Trust Allocation Help

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blacksmith4
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Trust Allocation Help

Post by blacksmith4 » Wed Feb 27, 2019 6:01 pm

Hello:
I've come into a weird situation where I am now trustee on two separate trusts for a friend. The friend is 60. The trust assets will be distributed to me and another relative after the friend dies, but I'd be more than happy to distribute all during his lifetime. I need to decide how to invest the funds.
Friend's background: Income: ~$500k/year, minimal expenses now but limited savings. Will retire in 4-7 years with house paid off but approximately only $1mm in retirement.

Trust A: $1mm - for general health/education/maintenance/support of friend. General goal is to improve quality of life and prevent squander. I'd like to help ensure that this induces reasonable retirement.
Trust B: $250k - designated for the persons's "critical needs" (or health).

I have no idea how best to invest either of these accounts but I do not want to pay anyone. My inclination is to invest Trust A in about 50% broad market stocks, and Trust B as 25% broad market stocks. However, even within those allocations, it's not clear to me to what extent I should seek dividends or other particular features?

Thanks in advance for any you can provide!

Topic Author
blacksmith4
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Re: Trust Allocation Help

Post by blacksmith4 » Wed Feb 27, 2019 6:24 pm

On Trust A, the more I think about this, the more I realize that it really should just be treated as if it were standard post-tax retirement money. It looks like 2025 target date funds are generally allocated as about 60/40, so I'll shoot for that. The primary difference is that this trust will be making distributions prior to 2025, and I'm not really sure how best to think about that. Perhaps aim to distribute just the non-equity income?

As to Trust B "critical needs," I suppose I need to determine how much a worst case "critical need" could cost for someone who already has insurance. Does anyone have any insight on that?

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prudent
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Re: Trust Allocation Help

Post by prudent » Wed Feb 27, 2019 8:06 pm

How much is the beneficiary dependent on the trust money? Is it anticipated he will surely need $X every year for support or is the trust supposed to be "extras"? I think this might factor into the asset allocation. The more dependent he is on that trust money every year, I might want to be more conservative.

Do you anticipate the "other relative" to be at all concerned about, and/or interested in, how you (1) manage the trusts' investments and (2) how you choose to distribute the funds to the beneficiary?

fabdog
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Re: Trust Allocation Help

Post by fabdog » Wed Feb 27, 2019 8:14 pm

As you select trust investments, look for low turnover funds that do not distribute large capital gains distributions. Those in most cases stay in the trust and get taxed at the trust rates, which get to the top bracket really fast. Dividends and interest show up as trust income but can be distributed. If you distribute them the beneficiary pays tax at their rate, which is most of the time less than the trust tax rate

Mike

ExitStageLeft
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Re: Trust Allocation Help

Post by ExitStageLeft » Wed Feb 27, 2019 8:15 pm

You've taken on quite a responsibility. Hopefully your friend recognizes and appreciates that.

This is when an investment policy statement seems to be an absolute necessity.

Topic Author
blacksmith4
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Re: Trust Allocation Help

Post by blacksmith4 » Wed Feb 27, 2019 8:56 pm

prudent wrote:
Wed Feb 27, 2019 8:06 pm
How much is the beneficiary dependent on the trust money? Is it anticipated he will surely need $X every year for support or is the trust supposed to be "extras"? I think this might factor into the asset allocation. The more dependent he is on that trust money every year, I might want to be more conservative.

Do you anticipate the "other relative" to be at all concerned about, and/or interested in, how you (1) manage the trusts' investments and (2) how you choose to distribute the funds to the beneficiary?
Thanks everyone.

I’ll respond to the above and everyone else here too:

- I’m not concerned whatsoever about legal liability or the concerns of other beneficiaries. I do like the idea of an investment policy document though still, thank you.
- He doesn’t need this money at all until he retires, but might appreciate a reasonable initial cash distribution to upgrade his life for the next several years.
- I’m thinking that until he retires, he’ll already be in the top 23.8% long term cap gains bracket. I’m guessing he’s not in the top income bracket, but still certainly above 23.8%... so do you think it makes sense to seek long term cap gains and incur tax at the trust level for the next several years —and then switch to a low turnover fund after his retirement?
-it’s my pleasure, and I find this stuff interesting but I know he does appreciate it. It’d be very cool to establish some better technology whereby friends more frequently designate one another as trustees in order to protect certain assets from creditors/bad impulses. Once I get the hang of this, id love to try to setup some standard procedures to make it as easy as possible.

ExitStageLeft
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Re: Trust Allocation Help

Post by ExitStageLeft » Wed Feb 27, 2019 9:40 pm

By the way, welcome ot the forum!

If you call the new enterprise Retirement Wingman, I want a piece of the action! :mrgreen:

Topic Author
blacksmith4
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Joined: Wed Feb 27, 2019 5:30 pm

Re: Trust Allocation Help

Post by blacksmith4 » Thu Feb 28, 2019 7:59 am

ExitStageLeft wrote:
Wed Feb 27, 2019 9:40 pm
By the way, welcome ot the forum!

If you call the new enterprise Retirement Wingman, I want a piece of the action! :mrgreen:
Appreciate it.
So, does everyone agree that a 60/40 and 25/75 stock/bond ETF allocation make sense in Trusts A and B respectively? (53/47 in total)

ExitStageLeft
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Re: Trust Allocation Help

Post by ExitStageLeft » Thu Feb 28, 2019 1:33 pm

blacksmith4 wrote:
Thu Feb 28, 2019 7:59 am
...
So, does everyone agree that a 60/40 and 25/75 stock/bond ETF allocation make sense in Trusts A and B respectively? (53/47 in total)
They are reasonable allocations. You won't know until after the fact if they are the best ones. So you state your thesis in the IPS why each AA is appropriate for each trust. It should also state the tax management objectives. There will be conflict amongst the objectives of maximizing reward and minimizing risk and taxes. The documents establishing the trust should offer some insight into how to resolve those conflicts.

Not exactly on point here, but there are some nice articles at ERN on safe withdrawal rates for different allocations over different time horizons. The section Best Case Results has a chart that I link to often: https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Topic Author
blacksmith4
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Joined: Wed Feb 27, 2019 5:30 pm

Re: Trust Allocation Help

Post by blacksmith4 » Wed Mar 13, 2019 11:25 pm

Hello:
I've determined that the trust should be much more conservative than originally planned. The beneficiary is very averse to stocks, in general. However, there's desire to make zero distributions for at least five years and use this time to grow the corpus at like 4% a year. The problem is that this will be difficult to do without incurring massive taxes. Muni bonds are the only way I think to achieve this goal, since regular bond etfs would pay interest that would need to be paid out or incur big trust-level taxes (federal only). But MUB doesn't necessarily get us all the way to the 4% goal.

Are there any asset classes besides Muni Bond ETFs worth considering here? Could I possibly combine some low volatility stock ETF with a gold miners ETF to achieve the desired outcome? How about these "preferred share" ETF offerings?

Thanks!

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