When you set up an inheritance for your children, you’re probably not planning to leave a big chuck of it to your wealth advisor. But that is often exactly what happens. Few estate planning attorneys discuss with their clients: How is your money going to be managed after your death?
It is a common estate planning practice to establish one or more trusts that are funded at death. These trusts typically receive the proceeds of life insurance or other assets. Often, they are set up for the benefit of your children and other beneficiaries who may not be sophisticated investors.
Few estate planning lawyers are sophisticated investors themselves. They also receive referrals from the securities industry. So even if you have set up a globally diversified portfolio of low management fee index funds in an asset allocation appropriate for you, your work is not done.
An estate planning attorney is unlikely to advise you to select a “directed trustee” who handles only administration of the trust and does not manage money, or to include language setting forth investment guidelines for the trustee to follow in appointing an independent investment advisor to manage the trust assets. I recommended this language:
"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 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 Swedroe and Joseph Hempen."
Whether you use a large full-service trustee or a smaller directed trustee, your estate attorney should submit the trust document to the trustee you intend to use to be sure it is acceptable to them.
Finally, in order to protect the trust from dishonesty or fraud by the investment advisor appointed by the trustee, consider adding this additional language:
“The role of the investment advisor shall be limited to rendering investment advice. Trust assets shall, at all times, be maintained at an independent custodian bank and shall be deposited directly with the custodian bank, in accounts in the name(s) of the Trust. The independent custodian shall be one of the five-largest custodian banks in the United States. The investment advisor shall have no access to trust funds.”
Some time and consideration by you in the estate planning process can save your loved ones from incalculable harm after your death.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You’ll Ever Read, will be published March 3, 2014.
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.