GTH Estate Planning Blog

The diversified trust portfolio of our friend Lars gained $66,500 during 2012, on its initial investment of $500,000. He is expecting 2013 to be a flat year. The precious metals mix of rich uncle Nils advanced less, to $538,250 but he feels his gold, half his holdings, will be up 15% in the coming year. They meet for dinner at Guy.

Well, not so good for the old man so far. Gold is down almost 5%, and silver nearly 7%. Platinum and especially palladium are up, but the weighted average is minus 2% for the first quarter. Nils suspects he won't be choosing the drink this time.

They split the last of the Malbec, and ready for investment year 2013. Nils's precious metals lagged behind Lars's diversified trust mix in 2012, so he feels there will be some natural catching up in the coming year. "Gold will be up 15% easy in 2013." Lars suspects he may be right; there are a lot of potentially destabilizing forces and that favors gold, but doesn't that always seem the case? He has heard the phrase "In these turbulent times..." pretty much every one of the last thirty years.

Concurring with Nils's drift, Lars says he thinks his trust did overall too well last year, and there will be a reckoning for it. Stocks may have gotten ahead of themselves but he still thinks, without any technical analysis, that they will give a 5% return in 2013. He is more wary of bonds, feeling the world is stretching for return and will pull a muscle in the process; he predicts zero net return for bonds. REITs have the unfortunate combination of having done too well (like stocks), and being interest-rate sensitive (like bonds) at least in the short run, so Lars predicts a negative 5% for REITs. All in all he guesses it should be close to a zero-return year.

The first year is in the books, on the bet between our CPA friend Lars and his rich Uncle Nils. Bold Nils is betting his $500,000 on precious metals, mostly gold. Lars, both naturally more cautious and investing as fiduciary of a family trust, has diversified among stocks, bonds, REITs, and a portion of Nils's metals mix. They are having dinner in the first week of the new year, and comparing results.

Nils's small September 30 lead has vanished in the last three months. Gold, silver, and platinum are down at least by half since then. Only palladium has improved. Lars, neither scientific nor handy, has learned as a by-product of the wager that palladium goes into catalytic converters. He guesses maybe it's improved with car sales.

Lars's 13.30% increase for the year is nearly double Nils's 7.65%. REITs and global and US stocks have all gained more than 15%. Even intermediate corporate bonds yielded almost 7%; Lars sees that as coming to an end before long (more on that in the two men's predictions, in next week's blog).

Uncle Nils was the winner for the quarter just past. His mix of gold, silver, palladium, and platinum roared back from an overall negative at mid-year, to almost 14% year-to-date. Silver was the biggest gainer, up 25% in just three months. Gold, overweighted at half the total mix, was up more than 10%.

Lars, investing for a family trust in a more diversified way, had a good third quarter but not as strong as Nils's. The trust's combination of stocks, real estate, and intermediate bonds (with also a dose of Nils's own mix) is up more than 12% for the year, doubling the increase it had mid-year. Stocks and real estate have been good performers, comparable with Nils's metals, but a 6% YTD return on bonds, while good, holds back Lars's overall average.

At their monthly dinner at Guy after each calendar quarter, Lars and Uncle Nils start the meeting by reviewing their one-year and five-year asset allocation bet. Lars has done quite a bit better than Uncle Nils in the second quarter. One of their customs is that each quarter's winner gets to choose the drink they'll both have. Other than this he'll go easy on Nils. Crowing early is bad karma.

The $500,000 trust Lars is managing, is pitted against the same amount of Nils's own money. Nils was in love with precious metals when they started, and so chose funds of those glitterings, with half in gold. Lars diversified the trust in stocks (40%), bonds (20%), REITs (20%), with the last 20% matching Nils's overall mix.

Now having the duty to inform nephew Walter and other beneficiaries of the trust Uncle Nils has established, Lars considers for a few days what to do about it. He's concerned about undermining Walter's motivation even further. Lars must not only let Walter know there is a trust; he has to tell him annually about the assets, income and expenses of the trust, and a few other details.

Lars has proclaimed in other settings that when there's an awkward situation it's usually best to just go to the other party and try to talk about it. So he takes his own advice and invites Walter out to lunch on a Saturday. Over sandwiches and soft drinks Lars asks Walter how community college is going (Lars refrains from reminding Walter that it's his fifth year there). The nephew gives a noncommittal response and jumps the conversation ahead by asking Lars "Why did you want to have lunch with me?"

Lars's conversation with lawyer Duncan resumes. As trustee of the new $500,000 trust for relatives, Lars must not only give them initial notice, he has to share a detailed annual report of the following:

Receipts and disbursements during the year;

Assets and liabilities and their values at year's beginning and end;

Trustee compensation (here none);

Agents (brokers etc.) hired by the trustee and their relationship to him;

Trust debts incurred;

Any conflict of interest transactions;

A notice that a beneficiary may petition the Court for review of the report; and

A statement that any lawsuit against the trustee must be brought within three years.

Another tax season behind him, Lars is having one of his periodic late-afternoon check-ins with lawyer friend Duncan, mostly on wealthy Uncle Nils's affairs. Duncan like Lars has a nice but not fancy office, befitting a sensible personality and a modest prominence in a medium-sized city. Duncan had recently helped to establish the $500,000 trust given by Uncle Nils for relatives. Lars is trustee.

Duncan tells Lars there is new Washington law defining a trustee's duty to inform the beneficiaries. Lars is sensing from Duncan's earnest tone and widened eyes that he should be more than a little bit concerned about the requirements.

There are two main parts of the law. First, a newly defined duty to inform beneficiaries of the existence of the trust at the outset. This initial notice must tell of the existence of the trust, of who gave it (here Nils), of who is Trustee (here Lars) and how he may be contacted, and of the beneficiary's right to request information about the trust.

There are eight beneficiaries of the $500,000 trust: Lars, his wife Kyra, his three children and one grandchild, and Lars's sister and her son. The main idea of this "generation-skipping" trust is to pay income to Lars and Kyra from one share, and to Lars's sister from another, for their lifetimes and then to pass on to the next generation without being subject to estate tax in the first generation of beneficiaries. Distributions of principal may be made to either generation as needed, but this isn't expected. Lars has to give this initial notice now. So what's the problem?

As March yields to April, Lars is excited to check the first-quarter results of his investment bet with his wealthy Uncle. Nils, a winner in his real estate career but (Lars thinks) naïve in securities investing, has put all his entry in the bet ($500,000) in precious metals: half in gold and lesser percentages in silver, palladium, and platinum.

How has Nils done in the first quarter? Gold has done well, with an almost 7% increase. Although his other three choices are also precious metals, they don't correlate with the gold. Palladium is down just a little. The other two, silver and platinum, are up more than 16% each, rather spectacular for just three months. Nils doesn't know why his commodities don't correlate. Lars wonders whether it has something to do with industrial demand for some of them. On a weighted average basis, Nils's choices for the quarter are up 9.21%, not counting management fees or commissions (a subject for another day).

Lars and Nils have made their bet. Nils is putting his $500,000 on precious metals. Lars as trustee of a new family trust with the same amount, is investing in diversified fashion. We'll check in from time to time on how this bet is going.

Trustees, who are investing money for other people, are obliged to strive for safety and a good return at the same time, not always an easy combination. They must also balance the interests of different classes of beneficiaries. For instance if a trust pays income to a surviving spouse and then goes on to children (or, not uncommonly, to stepchildren), then the trust should ordinarily have a mix of bond-like producers of income for the spouse, and stock-like holdings promising long-term gain for the children.

The duties and legal exposure of a trustee are illustrated in Estate of Cooper, a case decided by the Washington Court of Appeals in 1996. In oversimplified terms the surviving husband was lifetime income beneficiary as well as trustee. He got sued by the children who were to receive the trust after his lifetime.

Step-nephew Sal has gotten the wealthy old man Nils keenly interested in precious metals. Look at the returns the last few years! OK; gold has come off its 2011 high, but the three-year return is way better than that of the Dow. And in one way of thinking isn't gold the only sure thing, the basic measure, what people will be grabbing for if our whole financial system goes kaput?

Nils has been a very good real estate investor over the years. He seems to think this carries over to other areas and Lars realizes this is potentially dangerous, but not unusual and not likely to get out of control. To give Nils some room to feel like he's still a crafty guy, Lars has agreed over the holidays to a bet or contest between them.