The question of controlling investment choices within a bypass trust, specifically preventing investment in non-diversified funds, is a common concern for grantors wishing to maintain a degree of oversight even after establishing the trust. A bypass trust, also known as a credit shelter trust, is a valuable estate planning tool designed to utilize the estate tax exemption while providing for a surviving spouse. However, granting complete investment discretion to a trustee can leave room for choices that might not align with the grantor’s risk tolerance or long-term financial goals, including investing heavily in single stocks or other non-diversified assets. While complete control is rarely feasible or advisable, there are mechanisms to influence investment strategy and mitigate the risk of overly concentrated portfolios.
What powers should I retain as the grantor?
As the grantor, you can’t directly dictate every investment within the bypass trust after it’s established, but you *can* include provisions in the trust document that guide the trustee’s decisions. A common approach is to include an “investment direction” clause. This allows you, while competent, to provide non-binding recommendations to the trustee regarding investment allocation. The trustee isn’t *required* to follow these suggestions, but they must be considered and a reasoned explanation provided if they deviate. Furthermore, you can specify that investments must adhere to a “prudent investor rule,” which legally requires the trustee to act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would use. According to a study by Cerulli Associates, approximately 65% of high-net-worth individuals express concerns about their trustee’s investment choices, highlighting the importance of clear guidelines. Another tool is to include specific language restricting investments in highly speculative or illiquid assets – defining “non-diversified” within the trust document itself.
How can I define “diversification” in the trust?
Defining “diversification” within the trust is crucial. Simply stating “invest in a diversified portfolio” is insufficient. Instead, specify acceptable asset allocation percentages. For example, you could stipulate that no more than 5% of the trust’s assets can be invested in a single stock, or that at least 60% must be held in broad-market index funds or ETFs. You can also dictate a range for allocation to different asset classes: equities, fixed income, real estate, and alternative investments. According to data from Morningstar, portfolios with greater diversification historically exhibit lower volatility and a more consistent return profile. It’s important to remember that the level of diversification should align with the trust’s time horizon and the beneficiary’s risk tolerance; a longer time horizon may allow for a more aggressive, yet still diversified, approach. A well-crafted investment policy statement, incorporated by reference into the trust document, can provide detailed guidance on these matters.
What happens if the trustee invests poorly?
There was a retired engineer named George who, after years of meticulous planning, established a bypass trust to provide for his wife, Martha, after his passing. He included a general diversification clause but hadn’t specified any concrete limits on individual stock holdings. Unfortunately, the trustee, a distant cousin with limited investment experience, became enamored with a new tech startup and invested 30% of the trust’s assets into its stock. The stock plummeted shortly after, severely eroding the trust’s value and jeopardizing Martha’s financial security. This is a cautionary tale about the importance of *specific* investment guidelines. If a trustee breaches their fiduciary duty by making imprudent investments, beneficiaries have legal recourse. They can petition the court to remove the trustee, compel them to reimburse the trust for losses, or both. Legal battles can be costly and time-consuming, so prevention is far better than cure. Approximately 20% of trust disputes involve allegations of improper investment management, according to the American College of Trust and Estate Counsel.
How did a client successfully implement these safeguards?
Thankfully, another client, Eleanor, learned from these examples. She meticulously crafted her bypass trust with the assistance of Steve Bliss, her estate planning attorney. She not only included a detailed investment policy statement outlining asset allocation targets and diversification requirements but also established a “trust protector” role. This independent third party, chosen by Eleanor, had the power to review the trustee’s investment decisions and intervene if they deviated from the established guidelines. This protector was a seasoned financial advisor with a fiduciary duty to the beneficiaries. Years later, after Eleanor’s passing, the trustee proposed investing a significant portion of the trust in a high-risk real estate venture. The trust protector, recognizing the venture’s potential downsides, exercised their authority to veto the investment, protecting the trust’s assets and ensuring a more stable financial future for the beneficiaries. Eleanor’s proactive approach, coupled with the implementation of robust safeguards, ultimately provided peace of mind and ensured her estate plan functioned as intended. This demonstrates that careful planning and the right legal guidance are vital for protecting your assets and securing your family’s future.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
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● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Feel free to ask Attorney Steve Bliss about: “What’s the difference between a will and a trust?” Or “What happens if someone dies without a will—does probate still apply?” or “Do my beneficiaries have to do anything when I die? and even: “Will bankruptcy wipe out medical bills?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.