Don’t Leave an Inheritance to Your Wealth Adviser

Here’s how to make sure your assets are properly managed after your death.

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Recently, there has been a lot of publicity about billionaires who have decided to disinherit their children, or significantly limit the amount of their inheritance. According to an article in Forbes, Gina Rinehart, an Australian billionaire, filed court documents in which she expressed her view that her children did not have the “capacity or skill” to manage their fortune.

Warren Buffett is well known for what many consider very enlightened views about inherited wealth. He has stated that he would give his children “enough money so they would feel they can do anything but not so much that they could do nothing.”

While a lot of attention is given to these views, here’s the elephant in the room that is often overlooked: Whether you leave your money to your children, charity, or others, how will it be managed?

I have spoken to many estate planning attorneys. They all told me none of their clients have raised this issue, much less provided guidance in their estate planning documents. The consequences of this omission can be almost as devastating as not having a will. The absence of a will means stress on your family, increased costs of probate, adverse tax consequences, and distribution of your assets in a manner that may be inconsistent with your wishes.

The consequence of not providing guidelines for how your assets will be managed after your death can mean a transfer of your wealth from your estate to the institution charged with the responsibility for administering the fund, and the advisers retained by them. Unrestrained by any oversight or benchmark, it’s likely your assets will be depleted by excess trading, underperformance, fees, and costs.

You can avoid these problems by appointing a “directed trustee” to serve as the trustee of your assets, and giving specific instructions for how the adviser retained by the directed trustee will invest your funds.

A directed trustee is a professional trust company that only administers trusts. It does not manage money. It’s important to separate these two functions. Otherwise, the trustee has a vested interest in retaining the asset management division of its company to manage your assets. Full service trust companies, in my experience, rarely manage funds in a manner consistent with sound, academically-validated principles of finance. Leading directed trustees include Advisory Trust of Delaware, Santa Fe Trust, Wealth Advisors Trust Company, and the Personal Trust Services Division of Charles Schwab Bank.

Appointing a directed trustee is just the first step. Here’s language you could consider including in your trust documents that will provide the necessary guidance to the trustee and the adviser retained to manage your assets:

"The investment manager shall be guided by the basic principle known as modern portfolio theory. The investment manager should make no effort to ‘beat the markets.’ The investment manager shall focus on the asset allocation of the portfolio. The portfolio shall be globally diversified, using low management fee stock and bond index funds, exchange-traded funds, or passively managed funds. The investment manager shall be guided by the principles set forth in The Intelligent Asset Allocator by William Bernstein, A Random Walk Down Wall Street by Burton Malkiel, The Little Book of Common Sense Investing by John Bogle, and The Smartest Investment Book You'll Ever Read by Daniel R. Solin. If appropriate, the investment manager may invest in a laddered bond portfolio, following the guidelines set forth in The Only Guide to a Winning Bond Strategy You’ll Ever Need, by Larry E. Swedroe and Joseph H. Hempen."

Your estate attorney can include additional language giving the trustee discretion to depart from these guidelines if circumstances warrant.

You worked hard for your money. Of course, you should focus on who to leave it to and the provisions of your trust. However, unless you make provisions for how your money is managed, your biggest beneficiary may be your trust company and the broker or adviser retained by them.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information, and content on this blog is for information purposes only and should not be construed as an offer of advisory services.