Estate Trust question

[Ziggy]

I don't know if this type of financial question is appropriate to this forum or not, and if not, I apologize.

The question is about how an executor can best re-structure an estate trust investments. Basically, the way the trust works is that all the annual "income" from the trust goes to the trust "beneficiary" until that person passes away and then the assets are given to the beneficiary's children. The current beneficiary can restructure how the trust assets (stocks, bonds, cash, etc. ) are now to be allocated but they can not actually take the asstes out of the trust; just any annual income (i.e.: interest, dividends, gains on the sales of stock, etc.) that it generates.

Now here's the situation and issue: the current beneficiary does not need or want any income from the trust for the nex 5-7 years. They want to invest the current trust assets into things that will not loose value, that will grow, and that will not generate current annua income that will just be taxed before it is needed -- i.e. the beneficiary wants the assets to grow so there may be capital gains in the future, but not income now.

Wonder if anyone has encountered a similar problem and how they solved it. Wonder what specific things people would recommend as investments for a situation like this.

[MooreBonds]

Powershares claims to offer below-average capital gains distributions for their ETFs, since they use different methods than some ETFs when they sell shares in a holding. Other than that, I don't know of any other opportunities that would be able to defer distributions (capital gains and/or interest/dividends) for a while, yet have a NAV grow that would reflect the retained gains.

[clifp]

Vanguard has a series of Tax managed funds, that minimize distributions. One I looked at the Tax Managed Cap Appreciation fund appears to basically track the Russell 1000 index, and has very small distributions. For example the 5 year before tax return was 7.41% vs Russell 1K at 7.21 and the after tax returns (i.e top fed bracket) was 7.13%. Typical Vanguard expense ratio .1% to .2% which makes them cheaper than powershares ETFs

[Texas Proud]

Does the trust specifically say you have to DISTRIBUTE the income Most trusts are not that specific... ie MUST. if so, then you can hold the income and reinvest...

If you must, then yes, you need to put these in stock funds that do not distribute much such as the tax managed... OR go into zero coupon bonds...

[Ziggy]

Texas Proud:
You are correct. The Trust does not say the Trust's income must be distributed. My misstatement. The problem is that the income is taxed at te highest IRS rates if it is not distributed. That is different, and I confused the issue. Thanks for asking!

CLiifp & MooreBonds:
Thanks for your recommendations, too.

[Texas Proud]

It has been so many years that I have not idea what the tax rate is on a trust, but there used to be some progression... not all at the highest rate...

Let's try something else.... is there any language on people adding to the trust?? If not, distribute the money to bene and have the bene give back the money... and if he doesn't want to give it all back because of taxes, then give back only the amount that does not go to taxes...

Also, do some sales of losses on stocks.... keep the income down with capital losses... usually there are some to be had..

And like the first few posts... invest in tax managed mutual funds and zero coupon bonds... just don't get any income


Just don't make the mistake of trying to save taxes and then hurt the trust by not having it grow. I saw this happen a few times.... so against paying taxes they made stupid investments and were actually hurting the benes...

[gandalf42]

Well I know everyone is an index fund convert but in this situation why not just invest in some blue chip stocks that don't have dividends? Then you only have the capital gains to deal with when you're ready to sell off some.