Trust investments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
slickracer
Posts: 53
Joined: Sat Dec 26, 2020 10:00 am

Trust investments

Post by slickracer »

Good Morning,

Looking for some advice on investing about $100K for an inherited trust for which my Daughters are beneficiaries. The trust stipulates distributions of 1/6 of the trust value at ages 21, 25 and 30 years of age. I'm thinking of bucketing 1/3 of the funds with Schwab Target Index funds (office about a mile away makes it easy to open account...I gave up on doing it online with Vanguard):

-Distributions in years 2027 & 2029- use the Target 2025 fund

-Distributions in years 2031 and 2033- use the Target 2030 fund

-Distributions in years 2035 and 2017- use the Target 2035 fund

I've also considered building a 70/30 portfolio with Total Stock Index, Total Int'l Index, Intermediate Term Bonds & Short Term Bonds.

Would love your thoughts/advice, especially from anyone who has managed a similar situation in the past.

Thank you in advance!
User avatar
noraz123
Posts: 407
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: Trust investments

Post by noraz123 »

slickracer wrote: Sat May 08, 2021 7:39 am Good Morning,

Looking for some advice on investing about $100K for an inherited trust for which my Daughters are beneficiaries. The trust stipulates distributions of 1/6 of the trust value at ages 21, 25 and 30 years of age. I'm thinking of bucketing 1/3 of the funds with Schwab Target Index funds (office about a mile away makes it easy to open account...I gave up on doing it online with Vanguard):

-Distributions in years 2027 & 2029- use the Target 2025 fund

-Distributions in years 2031 and 2033- use the Target 2030 fund

-Distributions in years 2035 and 2017- use the Target 2035 fund

I've also considered building a 70/30 portfolio with Total Stock Index, Total Int'l Index, Intermediate Term Bonds & Short Term Bonds.

Would love your thoughts/advice, especially from anyone who has managed a similar situation in the past.

Thank you in advance!


I am not sure why you would use different target date funds at the different distribution dates.

If the funds are meant for your daughters, then I'd pick the target date of THEIR retirement. If daughter A was born in 2006, then perhaps a target date fund of 2070 would be appropriate. And that is appropriate regardless if she's 21, 25 or 30. Sames goes for Daughter B.

Three fund portfolios are very easy for Bogleheads to manage. But for someone turning 21, I'd definitely go with a target date fund.
Easy to maintain, well diversified, low cost, and self adjusting glide path.
Topic Author
slickracer
Posts: 53
Joined: Sat Dec 26, 2020 10:00 am

Re: Trust investments

Post by slickracer »

Distributions need to be complete when the youngest turns 30, which is in 17 years. We want the trust to cease at that point and be done with it.
L82GAME
Posts: 561
Joined: Sat Dec 07, 2019 9:29 am

Re: Trust investments

Post by L82GAME »

How is the $100k currently invested (e.g., in a bank account titled to the Trust, or some other arrangement)?
"Still I am learning." - Michelangelo
Topic Author
slickracer
Posts: 53
Joined: Sat Dec 26, 2020 10:00 am

Re: Trust investments

Post by slickracer »

L82GAME wrote: Sat May 08, 2021 7:55 am How is the $100k currently invested (e.g., in a bank account titled to the Trust, or some other arrangement)?
Yes, currently in a trust titled bank account, awaiting the settlement of real estate to determine the exact amount of funds to invest.
Enolacs
Posts: 3
Joined: Sat May 08, 2021 8:04 am

Re: Trust investments

Post by Enolacs »

noraz123 wrote: Sat May 08, 2021 7:50 am Three fund portfolios are very easy for Bogleheads to manage. But for someone turning 21, I'd definitely go with a target date fund. Easy to maintain, well diversified, low cost, and self adjusting glide path.
My vote would be for a target date fund, with a single date as mentioned above for the daughters respective retirement, or better yet a total world index fund. Keep it simple.

slickracer wrote: Sat May 08, 2021 7:39 am The trust stipulates distributions of 1/6 of the trust value at ages 21, 25 and 30 years of age.
This adds unnecessary complexity. Pick a age where they receive the lump sum, i.e. 25 years of age, or a year in which they would all receive it, i.e. 2045 regardless of age.

As someone on the receiving end of a similar trust, albeit drastically smaller, simpler is often better.
Postmon
Posts: 304
Joined: Mon Jan 02, 2012 2:46 pm

Re: Trust investments

Post by Postmon »

I guess it depends on what the distributions are going to be used for at 21, 25 and 30? I'm assuming you don't know and it could range from spending to saving for retirement? If that's the case I'd do 60/40 in a 3 Fund.
L82GAME
Posts: 561
Joined: Sat Dec 07, 2019 9:29 am

Re: Trust investments

Post by L82GAME »

slickracer wrote: Sat May 08, 2021 8:05 am Yes, currently in a trust titled bank account, awaiting the settlement of real estate to determine the exact amount of funds to invest.
I think that's ideal as a starting place (i.e., no tax-qualified retirement plans listing the Trust as beneficiary). There are many knowledgeable posters on this forum, especially those who can provide advice regarding the tax implications relative to how the Trust is structured.

Generally, I suggest you consult with an estate attorney and tax advisor. While you don't want to overcomplicate the matter, without knowing specifics about how the Trust is structured relative to the beneficiaries and with you as Trustee and your enumerated powers as Trustee, it's difficult to adequately advise you (nor should I given that I'm not qualified to do so).

For example, depending on how the Trust names the beneficiaries (and perhaps based on whether, as Trustee, you can create sub-trusts) will have a bearing on how beneficiaries will be taxed on distributions, and how the Trust may be taxed on undistributed income (e.g., capital gains that remain within the Trust). Given that all Trust assets will eventually be distributed to your daughters over the next sixteen years, there will be both dividends/interest distributions (income tax rates) and capital gains distributions (cap. gains tax rate). Exactly how this is divvied between the beneficiaries and the Trust determines respective tax rates, which can be as high as 37% for income and 20% for cap. gains respectively attributable to the Trust's income with very low exemption thresholds, not inclusive of state tax rates and structure. Then there's the matter of your daughters' respective tax implications.

This should be sorted out prior to embarking upon an investment strategy. Generally however, if the assets remain in one Trust for your daughters, I'm not sure that investing the assets in multiple TDFs makes sense, as it would be one pot of assets to draw from for distribution purposes.
"Still I am learning." - Michelangelo
JBTX
Posts: 8219
Joined: Wed Jul 26, 2017 12:46 pm

Re: Trust investments

Post by JBTX »

Make sure you are aware of trust tax rates where brackets are much lower

https://www.greensfelder.com/trusts-and ... mounts-for

Depending on the amounts some level of tax management may be beneficial, and capital gains are more attractive than ordinary income at higher levels.
User avatar
celia
Posts: 12790
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Trust investments

Post by celia »

I would be concerned that whatever you do, the value being distributed each time would vary. A distribution could end up being less than one given 2 years earlier if the markets go down. And the trust also has to account for taxes along the way unless you "push" them onto the beneficiaries.

I haven't thought about this a lot, but offhand this is what I would do: Invest in only one index fund (or a target fund containing mainly index funds) and let the distributions go to a money market account for taxes. (Taxes can't be more than the growth--distributions and capital gains when selling.) Take each distribution from a sale of the chosen index fund one week before their birthday in the appropriate years and give it to them on their birthday (1/6, 1/5, 1/4, 1/3, 1/2, 1/1 each time from the index fund only). After the final taxes are paid, split the left-over and give half of it to each of them.

Let them know the plan beforehand and tell them the value will vary since the stock market changes, but usually goes up in the long term. This is meant to prevent hard feelings down the line and is not in your control as far as the future prices, although you would be doing what appears to be in their best interest.
User avatar
celia
Posts: 12790
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Trust investments

Post by celia »

Enolacs wrote: Sat May 08, 2021 8:19 am
slickracer wrote: Sat May 08, 2021 7:39 am The trust stipulates distributions of 1/6 of the trust value at ages 21, 25 and 30 years of age.
This adds unnecessary complexity. Pick a age where they receive the lump sum, i.e. 25 years of age, or a year in which they would all receive it, i.e. 2045 regardless of age.

As someone on the receiving end of a similar trust, albeit drastically smaller, simpler is often better.
This goes against the deceased's wishes, which the trustee is bound to honor, if at all possible. And things can change as time goes on like one of the beneficiaries or the trustee could die before all the distributions are done. So the distribution plan should be written down and the beneficiaries are entitled to know what will happen (if they are not minors).
dbr
Posts: 35952
Joined: Sun Mar 04, 2007 9:50 am

Re: Trust investments

Post by dbr »

There is no reason to bucket asset allocations to correspond to when the distributions are to be made.

The asset allocation should match the life time needs of the beneficiaries. For ages up to 30 years I would probably put the whole trust in stock index funds. Note that TD funds for the retirements of your children would be rational but also amount pretty nearly to 100% stock for ages 20-30.

$100k distributed across three beneficiaries is a small amount relative to the earnings and savings of them, so there is no need to fear the downside of risk.

Is there any specific objective that needs to be provided for? If there is that could change the approach.

An interesting wrinkle is that if the beneficiaries likely plan to take their distribution and invest it as they likely should in 100% stock, then a 100% stock trust means everybody gets the same thing no matter what year they each reach different ages. You could apply the same reasoning to the suggestion of a TR fund for each respective retirement date.
L82GAME
Posts: 561
Joined: Sat Dec 07, 2019 9:29 am

Re: Trust investments

Post by L82GAME »

celia wrote: Sat May 08, 2021 12:56 pm This goes against the deceased's wishes, which the trustee is bound to honor,
+1
"Still I am learning." - Michelangelo
User avatar
asset_chaos
Posts: 2005
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: Trust investments

Post by asset_chaos »

As there is no step up in basis for distributed trust assets and as trust income tax brackets are so compressed, I think that argues for investments that generate not too much current income and that a beneficiary in almost any circumstance could be content to continue to hold, or that, given the distribution ages, a beneficiary could possibly sell and take advantage of zero long term capital gains rates. To me that argues for using one of the total type stock funds, total world, total stock, maybe tax managed capital appreciation. Tilted towards growth of principal, not current income. You don't say how old the daughters are now; that first distribution of principal date being one year off versus twenty years off might make a difference if I'd hold any bonds/CDs or not.

Does the trust allow distribution of income to the beneficiaries at any time? If so, it may be advantageous to distribute up to $2k per daughter per year (need to look up exact kiddie tax amounts) of any dividend income so that it's taxed at zero; put distributed income money into other, e.g. 529, account for beneficiaries. Cost is having to file an income tax return for each daughter.
Regards, | | Guy
Topic Author
slickracer
Posts: 53
Joined: Sat Dec 26, 2020 10:00 am

Re: Trust investments

Post by slickracer »

I would like to thank everyone for their responses. I've done some more research and it appears we can transfer securities in-kind to the beneficiaries. This seems to be the best solution as I can invest the funds in Total Stock Index, for example and pass shares as needed. The trust document does have some flexibility in the distributions, however, they must be complete by age 30 (17 years from now). We also want to end the tax filing burden of the trust as soon as we can. I'm going to confirm with my CPA and estate attorney as well.

Thank you!
bsteiner
Posts: 5862
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Trust investments

Post by bsteiner »

In deciding on investments the trustees would consider the beneficiaries' current and expected future needs.

Unless someone has special needs, the trustees may want to consider whether it's worth administering trusts this small.
User avatar
celia
Posts: 12790
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Trust investments

Post by celia »

slickracer wrote: Sun May 09, 2021 2:17 pm I would like to thank everyone for their responses. I've done some more research and it appears we can transfer securities in-kind to the beneficiaries. This seems to be the best solution as I can invest the funds in Total Stock Index, for example and pass shares as needed. The trust document does have some flexibility in the distributions, however, they must be complete by age 30 (17 years from now). We also want to end the tax filing burden of the trust as soon as we can. I'm going to confirm with my CPA and estate attorney as well.

Thank you!
I was thinking of this today. But the drawback with giving them shares is that they will assume the cost basis at which you buy. In 17 years, they may be afraid to sell (as would the trust) because of the Capital Gains. But the preferential 0%, 15%, or 20% for Long Term gains would likely be lower than what the trust would pay.

I don’t see how you can get out of filing a trust tax return for 17 years. What you hold in it is irrelevant. Even if the shares have losses, they likely give out distributions.
Post Reply