Dynasty trust asset allocation

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Joey Jo Jo Jr
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Dynasty trust asset allocation

Post by Joey Jo Jo Jr »

I couldn’t find this discussed previously, so I thought I’d ask if there were any asset allocation recommendations for a trust that is designed to hold assets, and pay beneficiaries, for multiple generations? For context, by default a trustee has a general duty to invest as a prudent investor, including diversify, and not to favor the current or future generations of beneficiaries.

For those that would say, duh, 100% stocks, I’m not sure if a typical judge would care much about the Kelly Criterion or other esoteric concepts when the market goes down 50% and the beneficiaries sue you for breach of fiduciary duty. On the other hand, if you targeted the Sharpe or Sortino Ratio you could be accused of being too conservative when the beneficiaries fall from the 1% to the 2% after a decade long Fed fueled bull market.

Just wondering if anyone had practical insight or experience with this question? Thanks!
alex_686
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Re: Dynasty trust asset allocation

Post by alex_686 »

Joey Jo Jo Jr wrote: Wed Jul 21, 2021 11:20 am On the other hand, if you targeted the Sharpe or Sortino Ratio you could be accused of being too conservative when the beneficiaries fall from the 1% to the 2% after a decade long Fed fueled bull market.
I don't know what this means, either the first part (Sharpe or Sortino Ratio) or the second part ( conservative when the beneficiaries fall from the 1% to the 2%)

There is not right answer, but there is a right method.

You are dealing with multiple people with multiple goals over different time horizons and have different risk tolerances.

In theory you want to build a portfolio that meets - or at least optimizes - everybody's needs. In practice this is going to be hard to do. Maybe the trust lays out some guidelines. So you are just going to have to sort of wing it.

What you can do is write up a ISP. You can state what the goals, market expectations, and risk tolerances are. What priority are the goals? What risks can't be tolerated? i.e., if the current generation needs trust disbursements to pay for living expenses then the portfolio probably couldn't stand a 50% drop in equities.

You can't make everybody happy. You can lay out clearly what choices were made and why in a transparent fashion.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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anon_investor
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Re: Dynasty trust asset allocation

Post by anon_investor »

Joey Jo Jo Jr wrote: Wed Jul 21, 2021 11:20 am I couldn’t find this discussed previously, so I thought I’d ask if there were any asset allocation recommendations for a trust that is designed to hold assets, and pay beneficiaries, for multiple generations? For context, by default a trustee has a general duty to invest as a prudent investor, including diversify, and not to favor the current or future generations of beneficiaries.

For those that would say, duh, 100% stocks, I’m not sure if a typical judge would care much about the Kelly Criterion or other esoteric concepts when the market goes down 50% and the beneficiaries sue you for breach of fiduciary duty. On the other hand, if you targeted the Sharpe or Sortino Ratio you could be accused of being too conservative when the beneficiaries fall from the 1% to the 2% after a decade long Fed fueled bull market.

Just wondering if anyone had practical insight or experience with this question? Thanks!
Wouldn't it just make sense to have a simple 3 fund portfolio with a 60/40 AA? Keep it simple with a forever allocation?
Lee_WSP
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Re: Dynasty trust asset allocation

Post by Lee_WSP »

You seem to be asking about the trustees duties. This is easily answered. See the prudent investor rule. I believe a copy can be found in the uniform trust code. If not, I'm sure Google has some links.
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Joey Jo Jo Jr
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Re: Dynasty trust asset allocation

Post by Joey Jo Jo Jr »

Thanks all. Sorry for not being clearer, but I’m really wanting to know a specific allocation (or maybe range/variations), similar to Anon’s response, assuming the trust doesn’t specify. And to my knowledge the restatements of law and state statutes do not get that specific.

Perhaps it is as simple as 60/40? Certainly a judge is fairly likely to have heard of that and so it might be more defensible if sued. On the other hand, I believe the maximum risk adjusted return (as measured by Sharp/Sortino/etc) would point to less equities, whereas overall long term returns project to be higher with more equities (and how much is too much?). Basically, it seems like there is a range of options on the efficient frontier and how do you know what part of the frontier to build your house on?
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Joey Jo Jo Jr
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Re: Dynasty trust asset allocation

Post by Joey Jo Jo Jr »

PS - if it were just me I could decide for myself (ie, hey, I think I like 70/30), but as a trustee you don’t really have that luxury because the beneficiaries will have different opinions, and that is just the beneficiaries that are currently alive without dementia. And even those living might have dumb opinions (100% Dogecoin!) which may be why it’s in trust in the first place.
aristotelian
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Re: Dynasty trust asset allocation

Post by aristotelian »

I don't see why the prudent investor rule would preclude 100% stocks with such a long timeframe. That said, if you have enough money to establish a dynasty trust you have enough money to ask the lawyer who is helping create the trust.
alex_686
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Re: Dynasty trust asset allocation

Post by alex_686 »

Joey Jo Jo Jr wrote: Wed Jul 21, 2021 12:27 pm Thanks all. Sorry for not being clearer, but I’m really wanting to know a specific allocation (or maybe range/variations), similar to Anon’s response, assuming the trust doesn’t specify. And to my knowledge the restatements of law and state statutes do not get that specific.
There is not. Every situation is unique. Critically, the character of investments change over time. As a simple example, today's 10 year treasury acts nothing like the 10 year treasury of 25 years ago.
Joey Jo Jo Jr wrote: Wed Jul 21, 2021 12:33 pm PS - if it were just me I could decide for myself (ie, hey, I think I like 70/30), but as a trustee you don’t really have that luxury because the beneficiaries will have different opinions, and that is just the beneficiaries that are currently alive without dementia. And even those living might have dumb opinions (100% Dogecoin!) which may be why it’s in trust in the first place.
Check your trust and local laws, but the trustee is usually given a wide latitude in choices of assets and the beneficiaries have little recourse if they don't like it. So, as I said before, solicit everybody's opinion. Focus on their goals and risk tolerances. Do not ask about asset allocations or particular assets, like Dogecoin. Then put together a plan. Then lay out the plan. You don't have to tell everybody what everybody's else goals were.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
BillWalters
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Re: Dynasty trust asset allocation

Post by BillWalters »

As with all trusts, read the trust. Some explicitly waive the prudent investor rule. In practice, trustees generally have wide latitude. Any reasonable AA is not going to cause problems.
bsteiner
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Re: Dynasty trust asset allocation

Post by bsteiner »

Joey Jo Jo Jr wrote: Wed Jul 21, 2021 11:20 am I couldn’t find this discussed previously, so I thought I’d ask if there were any asset allocation recommendations for a trust that is designed to hold assets, and pay beneficiaries, for multiple generations? For context, by default a trustee has a general duty to invest as a prudent investor, including diversify, and not to favor the current or future generations of beneficiaries.
...
It would depend on how much (relative to the size of the trust) and when the trustees anticipate that they'll need to "pay beneficiaries."

The trustees will probably have higher percentage of stocks if no distributions are anticipated for a long time than if substantial distributions are expected to be needed on a current basis.
123
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Re: Dynasty trust asset allocation

Post by 123 »

While some consider it an honor and a duty to be given responsibility for investment management of a trust it is quite possible that if an outsider, like Vanguard, was given that responsibility it could lessen the likelihood of conflicts and divisions over investment management and performance. Using a corporate investment manager also handles the "Dynasty" issue with trust investment management instead of the trust being dependent upon the (likely varying) knowledge and skills of successive family members who are assigned that role. A corporate investment manager likely lessens the likelihood of an investments being driven by the personal whims of an individual trustee.
The closest helping hand is at the end of your own arm.
Topic Author
Joey Jo Jo Jr
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Re: Dynasty trust asset allocation

Post by Joey Jo Jo Jr »

Perhaps the DIY investing ethos doesn’t really apply to trusts, and the safest thing for the trustee to do is just pay for an investment advisor to make the call. Then the advisor can bless whatever allocation they want to bless. Maybe using a fee based advisor with periodic review if the trustee is willing to avoid AUM fees.

Thanks for the feedback and your time.
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