Estate Distribution 12+ Years From Now

[Keopele]

Hi All,
I'm the executor of my Mom's Estate. Within her Trust, she has directed me to set aside a sum amount to be divide into shares and then distributed to each of her four grandchildren along with accrued interests, as each reaches the age of 30. Current ages are 18, 16, 9, and 6. So first distribution in 12 years and last in 24 years. I have full power and authority to invest or reinvest any money within the Trust. I'm a fairly conservative/moderate investor by nature, but have a hard time thinking that $140,000 will sit in a trust savings account earning next to nothing for 12 years until the first distribution.

Any recommendations on how to manage this? A 10yr CD at 1.3ish%? Maybe half in a 10yr CD and the rest in some sort of Bond? I want to be able to guarantee the distribution, but with 12+ years, would like to help them earn a little more. Appreciate any insight..

[38Chevy454]

Just my opinion, but you really need something that will at least keep up with inflation and better to return higher than inflation. No CDs doing that now. Plus with your 12 to 24 year time frame I would go with a typical 60 equities/40 fixed income mix, or to make it simple pick a fund like Vanguard Wellington or Fidelity Puritan that will keep the ratio and have much better return than CDs or similar.

If you are really risk averse, then a straight bond fund will still be better than CDs over your time frame. You could do the inflation protected gov't securities, for max security, but also the known low return barely over inflation.

[donheff]

When do you have to divide the pot, when the first kid turns 30 or could you do it now? Could you break the current pot into four parts and consult with the kids or guardians about how to invest it? If I had a kid coming into such an inheritance I would recommend that it be invested in a diversified set of equity index funds and left alone. If you had to make such a decision yourself you could end up in trouble although maybe selecting some sort of endowment AA would pass muster.

[bingybear]

sounds like this is an irrevocable trust at this point. One thing you will have to consider assuming my assumption is correct, you will have to file taxes for the trust every year. All earnings that are not distributed will likely be taxed at trust rates which are typically higher than individual taxes.
You have 12+ years that this will be in the trust. If this were my trust (which it isn't), I would likely want it to be invested in a moderate diversified portfolio in investments that distribute limited amounts of income. Think diversified index investing. I would periodically re-balance while creating as little income as possible.
Do the grand kids or their guardians know this exists? Does the trust allow discussing/revealing any information at this point? If allowed, talking with the guardian about investment style may be useful. Talking to the 6 year old... maybe not that much.

Did the trust direct you in how to invest the funds? Or provide any guidance? I'm working on revising our trusts ... so much of this is what I'm considering with our trusts.

As for talking to the

[pb4uski]

For one thing, a 10 year CD should be paying almost 3%, not 1.3% so you should shop around. If it were me, I would keep it simple and go Wellington, or Wellesley... that way you could have one account and each recipient gets the return from now until they get their distribution so it is easy.

Another alternative would be 50% in a long term CD and the rest in Total Stock.

[Texas Proud]

I would be very careful in investing so conservatively.... back when I used to do taxes a trustee was sued by the family for bad investments... I do not know what happened as I was gone before it was over... the funny thing is he did invest pretty well, but not great... but I would think a CD would get you in trouble...


I would put the money in a retirement dated fund... as if the child was going to retire at 30.... so the 12 year can be a 2025 or 2030 dated fund... the others adjusted accordingly....

[REWahoo]

Quote:

Originally Posted by pb4uski If it were me, I would keep it simple and go Wellington, or Wellesley...

+1

[CaliKid]

Be careful if you hold the income as the trust tax brackets are extremely compressed so you get to the top bracket very quickly. Often times the trust says to distribute the income anyway. If not, you may want to distribute the income to avoid an adverse income tax impact.

[Bamaman]

It hardly seems fair with the vast difference in ages. The oldest gets screwed and the 6 year old may come out smelling like a rose. Remember that investments can compound over time, and 24 years is a long time.

I agree about investing the funds into a number of diversified extremely low cost ETF's.

[harley]

Give everyone a set amount (adjusted for inflation) as they turn 30. When the last one gets there, give him/her his/her portion, then split the remainder 4 ways. Only fair way to do it, as far as I can see. The oldest will be 42 by then, but it's always nice to receive a bonus no matter what the age is.

If you do something like this, definitely invest for some relatively safe growth (Wellesley/Wellington seem like good options). That way there might be a nice sum to split.

[Walt34]

Quote:

Originally Posted by Texas Proud I would be very careful in investing so conservatively.... back when I used to do taxes a trustee was sued by the family for bad investments... I do not know what happened as I was gone before it was over... the funny thing is he did invest pretty well, but not great... but I would think a CD would get you in trouble...

That's odd, I would come to the exact opposite conclusion because of the fiduciary responsibility - the obligation to NOT lose any of the investment. So I would lean toward putting it in something FDIC insured or at least very conservative and take the position that if it simply kept up with inflation that would be good enough.

[Earl E Retyre]

Quote:

Originally Posted by Walt34 That's odd, I would come to the exact opposite conclusion because of the fiduciary responsibility - the obligation to NOT lose any of the investment. So I would lean toward putting it in something FDIC insured or at least very conservative and take the position that if it simply kept up with inflation that would be good enough.

I agree with Walt34. If it were me, I would put 80% in a federally insured CD earning about 3% and the remaining 20% in a stock Index fund like VTI. This would best ensure you do not lose principal and would likely keep up with inflation.

[Texas Proud]

Quote:

Originally Posted by Walt34 That's odd, I would come to the exact opposite conclusion because of the fiduciary responsibility - the obligation to NOT lose any of the investment. So I would lean toward putting it in something FDIC insured or at least very conservative and take the position that if it simply kept up with inflation that would be good enough.

Quote:

Originally Posted by Earl E Retyre I agree with Walt34. If it were me, I would put 80% in a federally insured CD earning about 3% and the remaining 20% in a stock Index fund like VTI. This would best ensure you do not lose principal and would likely keep up with inflation.

It matters what the trust says about investment and what the trust is set up to accomplish....


The other point is that it was 10s of millions of dollars.... maybe even 100 mill....

[Dancfo]

Regarding the investments, you have a strong possibility of being sued if you invest a 6 year old's money in a CD (or similar) for 24 years. Think how you would feel if someone did that with "your" money. Unless the document specifically dictates your investments, you are probably held to some sort of "prudent investor" standard. Again, investing in a CD may be safe, but it is not a prudent investment for such a long time horizon. You want these funds to have an opportunity to grow. A balanced portfolio might be as conservative as you wish to go.

Also, depending on what state the trust is administered, you may have a legal obligation to provide statements and a copy of the trust to the beneficiaries or their guardians. It is important to understand this requirement. If you do not provide proper accounting or documents, you are again setting yourself up for a problem. Providing information to the beneficiaries allows them to review what you are doing and allows them the opportunity to object. Although they can always sue you, it helps if you have been providing statements for years and they don't object at that time. State statutes are generally specific on this point.

The other posts concerning the tax brackets are also true. In 2015 income in excess of $12,300 was taxable at 39.6%. If the trust allows you to distribute income as a discretionary distribution, consider finding a way to do so in order to reduce the taxes.

Being a trustee can open you up to a considerable amount of liability. Be careful and don't hesitate to consult an attorney if needed. And no, I am not an attorney . Alternatively, look up your state's trust and/or probate statutes and educate yourself.

[Texas Proud]

Also... a thing on taxes....

If you invest in some of the tax advantaged accounts at Vanguard, they hardly ever give off cap gains... so you would only be paying taxes on the divis... sure, a big cap gain at the end when distributed, but still less taxes over all...


I do not remember, since it has been a long time ago.... but you might be able to distribute the 'stock' in kind and not pay a cap gain tax... this is just a possibility, so ask someone who knows for sure...


One more thing... I would set up separate accounts... that way if you change investments on the oldest because it is getting closer to distribution you do not have to change on the youngest....

[Keopele]

Thanks all for the great feedback. A few more details:
- 3 of 4 kids are mine.
- Mom dictated a set amount for each kid in the Trust
- Mom gave me instructions not to discuss this with any of the kids until they are 30. She wants this to be a nice bonus to help them make any life improvements at that time.
- Trust specifically says:
"I direct my Trustee to set aside the total sum of $XX from the Trust funds to be divided into shares and then distributed to each of my grandchildren, along with accrued interest, as each one reaches the age of thirty (30) years. Presently, I have four (4) grandchildren, and each one shall receive the share designated: 1 shall receive $XX, 2 shall receive $XX, 3 shall receive $XX, and 4 shall receive $XX."
- Notices and reports - Section in Trust stating that I don't have to notify any beneficiary of the trust, copy of the trust, reports, etc.
- Trust also states that if any person entitled any distribution prosecutes any action to contest any provision, etc...then all distributions shall be forfeited and annulled, etc..

I think for now I will set aside the sum amount in a local bank trust account with other trust monies while I make the other immediate distributions Mom wanted. I'll consult with the Estate Lawyer and Tax Accountant a bit, but I'm leaning towards harley's suggestion of investing the sum amount maybe part in a 10yr CD and part in VG Wellington and distribute their alloted amount at 30 and split the remaining after the last gkid turns 30. I think this covers being a prudent investor, making sure they get their alloted amount, and likely another nice bonus when the last one turns 30.

Any other insights, I'd appreciate it. Thanks!

[CaliKid]

- Notices and reports - Section in Trust stating that I don't have to notify any beneficiary of the trust, copy of the trust, reports, etc.
- Trust also states that if any person entitled any distribution prosecutes any action to contest any provision, etc...then all distributions shall be forfeited and annulled, etc..

Different states are different but I do believe at least in some states you can not trump the probate code. So notices and accountings may be required by state law. You might double check with an attorney.

As for the no-contest clause that's quite common. However, again at least in some states, questioning an accounting or an investment selection may not be a contest triggering the no contest clause. Again, I would consult with an attorney if I were you.

[Dancfo]

CaliKid is correct in reference to statements. Note Florida Trust Statute 736.0105 (2)(r) & (s) & (t). Granted - this may not be applicable for your state, and being sued by one of your children may be unlikely, but the point is there are lots of rules and considerations to be addressed.

[Texas Proud]

I would not rely on that clause about contesting.... it says no contesting any clauses of the trust, but not what the trustee does... unless there is a specific line stating if they sue the trustee for their work I think you are open... IOW, they are not disputing any clause of the trust, but your fiduciary responsibility to invest the funds...

Is there an investment clause Telling you how to invest the money? Maybe a clause to say you can invest the money any way you see fit? (this might help on the suit issue, then again, 3 of them being your kids will likely prevent them from suing anyhow)....


Also, with the little you gave it seems to contradict itself... it say to give to the GK PLUS accrued interest.... but later you say it says a specific amount to give when they turn 30... or, do you read it to mean set aside that much to each at the time you start the trust?

Again, from what you have listed, you have to distribute all funds to a child when they turn 30.... you cannot save any money to distribute later...