Northwestern Montana Operated 1923 - 1990 Libby, Montana Gayla - - PowerPoint PPT Presentation

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

Risk Tolerance

Ability to take Risk

§16047.(c)(4) – Role of investments in context of overall trust and other resources

Legal and Regulatory Factors Investment Constraints Investment Constraints

§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 Low human capital – low potential to earn money in the future Need to begin drawing from investment account soon Receiving annuities until the end of life Annuities have no COLA Has no dependents No assets available outside of investment account Planning on significant charitable contributions Debt free Increase Decrease Decrease Increase Decrease Decrease Increase Increase Increase

§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 Suffered significant investment losses in the past Possesses deep understanding of financial markets Expressed desire to put money in cryptocurrencies Keen to retire early Already knows they have enough to cover their needs Founded and manages his/her own business Decrease Decrease Increase Increase Decrease Decrease

§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

$20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 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)

$51,744 $44,635 $38,502 $33,213 $28,649 $24,713 $42,000

Assets Depleted by age 74 Assets Depleted by age 91

§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.

§16048. – Diversify the Investments of the Trust

§16048. – Diversify the Investments of the Trust

§16047.(c)(2) – Consider Effect

• f Inflation or Deflation
• 2.00%
• 1.00%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 1985 1990 1995 2000 2005 2010 2015 CPI Inflation

1.00 1.21 1.42 1.60 1.81 2.06 2.22 2.36

1 1.2 1.4 1.6 1.8 2 2.2 2.4 1985 1990 1995 2000 2005 2010 2015 Compounding Inflation

§16047.(c)(2) – Consider Effect

• f Inflation or Deflation

Large cash holding ~14% Above average fees ~1.06%

• Charged over 1% on cash for management

fees but generating only 0.30% interest

Low interest on cash ~0.30%

• Should get ~2% - ~$3100 surrendered / year

§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

Expense Ratio: 1.25%

PERFORMANCE: 10.00%

→

§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

• f investment decisions or strategies

§16047.(c)(3) – Consider tax consequences

• f 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

Perform Final Review of Hybrid Portfolio

§16047.(c)(3) – Consider tax consequences

• f investment decisions or strategies

Gradual Phaseout

▪ ▪ ▪ ▪ ▪

Summary of Common Pitfalls of Investible Assets for Successor Trustees

§16047.(a) Duty to Monitor §16047.(c)(4) Role of Investments §16047.(c)(7) Liquidity Needs §16048. Diversification

Too many positions Bad asset allocation Too many illiquid investments Inappropriate use

• f annuities

Excessive exposure in single sector/asset Portfolio holdings highly correlated

§16047.(c)(2) Inflation

Excessive cash in bank for extended period of time

§16002.(a) Beneficiaries

Not managed under Fiduciary Standard

§16050. Cost Management

High expense ratios Too many transactions

§16047.(c)(3) Taxes

Neglect tax considerations Advisor billing on large cash position High management fees

Questions?

Disclaimer