Areas of Specialization: Private Trusts

Approximately 24% of household wealth is held by the generation prior to the baby boomers (born 1926 through 1945). The wealth transfer that will occur between the generations is staggering. In the next 20 years this 1926 to 1945 generation will transfer 12 trillion dollars to the baby boomers. However, this older generation is living into their 80’s and 90’s and before the transfer occurs the baby boomers are becoming their parents’ caregivers and financial managers. According to the Uniform Prudent Investor Act, a common vehicle for holding the parents’ wealth is a private gratuitous trust. This is where one child is responsible for managing the investments of their aging parents and for distributing the remaining assets to all the children, upon the death of the last surviving parent.

The parents create the “living” trust, transfer their assets into the trust, and usually are the sole trustees of the trust. However, at some point the parents (or surviving parent) maybe unable or unwilling to serve as the trustee(s). At that time the successor trustee, named in the trust document, will assume the responsibilities of managing the trust. While it is an honor to be chosen to manage your parents’ affairs, it is an honor that carries very serious ethical and legal obligations. As a trustee you are a fiduciary who must invest and manage trust assets for the sole benefit of the trust beneficiaries. These beneficiaries not only include the parents (or surviving parent) but also the ultimate beneficiaries of the trust, which are usually all the parents’ children.

As a fiduciary, you are required to follow the provisions of the trust and the guidance of the Uniform Prudent Investor Act. The Act utilizes modern portfolio theory to guide investment decisions. It requires the trustee to evaluate investment securities not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy, having risk and return objectives reasonably suited to the trust. While not specifically required by the Act, we think it is necessary to have a written investment policy statement to fulfill this duty.

At Ely Prudent Portfolios we help trustees create a written investment policy statement and fulfill their duties under the Prudent Investor Act. A trustee has a duty of loyalty to the beneficiary and where there are two or more beneficiaries, the trustee must act impartially, taking into account the differing interests of the beneficiaries. Diversification is explicitly required as a duty of prudent investing, as is the duty to monitor performance, consider tax implications, and minimize investment costs.

In addition the trustee is permitted to delegate investment management functions to qualified third parties. According to The Act, “A trustee who complies with the requirements of subsection (a) is not liable to the beneficiaries or to the trust for the decisions or actions of the agent to whom the function was delegated.” At Ely Prudent Portfolios we will accept this delegation in writing.

Because our lead advisor, Mr. Ely, is an Accredited Investment Fiduciary Analyst^TM, we are in a unique position to help trustees of private trust fulfill their fiduciary duties.