Blog

The Trustee as Investment Manager

By Rick Imhoff, CFP ®

One of the most important responsibilities of a trustee is to invest the assets of a trust in a manner that produces a rate of return that adequately meets the needs of both the current and future beneficiaries of the trust.  This responsibility is governed by fiduciary standards and any constraints stated in the trust agreement.

The way in which the assets are invested may change over time depending on which beneficiaries are receiving distributions from the trust.  If the grantor (the creator of the trust) is the current beneficiary, consideration must be given to the amount of income required by the grantor to meet expenses, the grantor’s income tax bracket, and the need to invade principal for an extraordinary expense or to supplement income.  If the grantor is alive and competent, he or she may direct the trustee to invest in certain types of assets to accomplish a specific objective.

If the grantor is alive but incompetent and unable to manage his or her financial affairs, the trustee will need to examine if the grantor’s situation has changed.  For example, the grantor may be in a nursing home and require more income to cover the increase in medical costs.  Also, the grantor may be in a lower tax bracket due to the higher deductions for medical expenses.  A shift in investment strategy may be needed to accomplish the new needs of the grantor, such as moving from tax-free investments to taxable investments or reducing the amount invested for growth and increasing the amount invested for income.

When the grantor dies, the remaining assets in the trust are to be distributed to the beneficiaries named in the trust.  If the trust is to be terminated and all remaining assets are to be distributed to the beneficiaries, either in-kind or in cash, the trustee will then need to liquidate those assets that are to be converted to cash and invest the proceeds in a short-term investment, such as a money market fund, until the funds are ready to be distributed.  If the trust is to continue for the benefit of one or more beneficiaries, the trustee will need to examine the beneficiaries’ income needs, tax bracket, and other important factors to determine how best to invest the remaining assets.

Regardless of the circumstances, the trustee must be prepared to adjust how the assets of a trust are invested to meet the changing objectives of the trust as well as the beneficiaries.  This is one of the big advantages of a professional or corporate trustee, such as a bank that provides trust services.  Since a professional trustee is in the “investment business,” it is familiar with a variety of investment strategies and techniques that can enable the trust to better accomplish its objectives and meet the changing needs of the beneficiaries, no matter who they are.

In addition, by selecting a professional trustee, the grantor can gain the benefits of the professional trustee’s institutional buying power which can potentially provide higher yields on income producing assets and lower transaction costs on buying and selling securities, that are typically not available to most individuals.  This benefit alone could offset a significant portion of the fees charged by the professional or corporate trustee.

So, when considering who should be trustee of your trust, keep in mind the important and ever-changing investment responsibilities the trustee must undertake.