How to invest trust funds????

[RE2Boys]

This really doesn’t apply to FIRE, but would appreciate the collective wisdom of this board’s comments.

Recently became the trustee of my deceased sister’s funds. I’m to set up a trust for the benefit of her two adult children. Half the value of the trust to be distributed in April 2010, other half (and trust terminated) in April 2015. No provision for distributing any trust income (interest, dividends, capital gains) at any other time. This will mean that the trust will have to pay income tax on current income in all years except 2010 and 2015. Trust income tax rates hit the 30% plus at around $10K taxable income.

Assets are about $200K. How to invest?? As I see them now, the prime issues are:

1. Minimize ordinary taxable income.
2. Have 3.5 year time horizon until first distribution.
3. Have 8.5 year time horizon when everything must be liquidated.

Current assets are invested:

American Funds:
EuroPacific 20K
New Economy 5K
Invest Co of America 30K
Income Fund of Amer 45K

Remaining 100+K in a tax exempt money fund.

Any comments, suggestions, or additional viewpoints are appreciated. I’m tempted to let the MM funds ride in anticipation of the 2010 payout, pull out EuroPacific and New Economy money and transfer to Investment Co. of America, start reducing exposure in all equities gradually after 2010 given my inclination of being conservative in my fiduciary responsibility.

[brewer12345]

I assume that you are aware of the "prudent investor" or "prudent man" standard you will be held to in managing the trust funds? If not, do a little reading.

If I were in your shoes, I would probably buy treasuries or high grade corporates that mature just before your first disribution date. It isn't far enough out to do much of anything else with.

For the rest of the money, no more than 50% equities would be appropriate, and yu would probably want to shade that down as we get closer to 2015.

[lswswein]

Quote:

Originally Posted by RE2Boys Invest Co of America 30K Income Fund of Amer 45K Remaining 100+K in a tax exempt money fund.

RE2Boys - I have looked up the funds and they are both disappointing as far as expenses go.

Invest Co of America - What class of shreas do you have? 5% front end load for the class A shares and also 0.55% ER for all shares.
Income Fund of Amer - This is a mortgage securities and high yield debt fund with close to 0.75% expense ration.

You should think about tax managed balanced fund at Vanguarda and also 2015 target retirement fund. Those would be more prudent

-h

[mickeyd]

Quote:

You should think about tax managed balanced fund at Vanguarda

Make sure that you take into account the fact that the T-M funds assess a 1% redemption fee if you hold the shares for less than 5 years. This could present a problem with the first distribution in 3.5 years.

[HFWR]

Quote:

Originally Posted by mickeyd Make sure that you take into account the fact that the T-M funds asses a 1% redemption fee if you hold the shares for less than 5 years. This could present a problem with the first distribution in 3.5 years.

Fraudian slip? :P

[saluki9]

Quote:

Originally Posted by lswswein RE2Boys - I have looked up the funds and they are both disappointing as far as expenses go. Invest Co of America - What class of shreas do you have? 5% front end load for the class A shares and also 0.55% ER for all shares. Income Fund of Amer - This is a mortgage securities and high yield debt fund with close to 0.75% expense ration. You should think about tax managed balanced fund at Vanguarda and also 2015 target retirement fund. Those would be more prudent -h

If these are A-shares (Most Amer funds are) and the load has already been paid these are both pretty decent funds

Look at their long term risk adjusted performance.

[mickeyd]

Quote:

Fraudian slip?

Good one, huh? It was only a small s that was missing...thanks for keeping me PC I corrected it. 8)

[RE2Boys]

Quote:

Originally Posted by lswswein RE2Boys - I have looked up the funds and they are both disappointing as far as expenses go. Invest Co of America - What class of shreas do you have? 5% front end load for the class A shares and also 0.55% ER for all shares. Income Fund of Amer - This is a mortgage securities and high yield debt fund with close to 0.75% expense ration. You should think about tax managed balanced fund at Vanguarda and also 2015 target retirement fund. Those would be more prudent -h

The load has already been paid by my sister years ago and there's no load if switching within the American Funds family. Fund expenses in range of 0.55% I've been on the fence for awhile whether to keep them or cash them out and go with Vanguard funds. The MM mentioned in my original post is Vanguard PA tax exempt MM. I'll look into the 2015 retirement fund, thanks. Thinking it may be prudent to phase down the equities in stages over the last five years.

Just found out about the Prudent Investor Act, see:

http://www.reedsmith.com/library/bul...usecache=false

Thanks for the helpful comments.

RE2Boys

[mickeyd]

Quote:

The load has already been paid by my sister years ago

Don't forget about 12b-1 fees. It's the fee that keeps on giving, and giving and...

[FinanceDude]

Quote:

Originally Posted by lswswein RE2Boys - I have looked up the funds and they are both disappointing as far as expenses go. Invest Co of America - What class of shreas do you have? 5% front end load for the class A shares and also 0.55% ER for all shares. Income Fund of Amer - This is a mortgage securities and high yield debt fund with close to 0.75% expense ration. You should think about tax managed balanced fund at Vanguarda and also 2015 target retirement fund. Those would be more prudent -h

Probably jumping the gun to liquidate the shares without knowing more...........if you sister bought the shares some time ago, you did not pay the front load, and so what does it matter in the scheme of things?

Outside of Vanguard, American Funds has one of the lowest ER's in the whole MF industry, anf they are very conservative. The goal in trusts such as these that will distribute within a short time frame is to PROTECT what is in there, so by reallocating to some low risk instruments like Treasuries and the like, you should be in good shape.

Be sure you have an Investment Policy Statement drafted, and that you sign off on it and have it notarized. That way, if anyone asks a question about how you managed the funds, you have a paper trail.........

[lswswein]

I did not know about the cost basis for the shares but I was under the impression that there would be no capital gains taxes on them because of it being a trust. (FYI - I have no clue about Trust stuff )

The suggestions made were based on that. The TR2015 is for the money to be used in 8.5yrs, not the 3.5yrs. About the money to be used in 3.5 yrs I would stay with short term bonds. Also I dont see how the High Yield Fund / Mortgage funds are useful in the portfolio - They are not yeilding much higher that Treasuries.

Bogle also says American Funds are good but I would like to see if there are any other lower ER funds for short term funds.

hope this is useful
-h