Northwestern Montana Operated 1923 - 1990
Libby, Montana
Gayla Benefield
Ignoring Potential Problems
We Can All Relate
Successor Trustees
Problems are not obvious
No one has said anything so far
Changes can be burdensome
Avoid being a troublemaker
Reviewing Assets as Successor Trustee
Common Issues
§16047.(a) – Duty to Monitor
§16047.(c)(4) – Role of investments in context of overall trust and other resources Ability to take Risk Risk Tolerance
§16047.(c)(4) – Role of investments in context of overall trust and other resources Investment Investment Constraints Constraints Legal and Regulatory Factors
§16047.(c)(4) – Role of investments in context of overall trust and other resources Highly Subjective: - Based on psychological factors - No precise measurement - Willingness to take risk can and will change over time Possible factors: - Investment experience - Source of wealth - Inclination towards taking on debt - Personal financial goals
§16047.(c)(4) – Role of investments in context of overall trust and other resources Ability to Take Risk Younger with longer time horizon to recover from losses Increase Decrease Low human capital – low potential to earn money in the future Need to begin drawing from investment account soon Decrease Increase Receiving annuities until the end of life Annuities have no COLA Decrease Has no dependents Increase Decrease No assets available outside of investment account Planning on significant charitable contributions Increase Increase Debt free
§16047.(c)(4) – Role of investments in context of overall trust and other resources Willingness to Take Risk Wants portfolio of cash and short-term bonds Decrease Decrease Suffered significant investment losses in the past Possesses deep understanding of financial markets Increase Increase Expressed desire to put money in cryptocurrencies Keen to retire early Decrease Already knows they have enough to cover their needs Decrease Founded and manages his/her own business
§16047.(c)(4) – Role of investments in context of overall trust and other resources
§16047.(c)(4) – Role of investments in context of overall trust and other resources Ability Willingness
§16047.(c)(4) – Role of investments in context of overall trust and other resources Ability Willingness
§16047.(c)(4) – Role of investments in context of overall trust and other resources
§16047.(c)(4) – Role of investments in context of overall trust and other resources 100% Equities 0% Bonds 9% 80% Equities 20% Bonds 8% 60% Equities 40% Bonds 7% 40% Equities 60% Bonds 6% 20% Equities 80% Bonds 5% 0% Equities 100% Bonds 4%
§16047.(c)(4) – Role of investments in context of overall trust and other resources
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital • • • •
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital • •
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital $55,000 $51,744 $50,000 $45,000 $44,635 $42,000 $40,000 $38,502 $35,000 $33,213 $30,000 $28,649 $24,713 $25,000 $20,000 Age 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 Annuity Income (Real) Monthly Expenses (Real)
§16047.(c)(7) – Needs for liquidity, preservation vs appreciation of capital Adjustments Reduce annuity from $1 million to $250,000 and invest remaining $750,000 in a moderate risk portfolio with a 6% expected return. Assets Depleted by age 74 Assets Depleted by age 91
§16048. – Diversify the Investments of the Trust
§16048. – Diversify the Investments of the Trust
§16047.(c)(2) – Consider Effect of Inflation or Deflation 2.36 7.00% 2.4 2.22 6.00% 2.2 2.06 5.00% 2 4.00% 1.81 3.00% 1.8 2.00% 1.60 1.6 1.00% 1.42 0.00% 1.4 1.21 -1.00% 1.2 -2.00% 1.00 1985 1990 1995 2000 2005 2010 2015 1 1985 1990 1995 2000 2005 2010 2015 CPI Inflation Compounding Inflation
§16047.(c)(2) – Consider Effect of Inflation or Deflation Low interest on cash ~0.30% Above average fees ~1.06% Large cash holding ~14% - Should get ~2% - ~$3100 surrendered / year - Charged over 1% on cash for management fees but generating only 0.30% interest
§16002.(a) – Manage Assets in Sole Interest of the Beneficiary
§16050. – Only Incur Costs Appropriate and Reasonable in Relation to the Assets 1.24% Portfolio Expense Ratio
§16050. – Only Incur Costs Appropriate and Reasonable in Relation to the Assets → PERFORMANCE: 10.00% Expense Ratio: 1.25%
§16050. – Only Incur Costs Appropriate and Reasonable in Relation to the Assets ~1.35% fee Source: AdvisoryHQ
§16050. – Only Incur Costs Appropriate and Reasonable in Relation to the Assets 200+ transactions in one month
§16047.(c)(3) – Consider tax consequences of investment decisions or strategies
§16047.(c)(3) – Consider tax consequences of investment decisions or strategies 1) Transfer all investments over in-kind 2) Liquidate everything and re-invest the entire portfolio 3) Evaluate unrealized gains and losses ▪ Determine liquidation schedule to control for tax liabilities ▪ Keep some legacy assets in combination with advisor model and gradually phase out old investments over time
§16047.(c)(3) – Consider tax consequences of investment decisions or strategies Gradual Phaseout Perform Final Review of Hybrid Portfolio ▪ ▪ ▪ ▪ ▪
Summary of Common Pitfalls of Investible Assets for Successor Trustees §16047.(a) §16047.(c)(4) §16047.(c)(7) §16048. Duty to Monitor Role of Investments Liquidity Needs Diversification Too many positions Bad asset allocation Too many Excessive exposure in single sector/asset illiquid investments Inappropriate use Portfolio holdings of annuities highly correlated §16047.(c)(2) §16002.(a) §16050. §16047.(c)(3) Inflation Beneficiaries Cost Management Taxes Excessive cash in bank for Not managed under High expense ratios Neglect tax considerations extended period of time Fiduciary Standard High management fees Advisor billing on Too many transactions large cash position
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