Retiree's savings at risk

I'll grant you all that this could be some off-the-wall, wierdo trust, but barring that the bank is definitely got some answering to do. The following is based on many assumptions. Of course, the more assumptions, the more likely that one of them is incorrect. However, having dealt with trusts for a long time, the following statements are generally the case.

1. Your mother is not likely an actual beneficiary in the legal sense. Since only one trust has been mentioned and the children are the eventual recipients, I am guessing this is a typical Credit Shelter Trust. If so, the CHILDREN are the beneficiaries, not your mother. Your mother retains a "life estate" in the trust's assets only. As such, so long as she is living, she is free to use all income generated by the trust and may even use principal for "health and maintenance". The trust corpus is destined for the children.

1. Given the above, your mother's risk tolerance is probably not of much importance (I bet that raised a few eyebrows). The trust really isn't about your mother, it's about the children. It's the trust's goals (maximum inheritance to the children) that will determine prudent investments, not the goals of your mother (steady income). Those goals certainly overlap, but not perfectly. I'm not saying 99% equities was prudent (I think it was probably not), but the situation is not as cut and dry as determining the risk tolerance of a fixed income, retired, 70 year old.

2. Typically trusts have very few limitations on what can and can't be invested in. Limitations are advised against because trusts exist for many decades after the grantor's death and it's difficult to know how those specified investment classes will change over those years. Instead, a trust will usually allow nearly any investment and leaves prudency to be determined by professional trustees and, more importantly, the Uniform Prudent Investor Act (UPIA). I have never personally seen a trust that demanded an all-equity portfolio.

1. There almost assuredly is no outside "agreement" between the bank and the trust/beneficiaries/grantor. There doesn't need to be one and it's contrary to the intent of trusts in general. The trust IS the agreement. The trust document will specifiy what the trustee can and can't do, how much he can and can't charge, etc, etc... Again, I've dealt with lots of banks as trustees and I've never seen an agreement other than the trust document itself.

2. Almost all states allow beneficiaries to demand an accounting of the trust and most also allow benes to view the trust document. Why doesn't your mother get the step-children on her side? Unless they don't mind seeing their step-mom spend all the trust income AND begin depleting principal for "health and maintenance", they should be as concerned as she is. They are at risk of getting nothing!

Lastly, your course of action is largely dependent on what you want to accomplish. One thing to do is just have your mother call the bank trustee and explain her concerns. Simply put: she wants to know why they invested so heavily in equities even though doing so is not typical of investors relying on a fixed income.

Her other option is to get an attorney. Unlike many, I like lawyers. That said, the legal route will be much more expensive and more time consuming. Option 1 may get a satisfactory answer in 10 minutes. Option 2 will assuredly not. The bank will clam-up an direct all communication to their legal dept. However, if your looking for indemnification, a lawyer will statistically have more success.

Good Luck.

It seems to me that the most informative documents (denoting state law, generally speaking) on the subject of to what extent the contents of a trust must be diversified are the Uniform Prudent Investor Act (UPIA) and the Uniform Principal and Income Act (UPAIA). Wikipedia says 44 states and the District of Columbia have adopted the UPIA in whole. Other states may have adopted parts of the UPIA but not the entire UPIA. Forty-one states have adopted the UPAIA. Wikipedia has links to the text of both the UPIA and UPAIA.

If Tad's remarks were directed specifically to the OP's mother's trust, then I cannot find anything in the UPIA nor UPAIA that dictates the mix that trustees are expected to maintain so precisely that 99% stocks and mutual funds is a violation. Even the use of load funds can be justified under the two Acts.

The Acts really do give a lot of leeway to trustees. It takes pretty egregious conduct to justify a complaint about stock and mutual fund picks.

It seems to me that the best case outcome would be very gray, not black and white, indeed. First on diversifying: Enough leeway exists that I could not see much of an award coming the mother's way. Second on using loaded mutual funds: Again, this is discouraged but allowed. Third, a showing of harm really would be helpful, to say the least. Has the mother's trust income been significantly reduced? Speculating that it may be significantly reduced will hold little water. Lastly, let's say the mother does win an award. What would her net be after paying attorney's fees? And at her age, can she deal with this stress?

Given that stock and bond investors everywhere have taken similar huge hits, the most I would do, as a concerned child of this woman, is see if she would like a copy of the trust, review it with her, review the UPIA and UPAIA, and see if the two of you still feel there has been illegal conduct by the bank.

I base these remarks on a relative's prudent counsel: Before seeking an attorney, educate yourself as best you can on the law involved. It will save time and money if and when you do meet with an attorney. Said attorney should lay out in advance what he or she hopes to win the mother after his or her fees.

I thought this was a very good read on the duties of trustees such as the bank here, per the Uniform Prudent Investor Act (UPIA). It has much commentary on index funds vs. load funds in trusts.

Suze Orman has an interesting mental exercise in one of her books. Assume your current balance was fresh, 100% cash. How would you invest it today? Then do it. Forget the past, its gone.

The only modification is consider if your change would cause a tax-event. Then you might want to do something different, but starting with your answer to above.

Thanks for all your replies. I?ll call my mother and ask her your questions. She lives far from me, figuring this out would be easier if I lived near her. I believe she gets a percent of the balance of the amount in the trust to live on. That?s why she is worried about it going down.

She recently spoke to the bank and came away not very clear about their investment strategy. She is still concerned about having enough money to live on. It seems like the bank doesn?t explain things to her very well. My mother may not know much about investing, and she could make more effort to understand what is happening with the investments, but I would think the bank should be able to make things understandable to her.

You are trying to help someone who admittedly does not understand her situation. Since everything you know about this is coming from that confused person, you are confused. So much so that you can't ask the right questions here.

Suggestions:

1. Make a list of the questions you have received on this newsgroup.

1. Call your Mom, ask her to make an appointment over the holidays with the trustee.

2. Go with your Mom to that appointment and ask the questions.

1. Between now and then, google on "Testamentary Trusts", "Irrevocable trusts" and Credit Shelter trusts" for general preparation.

Bottom line: If you want to help her, go with her to the Trustee for information from the horse's mouth. You can't do this long distance because she can't tell you what is going on. Good luck. It sounds as if she needs and wants your help.

-HW "Skip" Weldon Columbia, SC

Up to now, the question of the loaded funds apparently has been forgotten after it was first mentioned. If you ask a sales person why one should pay a load when buying a mutual fund, the answer is usually that you are getting advice. When a trustee buys a mutual fund for inclusion in a trust, why does that trustee need advice from a sales person? Isn't that trustee, especially if a bank officer, supposed to be knowledgeable about such matters? Isn't the trustee already being paid for advice, and why should an additional payment to another person for advice be needed?

Apart from the mix of stocks and other products in the trust, the presence of a loaded fund is a danger signal.

Bear in mind that in 1982, the 30yr treasury was yielding 13+%. (as was the 10yr).

Or that bonds are overvalued.

Converting this 375k portfolio to bonds, does not eliminate the risk. It simply changes it from risk of stocks falling, to the risk of inflation and defaults on whatever bonds she would choose. Keep this in mind. Anyone who is suggesting that bonds are not risky is sorely mistaken.

At this moment, economic yield of stocks is approximately 10% (factoring dividends, reinvested earnings, and share repurchases). Economic yield on bonds is only 4-5% depending on riskiness. Guess whih asset class will win in the long run.

Of course, as John Galbraith pointed out, in the long run we'll be all dead, and it applies to your 70 year old mother as well. So her horizon may affect your choices in an obvious way.

The law does not see it as you do. See the post where I provided a link discussing load vs. index funds in a trust.

Igor Chudov wrote

Does "economic yield" mean yearly return?

The current dividend yield on the S&P 500 is around 2.9%.

Many managed accounts can buy loaded funds without paying a load for just that reason. -- Doug

Good, and it is my understanding that individual investors on their own can sometimes negotiate and have the load dropped. But there are so many good funds without loads that is hard to see why anybody would be eager to buy a load fund in the first place and bother with negotiation at all. Surely it is not because certain load funds have shown superior performance, because we all know that past performance is no guarantee of future success!

And also the risk of foregoing future gains, which is every bit as real as the risk of incurring future losses.

I generally agree. While there are a number of fine loaded funds out there, I don't know of any that are all that superior to an equivalent no load. But my point was that the mere presence of a loaded fund in a managed account is not necessarily a red flag. -- Doug

I think it is, because it means that someone is being paid to sell that fund to you instead of an alternative fund that may be just as good for your purposes. It means that whoever the load is paying has an incentive to place his or her personal interests ahead of yours.

Now... I suppose it might be that the manager has an arrangement with the fund that bypasses the loads, and in that case the conflict of injterest might not be there. My concern would be whether there is some other kind of compensation arrangement at work. For example, has the manager agreed to steer a minimum amount of business toward the fund in exchange for waiving the load?

I guess it comes down to this: If I am paying someone for advice, I want to know that no one else is trying to influence that person's judgment in ways that might be to my disadvantage.

Maybe call it a pink flag at least. As you say, it could be there for a good reason, but if it were my managed account I would want further explanation.

I cannot actually think of a good reason for paying a sales commission on the purchase of any fund, except for possibly a specialized fund that invests in one sector or one country and has no competitors. But for a senior seeking income I would doubt the need for such a fund. And even if I were an heir to that senior's assets and wanted long-term growth, I would prefer a Vanguard index fund any day.

I think she should convert most of her money into cash or bonds. Losses in the past should not affect what you do now. This is the sunk cost fallacy.

Some people claim that by shifting assets from shares to bond you are locking in past losses. This is not true. When the value of the shares went down, you have already lost the money.

It is true that by switching from stocks to bonds you make less when or if there is a recovery, but we cannot say whether there will be a recovery soon or not. If your mother needs the money to survive, it's better not to take the risk, otherwise her balance might fall to, say, $100,000 and she may not be able to live off that.

Just because stocks are down from the highs they were a year ago it doesn't mean they are less likely to go down. Stocks may have a while to go down. In the last ten years the S&P500 has not increased. In the last 18 years the Nikkei 225 has gone down by 70 per cent. This means the stocks markets of the two largest economies have shown sluggish performance in the long run.

It seems as if your mother is living off dividends. She doesn't need capital growth, so she never should have had her investments in growth stocks. I recommend moving the money into yield investments like dividend-paying stocks, bonds, property, money market, etc.

As a rule of thumb, the percentage of your portfolio you should allocate to cash and bonds should be your age. For example, if you are

Even if stocks do recover, if she had 40 per cent still in stocks, she captures that recovery to some degree.

Be wary of the gambler tendency to win back losses. That lost money is gone.

You should see a financial adviser for more specific advice related to your situation, but be careful about whwat kind of financial adviser you see.

That's not a decision she gets to make. IT'S NOT HER MONEY. From what we've been told, it is almost assuredly trust owned with the children as beneficiaries, and the mother only having a "life estate" in the trust corpus. The trustee is obligated to act in the best interest of the BENEFICIARIES (not the mother) and/or in accordance with the trust provisions. I'm not defending his actions, but doing what's best for the mother doesn't automatically bring him back into compliance either. That said, doing what's best for the mother is also best for the beneficiaries, but that would be for the beneficiaries and trustee to decide, not the mother.

Just because stocks are down from the highs they were a year ago, doesn't mean they are less likely to go up, either. And you're cherry- picking your definition of long-run. The S&P500 appreciated over the course of every decade since 1950, yet you picked only the last 10 years (in which there have been 2 recessions) to define the long run?

Again, not relevant in a trust situation. She may not need capital growth, but it may be the goal of the beneficiaries or in the trust provisions.

Who will promptly tell her that she is not authorized to make any changes to the account. As I said earlier, the only legit way to accomplish change in this account is to convince the beneficiaries that their best interest are highly correlated to her best interests and have THEM speak to the trustee about making changes. Ultimately, the trustee will need to be replaced by legal means or HE will have to consult a financial adviser about making changes.

I think most of your response would be perfectly acceptable were the investments not in trust. But the trust changes the rules of the game, and makes most of the above inapplicable.