investing than you do and may resist the changes you request. Sometimes these trusts are designed with a desire to leave money to the income beneficiaries not the residual beneficiaries while avoiding taxes.

I will say I can understand your general frustration. My husband's grandfather set up a generation skipping trust when federal exclusion limits were much lower. My MIL and her 2 siblings are the trustees and the income beneficiaries and the principal will be distributed to the grandchildren at the death of the last sibling. The income gets distributed every year and the law firm's management expenses get drawn from the principal. These are also not the investments we would have chosen and they have not done as well as low cost mutual funds.

My husband and his siblings and cousins get the accounting and need to sign forms each year. Fortunately we don't need the money and have simply accepted that the estate will be completely depleted before anything comes to him. But for those of you who are just saying be grateful: It is frustrating to just sit there as over the past 14 years or so we have watched the estate dwindle and the large fees that are more than 1% going to a law firm for some annual paperwork. My husband hates signing those forms. We would prefer they dissolve the trust and simply distribute the money to the income beneficiaries and never see it. My MIL tried to get her siblings to dissolve the trust and distribute everything out but they refused, even though they have no need of the money themselves. I am sure my husband's grandfather is shaking his fists somewhere as well as he was a savvy businessman in his day. You may need to focus on acceptance. Meeting with the person that drew up the documents and asking what the wills author wanted to achieve may bring you some understanding.

longleaf
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Re: Independent Trustee Actively Managing Trust Account

Post by longleaf » Thu Nov 30, 2017 11:56 am

mnecon wrote:
Thu Nov 30, 2017 11:51 am

I think you still need more information. You say it is generation skipping. Are there living members of the middle generation that are income beneficiaries? It seems contradictory that there could be with the age distributions but someone who is more expert can weigh in on how that works. If there are income beneficiaries they may have very different incentives for investing than you do and may resist the changes you request. Sometimes these trusts are designed with a desire to leave money to the income beneficiaries not the residual beneficiaries while avoiding taxes.
longleaf wrote:
Wed Nov 29, 2017 12:45 am
I am to receive the income from the trust; I assume this occurs at the end of the year because this split trust has not existed for a year, and I do not recall receiving income.
Frugality, indexing, time.

technovelist
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Re: Independent Trustee Actively Managing Trust Account

Post by technovelist » Thu Nov 30, 2017 12:01 pm

Carefreeap wrote:
Thu Nov 30, 2017 11:17 am
technovelist wrote:
Thu Nov 30, 2017 10:46 am
Carefreeap wrote:
Tue Nov 28, 2017 10:49 am
Gill wrote:
Mon Nov 27, 2017 9:44 pm
longleaf wrote:
Mon Nov 27, 2017 9:38 pm

The point is not to obtain control of the funds; I do not need/want them now anyway. I want to decrease the expense ratio and hold VTSAX solely in the trust. Seems like a good deal for the bank if they half their fee and hold what I request for decades rather than lose the trust to a different independent trustee.
I can assure you the bank won’t halve their fee. Investing a trust is only one of their many responsibilities as you will see in the future, not the least of which will be acting on your requests for discretionary invasions of principal.
Gill
I've often thought this was the real work of a professional Trustee; listening to the whining and complaining of people living beyond their means. Those "mean" Trustees who won't let them have access to their money! :wink:

And it can get worse with the greedy spouses who don't/won't understand that the Trust is not their money to spend either. FIL's 3rd wife and her adult children had a hard time with the concept that once FIL died the gravy train and monthly invasions to the Trust's principle were over. DH's grandmother did not intend for FIL's third wife to "live in the style to which SHE had been accustomed." I assume this is a common problem Trustees have when the income beneficiary passes and the assets pass to the remainderman.
I am expecting to be appointed in my mother's will as the trustee for her bequest to one of my brothers; she is still alive and could change her will, but that's what the most recent one says.

The will also gives me the power to appoint another trustee. I may see about appointing a bank trust department, if he is too annoying in his requests for invasion of the principal.

Hopefully that won't happen, but you never know...
Is her Trust going to be a by-pass Trust whereby your brother is supposed to live on the income and the corpus of the Trust is to go to a grandchild?

My mother's Trust was only intended to avoid probate. My job as Trustee for her Trust was to distribute the Trust assets to the beneficiaries (my brother and me) as efficiently and quickly as possible. My brother was still a PITA with all of his schemes but I got through it. I'm grateful that my mother actually listened to me and didn't appoint us as co-Trustees. His personal financial problems would have made a difficult situation even worse.
No, there are no grandchildren in the picture.

She just doesn't trust him not to blow his inheritance.

And I can't say I disagree.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Independent Trustee Actively Managing Trust Account

Post by Carefreeap » Thu Nov 30, 2017 12:24 pm

technovelist wrote:
Thu Nov 30, 2017 12:01 pm
Carefreeap wrote:
Thu Nov 30, 2017 11:17 am
technovelist wrote:
Thu Nov 30, 2017 10:46 am
Carefreeap wrote:
Tue Nov 28, 2017 10:49 am
Gill wrote:
Mon Nov 27, 2017 9:44 pm


I can assure you the bank won’t halve their fee. Investing a trust is only one of their many responsibilities as you will see in the future, not the least of which will be acting on your requests for discretionary invasions of principal.
Gill
I've often thought this was the real work of a professional Trustee; listening to the whining and complaining of people living beyond their means. Those "mean" Trustees who won't let them have access to their money! :wink:

And it can get worse with the greedy spouses who don't/won't understand that the Trust is not their money to spend either. FIL's 3rd wife and her adult children had a hard time with the concept that once FIL died the gravy train and monthly invasions to the Trust's principle were over. DH's grandmother did not intend for FIL's third wife to "live in the style to which SHE had been accustomed." I assume this is a common problem Trustees have when the income beneficiary passes and the assets pass to the remainderman.
I am expecting to be appointed in my mother's will as the trustee for her bequest to one of my brothers; she is still alive and could change her will, but that's what the most recent one says.

The will also gives me the power to appoint another trustee. I may see about appointing a bank trust department, if he is too annoying in his requests for invasion of the principal.

Hopefully that won't happen, but you never know...
Is her Trust going to be a by-pass Trust whereby your brother is supposed to live on the income and the corpus of the Trust is to go to a grandchild?

My mother's Trust was only intended to avoid probate. My job as Trustee for her Trust was to distribute the Trust assets to the beneficiaries (my brother and me) as efficiently and quickly as possible. My brother was still a PITA with all of his schemes but I got through it. I'm grateful that my mother actually listened to me and didn't appoint us as co-Trustees. His personal financial problems would have made a difficult situation even worse.
No, there are no grandchildren in the picture.

She just doesn't trust him not to blow his inheritance.

So is his Trust meant to last him the rest of his life? There's no distributions at ages 25, 35 and 40 or something similar? If so, I don't blame you for wanting to resign and let a professional 3rd party deal with the situation. Not only will you be the "mean" brother, just wait until he blows his share and starts asking you for money from your personal funds. That's what my brother did. I didn't go into detail in my earlier post but when my mother died her estate was UPSIDE DOWN by $400,000. After negotiating with her various lenders, I was able to give my brother about $20k. When he blew through that he started hitting me up for personal "loans". He's a trainwreck and the farther I can stay away from him the better both financially and personally. I have never understood how he thinks his various schemes are going to work other than pure luck. Plus he's kind of a mean jerk. It's painful to just have a telephone conversation with him.

And I can't say I disagree.

mnecon
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Re: Independent Trustee Actively Managing Trust Account

Post by mnecon » Thu Nov 30, 2017 12:41 pm

longleaf wrote:
Thu Nov 30, 2017 11:56 am
longleaf wrote:
Wed Nov 29, 2017 12:45 am
I am to receive the income from the trust; I assume this occurs at the end of the year because this split trust has not existed for a year, and I do not recall receiving income.
Sorry Longleaf. I missed this. So you have a trust that is separate from any other beneficiary and all assets in the trust are yours alone for income and residual beneficiary? At the very least, I would want to request a full schedule of fees the independent trustee will be charging. I would want to get a concrete answer on whether the 1% is truly all in or if there are additional annual fees for tax reporting and documentation? Are there fees every time you talk to them? The fees on the trust I see the accounting for are not only a fixed percentage but line item fees as well. I am sure every trust is different. We are going through the other side of this as we set up revocable trusts and new wills for our own children. I appreciate hearing your side of the independent trustee encounter.

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Re: Independent Trustee Actively Managing Trust Account

Post by technovelist » Thu Nov 30, 2017 12:53 pm

Carefreeap wrote:
Thu Nov 30, 2017 12:24 pm
technovelist wrote:
Thu Nov 30, 2017 12:01 pm
Carefreeap wrote:
Thu Nov 30, 2017 11:17 am
technovelist wrote:
Thu Nov 30, 2017 10:46 am
Carefreeap wrote:
Tue Nov 28, 2017 10:49 am

I've often thought this was the real work of a professional Trustee; listening to the whining and complaining of people living beyond their means. Those "mean" Trustees who won't let them have access to their money! :wink:

And it can get worse with the greedy spouses who don't/won't understand that the Trust is not their money to spend either. FIL's 3rd wife and her adult children had a hard time with the concept that once FIL died the gravy train and monthly invasions to the Trust's principle were over. DH's grandmother did not intend for FIL's third wife to "live in the style to which SHE had been accustomed." I assume this is a common problem Trustees have when the income beneficiary passes and the assets pass to the remainderman.
I am expecting to be appointed in my mother's will as the trustee for her bequest to one of my brothers; she is still alive and could change her will, but that's what the most recent one says.

The will also gives me the power to appoint another trustee. I may see about appointing a bank trust department, if he is too annoying in his requests for invasion of the principal.

Hopefully that won't happen, but you never know...
Is her Trust going to be a by-pass Trust whereby your brother is supposed to live on the income and the corpus of the Trust is to go to a grandchild?

My mother's Trust was only intended to avoid probate. My job as Trustee for her Trust was to distribute the Trust assets to the beneficiaries (my brother and me) as efficiently and quickly as possible. My brother was still a PITA with all of his schemes but I got through it. I'm grateful that my mother actually listened to me and didn't appoint us as co-Trustees. His personal financial problems would have made a difficult situation even worse.
No, there are no grandchildren in the picture.

She just doesn't trust him not to blow his inheritance.
And I can't say I disagree.
So is his Trust meant to last him the rest of his life? There's no distributions at ages 25, 35 and 40 or something similar? If so, I don't blame you for wanting to resign and let a professional 3rd party deal with the situation. Not only will you be the "mean" brother, just wait until he blows his share and starts asking you for money from your personal funds. That's what my brother did. I didn't go into detail in my earlier post but when my mother died her estate was UPSIDE DOWN by $400,000. After negotiating with her various lenders, I was able to give my brother about $20k. When he blew through that he started hitting me up for personal "loans". He's a trainwreck and the farther I can stay away from him the better both financially and personally. I have never understood how he thinks his various schemes are going to work other than pure luck. Plus he's kind of a mean jerk. It's painful to just have a telephone conversation with him.
He is 67.

Yes, I'm quite aware of the possibility of his blowing it and then asking me for money. My current plan to prevent that is to buy him a life annuity (no refund provision) with the trust money, so he can't blow it.
In theory, theory and practice are identical. In practice, they often differ.

letsgobobby
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Re: Independent Trustee Actively Managing Trust Account

Post by letsgobobby » Thu Nov 30, 2017 1:35 pm

The problem with using an individual as trustee is that individuals die. The decedent may have picked the most capable and most honorable individual in the world to be his trustee, but would have almost no influence on the choice of successor trustee. That is one of the reasons we have strongly considered a corporate trustee for our trust (namely, Vanguard).

afan, what are the institutions that will handle only the administrative aspects of a trust? Would you expect a lay individual could handle the investing, or would the trust need to hire a professional for that aspect as well? Even something so simple as picking an asset allocation: who would be responsible for the choice, and who would hold the liability, in that situation?

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FIREchief
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Re: Independent Trustee Actively Managing Trust Account

Post by FIREchief » Thu Nov 30, 2017 3:14 pm

afan wrote:
Thu Nov 30, 2017 10:36 am
I would not go so far as to say there are no true fiduciaries. In this thread at least two people have reported serving as individual trustees on trusts of which they are not beneficiaries, for free. Other than living up to promises made to friends and relatives, it is not clear how these people are gaining anything, certainly not money, but doing this.
You are, of course, correct. I've edited my post to clarify that I was speaking primarily in the context of corporate trustees.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

afan
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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Nov 30, 2017 5:23 pm

I think the problem with fiduciaries comes down to the assets under management fee system. It is loaded with conflicts. Honest people can work within such systems, but they cannot make the conflicts go away.

I would think "advice only" could make many of the conflicts go away. In theory a bank could provide asset management for a low flat fee that depended on the complexity of what the trust needed. If all it needed was a balanced portfolio of stocks and bonds, then it should be very low. It could then charge for the time of the administrative officers, if they had to do something, which most of the time they don't. It could charge for the tax return, if it did the return. It could charge for monthly distributions, with the fee likely being very low if they were set up to be automated. Right now I have set up automatic transfers from the trust account to or on behalf of the beneficiary. There is no charge, but there is also no human role in the distributions.

Kind of like the way lawyers and accounts bill for what they do, and don't expect to get paid anything when there is nothing for them to do. That model makes it a lot easier for them to avoid conflicts of interest.

But just as it is hard for financial advisors to make a living doing advice only, it might be difficult or impossible for a trust department to break even operating like this. So- conflicts.

What is included? Gill or bsteiner would have much more perspective on this that I do, but here is what I found:

Most of the companies were quite clear on what the basic fee covered and what it did not. For example, for some it included preparation and filing of the trust tax return. For others it did not. I did not ask how much they charged for the return because I assumed the amount would be too small to matter, at least for a trust with simple investments. If the assets were very complicated and the trustee had to coordinate with the beneficiary's tax situation then it would probably be important to have the CPAs at the bank do the taxes.

For a simple return where everything was marketable securities the return itself would be simple. I could do the return myself but I have an enrolled agent do it just to have someone else's eyes on things.

Some banks said that the fee included a small number of monthly distributions. Others would charge per transaction. I did not get a clear idea of what the charges would be, but I assumed they would be small.

I did not get a sense that what was included had anything to do with the basic AUM fee. Some places charged on the lower end of fees and included the tax return and some distributions. Others charged higher fees and would bill for each transaction.

I got the impression it had more to do with where on the size of trusts the bank had decided to be.

Gill mentioned that the large places where he worked would not accept trusts below $5M. My trust is smaller than that. Some places simply said they were not interested. Some would be if they thought it would lead to more business down the line, for example if my spouse and I wanted to use them. Some places had "small trusts" divisions that would deal with my trust.

I am still considering a corporate trustee as my backup. My particular concerns are if my life gets to the point that the small amount of work involved is too much, my health declines and I cannot do it anymore, I die, or the needs of the beneficiary get so demanding that I want someone else to take over. One of my major concerns is ending up at a place that would insist on actively managing the portfolio. Vanguard would not. Some of the Schwab advisors would not, but I worry about having to turn over responsibility to two entities. Sounds complicated.

At the moment there are no complicated investments in the trust or held by the beneficiary, so there would be no need for CFAs balancing the risk profile.

I should probably mention another difference between, I imagine, the typical Vanguard trust and what I assume goes on with large trusts at big banks. If there were $20M+ in the trust and the beneficiary had plenty of money outside of it, then I probably would not care nearly so much about what the bank charged. I would be sure there would be plenty of money for the beneficiary, come what may. I would be happily free of worrying about the trust, the markets, how much to distribute, how much to keep in reserve and similar questions. I would be more interested in the sorts of services Gill mentioned, perhaps whether the trust should be partly in illiquid investments, and managing for the next generation. I would not be worried that an extra $20,000-$40,000 was going to deprive the beneficiary of independence or a decent life.

As it is, this trust is not nearly that big, it is all the beneficiary has to live on, and it has to keep a good amount available to cover a long term care facility. The beneficiary is not there yet, but it seems likely it will come to that in a few years. The difference between 1-2% of trust assets and 0.55% of trust assets is therefore a highly meaningful amount of money for the beneficiary. If I, in my capacity as trustee, were going to spend that much of the trust money on something, I would feel obligated to make sure that whatever the trust was buying was worth the cost.

Given my typical bogleheads skepticism about the utility of active management, I could not imagine willingly paying a team of CFAs to create a portfolio of individual stocks. I would have been happy to review any evidence the banks may have had that their investment team produced better risk adjusted returns than a simple portfolio of 2-4 index funds. But as I said, no one was prepared to offer any evidence. I was to take it on faith that they were smart people, so of course they would beat the market.
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: Independent Trustee Actively Managing Trust Account

Post by Gill » Thu Nov 30, 2017 5:43 pm

If it makes any difference to anyone, the usual practice of charging trustee fees based either on the trust agreement or state law is to charge half to principal and half to income. I know this doesn't make the fee any less, but at least half is being paid by the remainderman and half by the income beneficiary. A fee of $10,000 would reduce distributable income by $5,000 for example.
Gill

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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Sat Dec 02, 2017 10:46 am

That's interesting, but puzzling. Does that mean the trustee would sell assets, generating taxable gains, to pay the fee when there are available already taxable funds from the income? Is there any expectation the the trustee would attempt to optimize the tax implications of management?

To the extent that a larger share of trust assets are taxed to pay the fees, that would be another reason to keep the fees as low as possible. Half a percent would create less need for this gain recognition than would 1.5%.

In the case of the trust for which I am trustee, I know who the remainder people are and they agree that the grantor's goal was to look after the beneficiary. If essentially all the trust is spent on the beneficiary and little were left for the remaindermen they would think that appropriate. So there is no tension between the interests in this case.

For trusts in different situations I could see the value of those experienced trust officers to balance the competing interests. I could even see a role for the CFAs. Not pursuing a hopeless and expensive attempt to beat the market through active management, but planning for the long term implications of different investment and distribution scenarios.
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: Independent Trustee Actively Managing Trust Account

Post by FBN2014 » Sat Dec 02, 2017 6:13 pm

If the trust was written properly there is a provision that outlines how the trustee can be removed. Spend a few dineros and consult an estate planning attorney. I manage a trust and have the funds invested with Portfolio Solutions (Rick Ferri's old firm). They charge .37% and use Vanguard and DFA index funds and ETFs which give an overall expense ratio of about .5% which is about as low a cost possible using an outside manager.
"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: Independent Trustee Actively Managing Trust Account

Post by FIREchief » Sat Dec 02, 2017 6:53 pm

FBN2014 wrote:
Sat Dec 02, 2017 6:13 pm
If the trust was written properly there is a provision that outlines how the trustee can be removed. Spend a few dineros and consult an estate planning attorney. I manage a trust and have the funds invested with Portfolio Solutions (Rick Ferri's old firm). They charge .37% and use Vanguard and DFA index funds and ETFs which give an overall expense ratio of about .5% which is about as low a cost possible using an outside manager.
When you say that "I manage a trust," are you saying that you are the current trustee? Do you collect any fees for trust administration?
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: Independent Trustee Actively Managing Trust Account

Post by FBN2014 » Sat Dec 02, 2017 8:50 pm

FIREchief wrote:
Sat Dec 02, 2017 6:53 pm
FBN2014 wrote:
Sat Dec 02, 2017 6:13 pm
If the trust was written properly there is a provision that outlines how the trustee can be removed. Spend a few dineros and consult an estate planning attorney. I manage a trust and have the funds invested with Portfolio Solutions (Rick Ferri's old firm). They charge .37% and use Vanguard and DFA index funds and ETFs which give an overall expense ratio of about .5% which is about as low a cost possible using an outside manager.
When you say that "I manage a trust," are you saying that you are the current trustee? Do you collect any fees for trust administration?
Yes, I am the trustee. The beneficiary is a family member so I only collect a fee as a reimbursement for outside expenses I have, such as travel expenses concerning trust business. I could easily manage the portfolio on my own doing it the Boglehead way but I prefer an outside manager to insulate me from accusations of mismanagement since I am not a financial services professional (CPA, CFA, CFP, etc.) My plan is to appoint Vanguard as successor trustee when I can no longer serve and to use a law firm on an hourly basis to handle issues pertaining to a house that the beneficiary lives in, i.e. payment of property taxes, sale of house in future, etc. I looked into having a directed corporate trustee for administration with Vanguard only as the money manager but the fees were too high in my opinion. The plan is not perfect but it is the best I could do given my bias to keep fees as low as possible while still having a competent trustee. Also if this plan doesn't work out, the beneficiary and remaindermen can remove the trustee by a majority vote and appoint someone else. Again, this is not perfect but I can't foresee all problems that could occur in the future so I need to have some faith that present and future beneficiaries will make the right choices for their benefit.
"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: Independent Trustee Actively Managing Trust Account

Post by FIREchief » Sat Dec 02, 2017 9:25 pm

FBN2014 wrote:
Sat Dec 02, 2017 8:50 pm
FIREchief wrote:
Sat Dec 02, 2017 6:53 pm
FBN2014 wrote:
Sat Dec 02, 2017 6:13 pm
If the trust was written properly there is a provision that outlines how the trustee can be removed. Spend a few dineros and consult an estate planning attorney. I manage a trust and have the funds invested with Portfolio Solutions (Rick Ferri's old firm). They charge .37% and use Vanguard and DFA index funds and ETFs which give an overall expense ratio of about .5% which is about as low a cost possible using an outside manager.
When you say that "I manage a trust," are you saying that you are the current trustee? Do you collect any fees for trust administration?
Yes, I am the trustee. The beneficiary is a family member so I only collect a fee as a reimbursement for outside expenses I have, such as travel expenses concerning trust business. I could easily manage the portfolio on my own doing it the Boglehead way but I prefer an outside manager to insulate me from accusations of mismanagement since I am not a financial services professional (CPA, CFA, CFP, etc.)
Very wise. Thanks.
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: Independent Trustee Actively Managing Trust Account

Post by afan » Sun Dec 03, 2017 9:25 am

FBN2014 wrote:
Sat Dec 02, 2017 8:50 pm
My plan is to appoint Vanguard as successor trustee when I can no longer serve and to use a law firm on an hourly basis to handle issues pertaining to a house that the beneficiary lives in, i.e. payment of property taxes, sale of house in future, etc. I looked into having a directed corporate trustee for administration with Vanguard only as the money manager but the fees were too high in my opinion. The plan is not perfect but it is the best I could do given my bias to keep fees as low as possible while still having a competent trustee. Also if this plan doesn't work out, the beneficiary and remaindermen can remove the trustee by a majority vote and appoint someone else. Again, this is not perfect but I can't foresee all problems that could occur in the future so I need to have some faith that present and future beneficiaries will make the right choices for their benefit.
Very interesting. It is good to hear from another trustee who is concerned about the fees charged to a trust.

I considered hiring a portfolio manager, but I found PASS too be too expensive. I found some firms that would do the investment management for a flat annual fee of $2,000 - $5,000, depending on the company. But since all I needed was a balanced portfolio of index funds I ended up deciding not to take on the expense.

I have found that managing the investment is trivial. Almost all the work of being trustee revolves around decision like how much to distribute to the beneficiary each month, planning for future big expenses, coordinating trust investments with the beneficiary's tax status, getting the beneficiary to make sound financial decisions or planning for what to do if that does not happen. When you were looking for trustees what impression do you get off how they would handle the noninvestment work?

What were the fees you were getting for a directed trustee? I think Portfolio Solutions charges essentially the same fees as Vanguard for PAS. Why were you considering the switch?

As of the last I checked Vanguard would not handle real estate. What is your back up plan if you need someone else to manage the house? Is the house in the trust? Does the law firm have a durable power of attorney from you as trustee so it can handle the real estate? Or are you simply counting on your being able to function and just hire the law firm to do the legal work?
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: Independent Trustee Actively Managing Trust Account

Post by FBN2014 » Sun Dec 03, 2017 12:01 pm

afan wrote:
Sun Dec 03, 2017 9:25 am

What were the fees you were getting for a directed trustee? I think Portfolio Solutions charges essentially the same fees as Vanguard for PAS. Why were you considering the switch?

As of the last I checked Vanguard would not handle real estate. What is your back up plan if you need someone else to manage the house? Is the house in the trust? Does the law firm have a durable power of attorney from you as trustee so it can handle the real estate? Or are you simply counting on your being able to function and just hire the law firm to do the legal work?
Fees for a directed trustee without portfolio management were typically .6% of trust value. However many directed trustees will only take on a trust with a minimum size of $2 million while the trust currently is about $1.2 million. I prefer not to switch from Portfolio Solutions however they do not offer trustee services, only investment management. In order to keep using them I would need to have the separate directed trustee and then the combined fees are over 1%. I'm satisfied that Vanguard provides essentially the same service at a reduced cost. Vanguard will not handle the real estate so that is why I need the law firm as a co-trustee specifically to handle that aspect only on an hourly basis. No, the law firm will not have a durable power of attorney because the POA is only valid while I am alive and would not be valid at my death so it is preferred to have them as co-trustee which would go into effect at my death or incapacity to serve. When using a law firm I believe it is desirable to use one that has an estate planning practice with many attorneys, don't name one with only a few attorneys doing estate planning. You want to be confident that the law firm or their successor if they merge with another firm, will be there when needed many years in the future. I chose one that has been in existence for over 100 years and that I have used for legal work previously.
"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: Independent Trustee Actively Managing Trust Account

Post by Gill » Sun Dec 03, 2017 2:19 pm

afan wrote:
Sun Dec 03, 2017 9:25 am
Does the law firm have a durable power of attorney from you as trustee so it can handle the real estate? Or are you simply counting on your being able to function and just hire the law firm to do the legal work?
Interesting. Can a trustee give a power-of-attorney to another absent specific language in the trust instrument? A trustee can delegate responsibilities to another, but through a power-of-attorney?
Gill

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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Sun Dec 03, 2017 3:42 pm

I think FBN answered my question. I was wondering what was the arrangement with the law firm. I gather it is a co trustee, so it does not need anything else to manage the trust. I gather it only charges hourly rates and only when it does something. I suppose I am surprised it would be willing to have responsibilities when it is not getting paid. I assume its major involvement is as successor trustee, and at that point it would charge more than just hourly rates when called upon to do something. What will the law firm charge when it takes over as sole trustee?

I admit I am a little leery of a law firm as successor trustee. Given the turmoil in that part of the legal business, many large firms have closed their estates and trust practices. Many such lawyers who were formerly in big firms are now at boutiques, that end of the business is not so profitable. The attorney who wrote the trust of which I am trustee retired and his big firm got out of that business altogether. He ended up sending all his files and his copies of the documents to his clients since his firm did not even want to store them.

My estate attorney is at a small firm that only does this kind of work. They say they will serve as trustee "when there are no other alternatives", but it is a small part of their business.

The firm appears to be successful, and are highly rated on Martindale, but I have no idea whether the it will still be around decades from now. I would assume a big bank would still be around, as will Vanguard.

As I said, by the time I was looking at directed trustees I was no longer thinking I needed a corporate trustee at all. But I thought I was finding lower costs than 0.6% of assets. Bsteiner also was suggesting some would work for a flat fee that would be well under that. But I did not shop that part of the business very hard. Since my trust does not hold real estate Vanguard is fine. If my trust did hold real estate I would be looking harder for an alternative.
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: Independent Trustee Actively Managing Trust Account

Post by FIREchief » Mon Dec 04, 2017 1:43 pm

Gill wrote:
Sun Dec 03, 2017 2:19 pm
afan wrote:
Sun Dec 03, 2017 9:25 am
Does the law firm have a durable power of attorney from you as trustee so it can handle the real estate? Or are you simply counting on your being able to function and just hire the law firm to do the legal work?
Interesting. Can a trustee give a power-of-attorney to another absent specific language in the trust instrument? A trustee can delegate responsibilities to another, but through a power-of-attorney?
Gill
I don't know about the scenario where the trust is silent, but I am aware of at least one instance where the trust does include such language.
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: Independent Trustee Actively Managing Trust Account

Post by longleaf » Wed Mar 14, 2018 7:55 pm

Update:

After discussions with the cotrustee and the independent trustee, the independent trustee is willing to invest in funds which I select. They will not reduce the fee (Gill was spot on). I will receive quarterly distributions of income from the investment.

So- should I look into Vanguard High Dividend Yield to get the maximum amount out of the trust as early as possible, or is another fund better for this strategy?

The distributed funds will be invested into Total Stock after I receive them.

Thanks for the guidance as always
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Re: Independent Trustee Actively Managing Trust Account

Post by dbr » Thu Mar 15, 2018 8:23 am

longleaf wrote:
Wed Mar 14, 2018 7:55 pm
Update:

After discussions with the cotrustee and the independent trustee, the independent trustee is willing to invest in funds which I select. They will not reduce the fee (Gill was spot on). I will receive quarterly distributions of income from the investment.

So- should I look into Vanguard High Dividend Yield to get the maximum amount out of the trust as early as possible, or is another fund better for this strategy?

The distributed funds will be invested into Total Stock after I receive them.

Thanks for the guidance as always
I don't have an immediate suggestion, but there should be plenty of candidates to do what the usual dividend investor should not do, which is deplete the investment by taking excessive dividends. Interesting situation.

The Vanguard High Yield Corporate Bond Fund is currently yielding (SEC) at 5.33%. You would have to check the distribution yield. Note that fund would be less risky than any stock fund as you pull out the income. There are, of course, all sorts of odd ball investments that distribute a lot of money and maybe someone could suggest one.

I wonder, as an off the wall thought, if it is possible to put the money in a term certain SPIA and get everything out in ten years or something that way.
Maybe you should seek legal advice for a case like this.

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Re: Independent Trustee Actively Managing Trust Account

Post by afan » Thu Mar 15, 2018 7:14 pm

If it makes sense to have it all in VTI then it would not make sense to put it in something else. When they turn the assets over to you it would be necessary to sell whatever it was in and buy VTI. You could end up paying taxes for nothing.

VTI should have lower taxable distributions than the high dividend fund, so again less in taxes.

Congratulations on getting the bank to give up on actively managing your account. I did not think you would be able to get that far. Granted, they are now collecting an investment fee for doing nothing, but that is better than collecting the same fee and further taxing you with their active management.
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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