What to do as trustee?

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brianboru's picture
brianboru
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What to do as trustee?

I am about to become the trustee of a trust for my daughter of an inheritance from her grandmother. Total amount will be less than 100k. Some will need to be invested for near-term (1-3 year), and the rest for longer. Is it possible to hold physical gold in a trust? Is that considered responsible enough to avoid an problems because of not fulfilling my "fiduciary responsibility"? Anyone have suggestions for how and especially where to invest such a trust? Thanks.

DrKrbyLuv's picture
DrKrbyLuv
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Re: What to do as trustee?

brianboru - This is not intended to serve as legal advice.  Depending on where you live, generally the "prudent man laws" suggest that prescious metals and other tangible assets may be part of a trust portfolio.

(U.S.) Trust Examination Manual, Section 3 - Asset Management - Part I, Investment Principles, Policies and Products:

 F.13. Tangible Assets and "Collectibles"
Tangible assets include works of art, antiques, stamps, coins and bullion, and diamonds and gemstones. Such assets often appeal to individuals who do not need current income from all their investments, and, therefore, can allocate a portion of their assets to tangibles in an effort to provide long-term capital gains with no current income tax consequences. Assets of this type are often viewed as an inflation hedge.

An examiner has several objectives in reviewing the management of tangibles. First, the examiner needs to determine that the department has adequate control over the assets and has made provisions for proper storage and adequate insurance.  Management should attempt to verify ownership of the assets, as the grantor can't acquire good title to stolen property.  Stolen artwork has resurfaced years later and has been returned to the rightful owner.  However, discovery and demand for the return of stolen art must be made.  The recovery period can extend well beyond the statute of limitations.  In one case, the court ruled that the statute of limitations didn't begin until a museum demanded the item be returned.  That was 30 years after discovery. 

Rare stamps and coins should be authenticated by an expert (such as the Philatelic Foundation of New York for stamps and the American Numismatic Association for coins). For diamonds and other gemstones a certificate should always be obtained. It is essential that such assets be maintained under dual control. Separate storage of tangible assets that might suffer significant damage, such as stamps, should be considered.

The purchase and retention of tangible assets should be permitted in the governing instruments.  Appraisals should be obtained periodically. With some notable exceptions, tangible investments may be difficult to liquidate. A national auction market exists for investment grade stamps. Gemstones are usually sold by consignment through a major dealer. Some risks can be minimized by permitting such investments only in directed, i.e. non-discretionary, accounts, and by using reliable dealers and auction houses.

The Economic Recovery Tax Act of 1981 essentially eliminated the option of investing in tangibles for self-directed employee benefit accounts (IRA, Keogh, Pension and Profit Sharing) after December 31, 1981. Under the law, any funds of a self-directed retirement plan used to purchase tangible assets must be treated as a taxable distribution of the plan's assets to the participant(s). Refer to Section 5 for further discussion of this topic. However, if an independent trustee or qualified investment manager, vested with investment discretion, selects tangibles as an investment, the participants of the plan would not be similarly penalized.
_____________________________________________________________________________
 
Note: The above verbage mentions that "Assets of this type are often viewed as an inflation hedge." From this I take that gold bullion is a prudent investment, especially if one wants to hedge against inflation - which I think we should be doing.
 
F.13. also goes on to say that "The purchase and retention of tangible assets should be permitted in the governing instruments." My take on this is that if one choses to buy tangible assets, they should be purchased and stored in a prudent manner. Allocated gold bullion is different from most of the other items listed as the market price is posted through-out the trading day. There are a number of secure, insured and audited gold storage vaults located through-out the US and the world.

The ratios are open for second guessing and traditional investment brokers often chase clients away from gold and silver since they cannot typically collect a fee.

Larry

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JAG
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Re: What to do as trustee?

Brianboru,

I have a few suggestions, for what they are worth, but I'm not sure about the red-tape associated with these suggestions. Since we don't know whether we are on the verge of another deflationary spiral or a hyperinflation / stagflation environment, the most prudent approach would be to try to initially prepare for each.

First, if the trust has any cash in a money market account, use it to purchase some gold and silver bullion and hold it in a safety-deposit box at a bank you trust. You should try to establish at least 10% of the trust's value in physical bullion.

Second, adopt a market neutral strategy by following these general allocations:

  • 20% in Commodity / Commodity Related ETF's (some examples include UGA , OIH, NLR, RJA, PBJ, RJZ, etc)
  • 20% in Value Mutual Fund(s) of your choosing
  • 40% in an Inverse S&P 500 Index Fund-such as RYURX
  • 10% in Cash

This portfolio allocation protects the trust's value during an initial deflationary spiral and/or market decline, and protects some of your purchasing power in the event of massive inflation. Of course, once you have a better idea of what is unfolding, you should make the necessary adjustments.

Disclaimer: Its probably not wise to take investment advice from strangers... but at least you know that I have no agenda.

 

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brianboru
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Re: What to do as trustee?

Many thanks for the detailed information, DrKrbyLuv and for your suggestions, JAG. I will consider all this carefully.

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jerrydon10
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Re: What to do as trustee?
brianboru wrote:

I am about to become the trustee of a trust for my daughter of an inheritance from her grandmother. Total amount will be less than 100k. Some will need to be invested for near-term (1-3 year), and the rest for longer. Is it possible to hold physical gold in a trust? Is that considered responsible enough to avoid an problems because of not fulfilling my "fiduciary responsibility"? Anyone have suggestions for how and especially where to invest such a trust? Thanks.

Brian,

I am an estate planner who writes living trusts (and other estate vehicles) for a living and will be glad to help you here.

It is quite legal to hold any asset in a trust including physical gold. The only exception is when qualified money (IRAs, 401ks, etc.) interact with a trust.

Assuming there are no retirement accounts that need to be stretched, physical gold is fine. If retirement accounts are involved and you wish to stretch them for your daughter, then only an IRS approved storage facility may hold the gold.

You will comply with fiduciary duty so long as your actions are to benefit the beneficiary rather than yourself. The latter is called "self dealing" and could get you in trouble. Is the gold being held to benefit your daughter rather than yourself? Then you are not self dealing and fiduciary duty is in compliance.

Most trusts have a successor trustee compensation clause in them. Does yours?

In that clause the grantor of the trust may state that you may not receive any compensation for administering the trust or that you may receive compensation. This clause is normally written in Article One depending on your state.

I will be glad to help you further. Just let me me know how I can.

 

brianboru's picture
brianboru
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Re: What to do as trustee?

Thanks so much for the clarification. I'm still waiting to get the details of the trust, including whether there will be any IRA money involved, from the executor. If I have further questions at that time, I will post them.

DrKrbyLuv's picture
DrKrbyLuv
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Re: What to do as trustee?

Jerry,

If you don't mind, I have a question.

How rigid are guidelines for prudent investments?  For example, I have heard that precious metals (tangible assets) should not comprise more than 20% of a trust portfolio.  And, many suggest a much lower percentage.  Do you see a problem with a trustee deciding to invest 50% or more of a trust in allocated precious metals?

Larry

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jerrydon10
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Re: What to do as trustee?

Larry,

This seems like prudent investment advise, but there are no trust laws that mandate this. If you have (or serve) a trust, please read the section headlined "Trustee Powers."

If your trust writer was good at what she does, there will be sections in that Article that specify that the trustee cannot be held liable for any investments made so long as that investment was in good faith, it was meant to benefit the beneficiaries and the successor trustee does not benefit from it. 100% gold is fine if the trustee feels that will best benefit the beneficiaries.

There is more (incomplete but working on it) on my web site:

http://usaestateservices.com/questions.html

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: What to do as trustee?

Jerry,

Thanks for your words and link - after reviewing your website (loaded with info) I've concluded that I need a living trust.

Another question if I may - do the investment guidelines equally apply to an "irrevocable" trust?

Again......thank you!

Larry

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: What to do as trustee?

Jerry,

Most of us here see what's coming and are preparing to mitigate the effect.  Your website is loaded with important info and I would suggest that the transfer of wealth is an integral part of CC planning.  For example, you make the point that "probate court" and such, should be avoided.  Not only because of potential tax consequences but also to allow money to be transferred without additional court directives. 

When the SHTF time hits us, we may presume that the courts will be bombarded and new standards may be adopted.  After reading your information, I think it is a fundamental issue to avoid the bureaucracy and back log of the courts. 

I hope you might consider contributing an article that discusses how living trusts may benefit everyone - spousal joint ownership and wills are just not enough! 

Larry

jerrydon10's picture
jerrydon10
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Re: What to do as trustee?

Hi Larry:

Yes, the guidlines are the same. The only difference a revocable trust has from an irrevocable one is the revocability factor. Revocability is an advantage only to those who want to maintain 100% control of their estate until the day they die.

Revocable trusts are not for those who want airtight asset protection.

Trusts are a must for some estates, moderately helpful in others and not necessary at all in still others.

There are several factors we look for in determining the needs of the estate.

Is this an estate worth more than the minimum probate size dictated by that state's laws? For example, in Missouri, any estate worth over $40,000.00 (but only $5,000.00 in New Jersey) must be probated in court unless some direct to beneficiary method is used.

Regardless of state laws, if the estate is worth over $100,000.00 some type of trust is needed for it.

Does the estate have property in more than one state? It is not at all uncommon for an estate to own a timeshare in Hawaii, a cabin in Tahoe or oil rights in Oklahoma.....etc. If so, that estate will have to be probated in several states and a trust is necessary as most trusts avoid probate all together.

Does the estate owner want privacy? Wills and the probate process are matters of public record. Trusts that come into effect during the life of the estate owner are totally private.

Does the estate total more in value than the federal death tax exemption? We don't want the heirs paying 50% and up of their inheritance to the feds. Trusts can be used to gain two federal exemptions, one for Dad and one for Mom.

Some estate planners espouse that EVERY estate needs a trust, however, I'm not one of them.

 

 

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: What to do as trustee?

Hello Jerry,

Good stuff....I owe you a beer! 

Do you think some of the rules could be changed - with retroactive mandates?  Maybe I'm getting too damned cynical but a fear I have is that our "broke" government may look for ways to scoop money from any transfer of wealth.  And, the local jurisdictions are getting strapped for cash, they may want to greatly increase the fees while extending the lead-time. 

Larry

jerrydon10's picture
jerrydon10
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Posts: 442
Re: What to do as trustee?

No, I don't think you're too cynical.

Bush repealed the death tax in graduated stages to be completely eliminated in 2010. This year the exemption is the highest it has ever been: $3,500,000.00.

If nothing further is done, there will be no estate taxes at all in 2010 and it will revert back to the Clinton era exemption of $1,000,000.00 in 2011.

However, Obama has already announced that this will change and Congress is working on it right now. No one knows for sure what to expect. Cross your fingers...lol.

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