Recently in Fiduciary responsibility Category

Avoid elder exploitation with proper planning

January 2, 2014, by

Shortly before Christmas a Lake Tapps woman was sentenced to two years in prison for stealing more than $200,000 from her elderly father, who has dementia. The woman said she was addicted to gambling and had convinced herself her father thought it was OK. It's a sad and all-too-common scenario. It's one that families can plan ahead to try their best to avoid.

The thefts were accomplished easily because her father had made her a co-signer on his bank account. While making a loved one a co-signer on a bank account can be helpful, a better solution is to execute a Durable Power of Attorney document to allow a trusted family member or friend to manage your assets if you become incapacitated. Your trusted friend could then manage your money, spend it on your mortgage or rent, your retirement home fees or nursing home care, your food and transportation, and even make gifts for you if you had an established pattern of doing so.

With a Durable Power of Attorney, family members or other interested parties have the right to request that the person managing your money - called your Attorney in Fact -provide a regular accounting. They also can ask the Court to order them to provide an accounting. The Attorney in Fact must keep careful records of how the money is managed so they can show other parties, or a judge, how the money was spent. If the Court finds problems, they may remove the Attorney in Fact and put the alternate in his place.

A Durable Power of Attorney has another benefit: You can nominate your choice of guardian, if one is needed; and often a DPOA saves you from needing a guardianship altogether.

Sharing a bank account with a loved one is problematic for a couple of reasons. For one, there's no accounting requirement. If your family members or friends think someone is stealing from you, there's no way to request an accounting; their only solution may be to call 911 or Adult Protective Services. Additionally, after you die, the contents of the joint bank account generally goes to the surviving account holder - not to your beneficiaries under your Will.

In sum, we recommend using a Power of Attorney document because of its flexibility and accountability. If you are using a Durable Power of Attorney to manage a loved one's money, contact your attorney if you have any concerns about your decision-making.

Buy REITs to diversify into real estate? (Part 2 of 2)

November 14, 2013, by

real estate aerial view.jpgWhy, despite the misgivings listed in last week's blog, does Lars invest 20% of the trust in the Vanguard index REIT? First, he likes real estate, feels it's somehow a special investment. It's kind of the old "they aren't making any more of it" thing. They don't call it real (estate) for no reason.

OK, so that's pretty subjective: what else? The REIT he's chosen is both diversifying and diversified. That is, in a portfolio of mostly stocks and bonds, real estate acts a little differently. This is good. When stocks are down, REITs might not be. And the Vanguard fund is itself spread into all kinds of real estate, so he's not betting everything on just shopping centers, or apartments.

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Buy REITs to diversify into real estate?

November 7, 2013, by

shopping center.jpgLars as trustee has invested in an indexed REIT fund offered by Vanguard. Lars likes real estate. He has watched Uncle Nils get rich in real estate. He has seen a number of other clients do the same. He doesn't fool himself that it's easy, but it does seem to be the most common way in his medium-sized city to build a big net worth.

So in the $500,000 family trust he has 20% in the REIT fund. It's easier than buying and managing apartments, or a building with commercial tenants. Because it's less painful Lars wonders whether it's less effective.

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The investment bet: third quarter, second year.

October 31, 2013, by

hunters cocktail.jpgAt this month's dinner at their favorite restaurant Guy, Lars is going over the September 30 results in his investment bet with rich Uncle Nils. When they started this at the beginning of 2012 Nils was excited about gold's then-recent performance so his money is on a mix of metals. With family trust money Lars is diversified as he should be, with equal portions of US stocks, international stocks, bonds, a REIT fund, and Nils's concoction.

It has been a very bad year for Nils's precious commodities. He's down 23% for the year, although he's recovered by about 6% this quarter. Lars is up 4% for the quarter and 3% for the year, with stocks (US stocks up 21%!) carrying the freight. The leader gets to choose the drink at each quarterly review. Nils has done a little better for the three months, but he's feeling down over his losses and also a little off physically, having tests recently. So from lack of energy he defers to Lars who orders a couple Hunters: whiskey and cherry brandy. Neither one of them is a hunter but it seems fallish and manly.

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Is Lars the trustee sufficiently diversified (2 of 2)?

July 18, 2013, by

vegetable soup.bmpIn the State of Washington, the rules for diversification of trust investments are in Revised Code of Washington (RCW) Chapter 11.100. There are a number of different concepts bubbling in RCW 11.100; we'll touch on just a few here as they pertain to Lars's trust.

A trustee is directed by RCW 11.100.047 to diversify unless there are "special circumstances" excusing it, and excepting that any asset given to the trust may be kept by it. Lars was given only cash to invest, not a piece of land or ownership of a business, and there don't seem to be any special circumstances calling for a concentration in one or two investments. So he seems required to diversify to avoid liability to beneficiaries.

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Is Lars the trustee sufficiently diversified (1 of 2)?

July 11, 2013, by

pie chart.jpgHow would our CPA friend Lars fare under the standards of the cases we've looked at recently, on a trustee's duty to diversify? He put the trust he's in charge of, in equal parts in five places: an international stock fund, a total stock fund, a REIT fund, an intermediate bond fund, and Uncle Nils's mix of metal commodities funds.

In the first case, discussed here May 30th, Baker Boyer National Bank was found liable for putting all the liquidity into bonds. The damages were calculated as the yield lost by not having 40% of it in stocks. The bank's argument that it also had real estate on the books for $1 but worth more, failed because it hadn't seemed conscious of this diversification until after the fact.

Lars seems OK under this case. He does have 40% in stocks, and he does have real estate (in the form of a REIT fund - maybe we'll explore this later), recorded at its true value and so clearly a conscious effort in that direction.

Continue reading "Is Lars the trustee sufficiently diversified (1 of 2)? " »

The investment bet: halfway through the second year.

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OMG - Nils's metals mix is melting! Well not really, but it's faring very badly this year in the investment bet with CPA nephew Lars. His alloy of half gold and lesser amounts of silver, palladium, and platinum, with all elements down sharply, is off a little more than 23% halfway through the year. As they take their first look at the numbers to decide who gets to choose the drink, Nils is subdued.

How did Lars do with his balanced trust portfolio of 20% REITs, 40% stocks, 20% bonds, and 20% Nils's metals? Much better than Nils, just off about 1.5% so far this year. Stocks and the REITs are up, despite their recent declines.

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Case 2 of 2 on a trustee's duty to diversify.

small hotel.jpgMrs. Cooper died in 1978, providing in her Will that a trust was to be established to provide Mr. Cooper with income for his lifetime, and then go to her two children Richard and Joyce. Her estate was about $800,000. As executor Mr. Cooper diddled around with the estate for eight years but finally funded the trust with $1.8 million.

Despite the growth in value, daughter Joyce still sued Mr. Cooper for slanting the investments toward fixed-income securities that would provide income for him, but no growth for the children's future benefit. Mr. Cooper countered with hey, I made the trust grow; in particular we made $500,000 on what had seemed a small investment in a hotel in Idaho.

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Case 1 of 2 on a trustee's duty to diversify.

farmland.jpgThe pleasantly named Baker Boyer National Bank held some liquid assets and 846 acres of farmland in a trust for the benefit of successive generations of the Garver family. The bank put the $194,000 of liquid assets into municipal bonds. This was during the period 1973 to 1982, when interest rates rose to record levels. This caused the bonds to decrease in value. They were ultimately sold at a loss of $63,750 (ouch!).

The Garvers sued the bank for failing to diversify the trust's holdings, and the trial court awarded the family $22,950 in damages. These were computed by comparing the municipal bond outcome, with what would have occurred if 40% of the portfolio had been in stocks. The bank appealed.

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The investment bet (second year, first quarter).

April 4, 2013, by

bourbon.jpgThe 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.

Continue reading "The investment bet (second year, first quarter). " »

The investment bet: predictions for 2013.

January 10, 2013, by

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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.

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The investment bet: year one.

January 3, 2013, by

wall street.jpg

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).

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The investment bet: third quarter.

October 18, 2012, by

TE BLOG. Cocktail Rusty Nail. 10.2012.iStock_000019075382XSmall[1].jpgUncle 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.

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The investment bet: second quarter.

July 26, 2012, by

TE BLOG. Cocktail with lemon.08.2012.iStock_000000338345XSmall[1].jpg
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.

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Lars talks with Walter.

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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?"

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