Evaluate letter of wishes for our trust

We are creating a living trust to benefit our two young children in case if we die. Wanted to get some feedback on the wishes below. The letter involves financial planning and investment decisions that are pertinent to this group and goes on at some length about the latter.
Could someone say if posting a letter of wishes (about 2 pages) to be criticised is appropriate here, thanks
Reply to
In article ,
If you want to bind the successor Trustee to follow your wishes your wishes must be part of the Trust. Then you need a mechanism to monitor the successor Trustee. Most estate planners do not recommend rigidly binding the trustee (e.g. 40 years ago a requirement to hold GM stock may have made sense, it sure doesn't today.)
In your case you have two issues - raising the children (ideals, ethics, education, lifestyle) and handling the money. You might want to have separate trustees for each function. Also plan for succeeding trustees and how to remove an unsatisfactory trustee (the bank is churning the portfolio, the brother-in-law becomes an alcholholic etc
Reply to
Avrum Lapin
This is a letter of wishes, it is not a trust document etc. Its purpose is to recommend the trustee how to handle money, both in giving as well as in investing. Here goes.
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ Letter of Wishes
Letter of Wishes
It is desired that the Trustee of the ***** and **** ****** Living Trust dated *** *, 2009, and any amendments thereto, or any subtrust created in that agreement make the following considerations when making discretionary distributions and investment decisions, under the terms of the Trust.
Care of minor children
The primary objective of the Trust is to provide for care and learning for our children before they reach majority. Expenses such as food, clothing, medical and dental care are to be provided for as needed. Amounts up to three current US poverty thresholds of a person under 65, as published by the Census bureau, per child per year require no documentation on the part of the Guardian. Any expenses beyond this are to be granted on reasonability basis and need to be sufficiently documented.
We want to provide for education for our children. The Trustee may exercise discretion in determining the amount of the distributions. Distributions should be made from the Common Trust to provide for tuition, fees, and living expenses to each beneficiary for the first 8 semesters of college or university level courses.
The primary reason for the 8-semester limit is to encourage responsible behavior and continual progress towards an undergraduate degree. We want to discourage wasteful use of Trust assets, but will encourage distributions for tuition, fees, and living expenses for a 9th and 10th semester at the discretion of the Trustee. We would encourage the beneficiary to earn personal income during the 9th and 10th semesters to offset the Trust distributions.
Criminal Defense
There is no limit how much can be provided to the beneficiaries for the purposes of their adequate legal representation in any criminal case against them.
Wedding gifts and first home co-payments
To ensure responsible financial behavior, and to avoid wrong incentives regarding marriage and buying homes, neither wedding gifts nor assistance with a down payment on a home, should be provided. Medical Expenses
Beneficiaries are encouraged to maintain adequate coverage for health expenses so that the Trust would not need to cover them. However, in the case of any uncovered medical expenses, the Trust is to cover any medical expenses that are not body enhancements.
The Trustees are to avoid any financial arrangement in managing the funds of the trust, that would involve compensation or incentive to the manager of the trust that would be based on trading commissions. The payment to the investment manager is to be done only on the basis of percentage of funds held.
Under no circumstances may the Trust purchase any newly issued securities, besides those issued by the US government. This includes any Initial Public Offerings or any other newly invented or newly issued financial instruments. The rationale for this is that in the opinion of the Grantor, these are rarely designed to benefit buyers. We define newly issued securities as those new types of securities invented within the last 10 years, or alternatively, any security issued or made public within three years of a contemplated purchase. This restriction precludes buying of any newly issued securities that are deemed prudent or suitable for investment, as well as any newly issued securities that are highly rated by rating agencies.
We encourage the Trustees to invest into low cost investment vehicles such as index funds that provides an inexpensive opportunity to invest in asset classes with some degree of diversification.
Within first ten years from forming the trust, any Berkshire Hathaway shares that belong to the Trust are not to be sold, except if the Trust runs out of other sources of money. Berkshire Hathaway is a diversified business that we consider to be a prudent investment, even if it comprises a large portion of the investment portfolio.
Asset Allocation
We do not agree with any financial advice or commonly accepted investment allocation principles, that suggest that asset allocation should not depend on general price levels. This often includes advice to base asset allocation on age only. We believe that the main source of risk in owning any asset, is the risk of paying too much for it, a mistake that cannot be redressed by holding the asset indefinitely.
We do not think of price level volatility as a true measure of financial risk, although we are aware of its popularity in academic and financial planning circles. [skip a sentence that explains why I know what I am saying] We recognize that prices of any asset class are subject to the prevailing moods of the investment community, and want to free asset allocation from being influenced by such moods.
When allocating money between low cost vehicles such as index funds, the Trustee should compare yields between stocks and bonds. The bond yield is defined as yield of intermediate maturity government securities, minus current rate of inflation (so called real interest rate), and the yield of stock funds is defined as the inverse of the P/E ratio of a widely accepted investment benchmark such as S&P 500, preferably on a trailing basis (several years earnings).
Funds should be allocated to the asset class offering higher yield, with the difference being greater the greater is the disparity between yields.
The Grantor does not object to, and does not consider imprudent, allocating up to 100% to one asset class in case if that class offers a substantially higher yield. Specifically, the Grantor would be comfortable with allocating 100% or close to 100% of the money into stocks in times of economic turmoil, if stock yields are sufficiently attractive. In addition to this, we would like to discourage investing a large percentage of money in stocks in case of general economic prosperity and stock earnings yields falling below 3-5%.
We would also like to discourage frequent reallocations, with assets reallocated no more than once or twice a year.
The above advice does not constitute an attempt to prescribe a "market timing strategy", but rather is oriented towards avoidance of overpaying for any currently fashionable asset class, and in the long run, would attempt to avoid permanent losses due to overpaying.
Reply to
Igor Chudov
It seems to me your document contains a lot of good advice for all adults investing money, not just those managing the assets of minors!
Reply to
Nice to hear that all the financial planners agree with this..
How do your beneficiaries spend the money once they are adults?
Reply to
I just got this newsletter that does the best job of blowing apart the Efficient Market Hypothesis that I have read. It's kind of long (12 pages) and occasionally geeky, but quite readable overall.
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It's also one sided. People looking for a defense of EMH will have to look elsewhere.
-- Doug
Reply to
Douglas Johnson

Why wouldn't you subtract the inflation rate from stock yields also?
william dot trice at ngc dot com
Reply to
Will Trice

Prohibitions on selling a specific stock for ten years need to be considered alongside a trustee's duties to manage the assets prudently. It could create a conflict that puts the trustee in a bind. Follow your doc, risk being sued for breach of fiduciary duty. Don't follow your doc, risk being sued for not following your wishes.
And your strategy description has significant ambiguities in it while being highly specific in some areas. That might leave a lot of room for a trustee to be sued. Example - you talk of an asset allocation approach based on earnings yields and inflation rates, but as you know these can be defined in many ways. Does "over several years" mean 2, 3, 5, 7? How should the umpteen adjustments to earnings be made (e.g. changes in GAAP, operating vs. other types, etc)? Which inflation rate, and how often is it checked? And how does one identify "general economic prosperity" - when you say to own no stocks - except in hindsight? It reads like a potential liability-creator for someone trying to follow the instructions.
And of course there's the bigger question...whether to attempt to manage money from beyond the grave in this way. Many years from now, a family/friend successor trustee might have no interest in managing the investments themselves, or lack the ability, etc. The alternative will be going to one of the many firms that manage trust assets. What will the legal effect of this document be? I don't know the answer to that, but it strikes me as a liability hot-potato.
Reply to
Tad Borek

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