Managing Trust Assets: An Investment Balancing Act
We help trustees meet their fiduciary responsibility by providing independent, objective advice in managing the assets to meet the needs of the beneficiary. According to the UPIA, the following considerations should be examined when building the appropriate investment portfolio: financial situation, current investment portfolio, need for income; tax status and tax bracket, investment objective and risk tolerance.
The investment manager should view the portfolio from a cash flow perspective; how much money may be taken out of an account while maintaining a high level of confidence that the money will last for a certain period of time. A distribution analysis, monitoring the rate at which money is being distributed from an account, should be performed at least on a quarterly basis.
Many special needs trusts have been established by parents for the benefit of their child with a disability (third party trusts). Other trusts may have been established by a parent, grandparent or court for an individual with special needs allowing them to protect their eligibility for certain government benefits (first party trusts). Regardless of how these trusts have been created, the guiding principles to follow in the investment management process is to create, monitor and change an investment portfolio to comply with the purposes, terms, distribution requirements and individual circumstances of each beneficiary. With an elder or disabled beneficiary, investment managers need to look beyond their model investment portfolios to the unique needs of the individual.
A good starting point in the process is to collect, analyze and review information or documents that pertain to the establishment and management of each trust account. The second step is to identify and establish the specific goals and objectives of each trust and the needs of the beneficiary. These goals and objectives should be determined by (but not limited to) the following factors:
- Income needs for short term, mid term and long term expenses
- Current and potential future assets to be added to the trust from future gifts, inheritances, settlements, etc.
- Income of beneficiary derived by all sources, including SSI, SSDI, Pensions, Child Support, etc.
- Government benefits currently being received by beneficiary such as Medicaid, Section 8, etc.
- Future potential government benefits, such as Medicare, etc.
To achieve these goals and objectives the portfolio must be invested across multiple investment classes. In addition, attention to fees and expense ratios of investments need to be considered and monitored. Overall, the account should be managed to pursue the needs of each specific beneficiary. One of the most important factors in determining the investment strategy of each account is the time horizon for the beneficiary. This is necessary to determine the most appropriate asset allocation including cash that must be available to help address the needs of each beneficiary. In situations where the trust assets are not adequate to provide for the lifetime needs of the beneficiary, a specific spend-down strategy should be followed. Since investing and planning is an art as well as a science, there are frequently various options and strategies to be considered. It is imperative to document the reason for each strategy and to identify the pros and cons of the various options.
Distributing Trust Assets: A Fiduciary Balancing Act
Paramount to the role of the investment manager and all of the strategies, suitability, and risk versus return analysis they are required to do is the role of the Trustee. The Trustee will dictate the specific distributions of the trust and needs of the beneficiary.
The Trustee looks at the portfolio from a fiduciary point of view, executing the provisions of the Trust document to meet the needs of the beneficiary and successors. It is their role to protect the integrity of the terms of the trust document.
There are also times when a document is very flexible with distributions and other times that documents are very strict. In the end, the trustee must adhere to the legal requirements of the trust with the best interest of the beneficiary.
Another layer of complexity is added when the beneficiary is someone that has special needs and may not be able to communicate or understand their overall situation. Family members may or may not be involved in the life of the beneficiary. There may or may not be a written Letter of Intent to help the trustee get to know the beneficiary. The trustee is further challenged to maintain the values of the family and the spirit of the grantor when they may never have met the beneficiary prior to be appointed in the role of the trustee.
Balancing Together
A primary focus for meeting the needs of the beneficiary is a balance between the roles of the trustee and the investment manager. It is in working together that the strengths and viewpoints of each professional compliment one another. For example, the trust may indicate a certain percentage of interest and/or principal must be distributed. From an investment management perspective, this may be considered an excessive distribution rate that cannot be sustained. The Trustee will interpret the provisions within the trust. The role of the investment manager is to maintain a proper asset allocation and provide adequate cash required to meet the direction of the trustee.
The key is in having effective communication between all parties working together as a team.
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