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Beneficiary Management

Beneficiary Management

What’s Your Sell Strategy?

Trustees need a sell strategy.

  • What’s your time horizon?
  • What’s your expected return for each asset?
  • What will you do if that return is achieved? Sell? Buy more?
  • How much loss do you tolerate?
  • When do you exit an investment?

Budgets And Beneficiaries

Trustees often request a budget from a beneficiary to determine how much trust money may be distributed for their benefit, such as health, education, maintenance, or support.


A surviving spouse who has $2 million of her own liquid assets is the lifetime beneficiary of a $3 million trust created by the now deceased grantor. The terms of the trust require the trustee to distribute all the income annually to the surviving spouse, and authorize the trustee to distribute principal to or for her benefit for health, education, maintenance, and support. The trust also states that the trustee shall consider all other assets and income which the surviving spouse has.

Issue: How much money does the surviving spouse need to live on over a 12-24 month period?

Answer: Before distributing trust funds, you will consider the surviving spouse’s $2 million. You should ask the surviving spouse for an annual budget. Once a reasonable amount is determined, then you can invest the $3 million trust in light of the needs of the surviving spouse and your duty to the remainder beneficiaries.

Tension Between Beneficiaries

As you might imagine, a natural “tension” will arise between the lifetime beneficiary and the remainder beneficiaries. One wants immediate income, the other wants money saved and invested for the long term. The tension is heightened when the lifetime beneficiary has his own, personal, wealth, and the trustee is not required to consider that when distributions are requested.

Part of a trustee’s job is to safeguard principal and to protect all beneficiaries, including the remainder beneficiaries. This includes anticipating how much the trust’s principal may grow to over the life expectancy of the surviving spouse—and how much the trust may be diminished by principal distributions to the surviving spouse. What will the trust principal look like in the future? Will it run out?

Anticipating Growth – And Loss – And Distributions

Trustees should estimate what the value of the trust will grow to over time. What if you have two years of losses? What if there are unforeseen medical expenses? Investments don’t always go up. And investment returns vary year to year, as do expenses. Our life expectancy is increasing. The likelihood is that we will be incapacitated before we die, requiring additional assistance and care. As beneficiaries age, the cost of living and health care rise.

The trust could be wiped out if there are large losses or distributions. This is why your analysis or forecast is so important.

It’s as simple as creating a spreadsheet with various rates of returns and various distribution amounts from year to year.

Invest and manage wisely so you don’t run out of money.

Don’t Let The Tax Tail Wag The Dog

The honest truth is that people hate paying taxes. Disdain for paying capital gains taxes is not an investment strategy.

Growth of trust assets, after the payment of fees, expenses, and costs, is an important consideration for trustees. The tax implications may be a factor in considering whether to sell an investment or not. This makes sense because, at the end of the day, we want to know the net amount which will actually be staying in the trust portfolio or being distributed to the beneficiaries. After tax and after fee returns are an important gauge for fiduciaries.

However, when there are built-in gains, the fact that you’re going to have to pay income tax on those gains should never wag the dog. Income taxes should never, ever, be the overriding or only factor.

Be Afraid. Be Very Afraid: Dangerous Language

Be wary of language in the trust document which instructs you or permits you to retain, indefinitely, a particular asset. Watch out for language which attempts to restrict the way you invest. This language may seem innocent or safe, but it’s not. It’s a wolf in sheep’s clothing.

It’s not uncommon to see trust language which instructs the trustee to invest only in high-quality bonds, or which instructs you to never sell a particular security. Do not accept the comfort which such language appears to provide. Courts have rightly viewed such language with suspicion and held trustees account able for following such limitations.

Why? A trustee is appointed or hired to exercise good judgment and sound discretion. You can’t be an ostrich and bury your head in the sand. You can’t point to a prior trustee, to inherited trust investments, or to the language of the trust document alone, and get a pass. Consider a trust document that instructs the trustee to hold, to retain, and to never sell a specific stock. But companies change. We know that each industry and all stocks have faced difficult economic times, bankruptcies, advanced competition, changing technologies and in some sense obsolescence. If you follow the strict language of the trust document, and don’t sell, the trust may be wiped out.

At no time does a trust document, no matter what the language says, permit the trustee to be imprudent or foolish, let alone stupid. When faced with such restrictive language, the trustee is required to exercise good judgment, and seek to reform or modify or change the terms of the trust to take off the “handcuffs”. Such a change may be done, depending on the governing law of the trust, by consent of the beneficiaries or by a court of law. One of the easiest things for a trustee to do, one of the most cost-effective, one of the most beneficial to the trust, is for you to march into court, and ask the judge for assistance, because you may have a ticking time bomb.

The trustee is not expected to have a crystal ball or to be able to predict what interest rates will do. The law does not expect you to be a prognosticator. You can’t be expected to predict the price of bonds or what the equity markets will do. Since most people don’t have the time nor experience to manage wealth, consider delegating investment duties to an investment agent.

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