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
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
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
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.
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.
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.
INVESTMENT AND PLANNING
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
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.
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
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.
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
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.