A Planning Strategy for Trust Stability

Planned giving specialists working with nonprofit charitable giving trusts, participate in the development of planned strategies for trust diversification. Those working with trustees of an estate trust with fiduciary responsibility for creating an effective estate investment plan, will have inside knowledge of the benefits and challenges of trust diversification. Trust laws provide that estate planning clients control the definition of their own estate trust’s asset diversification. Investment for purposes building capacity for the future, improves the chances that a trust is accomplishing the financial objectives of an estate.

Prudential Guidelines for Trustees

The federal enactment of the Uniform Prudent Investor Act (UPIA) in 1994 instituted guidelines for all trustees involved in investment decision. Trustee fiduciary liability is the principled rationale of the legislation protecting client exposure to high-risk investment strategies. The legislation also guides the size of the portfolio; liquidity and distribution; expected total returns; tax consequences; individual investments; the duration of the trust; and the overall economic environment. Rules of UPIA fiduciary duty to prudential decision, specify that trust assets are to be diversified, unless a trust is solely for the transfer of targeted family interest in a business entity, or for the avoidance of capital gains. Therefore, a diversified portfolio of equities, fixed-income securities, hedge funds, private equity, real estate, and natural resource funds is the mark of a properly planned trust investment vehicle according to law.

Trust Formation and Liability

Contiguous with the structuring of a directed trust, investment management limited liability companies (LLCs) designate fiduciary liability for trust investment strategy. The directed trust structure applies to large estate trusts set up for purposes of continuous investment and philanthropic contribution activities. A directed trust entity is formed to instill a governing check and balance process in administration of the trust by an investment committee, distribution committee and directed administrative trustee. The procedural aspects of asset allocations and control are generally subject to investment advisory, which has “fiduciary” liability for such actions. An individual trust protector with executive power to approve or veto investment decisions may be elected to add further control to a directed trust

The formation of family investment partnership(s) (FIPs) is another structural approach to trust diversification strategy. Like the LLCs, FIPs permit delegation of power in partnership units or trusts across each asset class of an estate, thus limiting liability for individual investment management decisions. The U.S. federal Securities and Exchange Commission (“SEC”) guidelines Unit investment trusts (“UITs”) provides rules for limited trusts for the purpose of investment in a fixed portfolio securities assets with specified expiry dates. The composition of the investment portfolio is stable the duration of UITs.

Trust-owned Insurance Policies

Normally purchased for protection of an irrevocable trust, life insurance coverage affords the flexibility for payment of estate debts, taxes, and early distribution of survivor income. Trust-owned insurance policies are structured to maximize death benefits as well, allowing an estate to payoff medical expenses incurred by an owner at end-of-life. Private placement life insurance (PPLI) is another trust diversification option, structured to maximize cash value, whilst minimizing the death benefit of a trust. This is also a capital gains taxation avoidance strategy for trust investors. PPLI reduces the amount of income tax owed from publicly traded securities, private equity, hedge funds, as well as many alternative investments.

Real Estate and Other Assets

Qualified personal residence trusts (QPRTs) set up for the purpose of trust purchase of real estate investments, increase the value of an estate. Protected from creditor attachment and tax-exempt under law, QPRTs are a popular estate planning tool. If the trust is structured properly, a trustee can also convert other trust assets such as antiques, fine art, and rare collectibles to real property through liquidation sale. By structuring a trust for inclusion of each asset class, trustees and administrators can effectively avoid fiduciary liability, while enhancing the investment potential of a trust and its future value for heirs.

Estate trust strategies enhance the potential for return on investment through structural formation, portfolio diversification, asset convertibility and transferability of investments.

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