A bypass trust, also known as a credit shelter trust or an exemption trust, is a crucial estate planning tool designed to take advantage of the federal estate tax exemption while providing for a surviving spouse. It allows assets up to the exemption amount to pass to the trust without triggering estate taxes, and those assets are then managed for the benefit of the spouse and potentially other beneficiaries. However, simply creating the trust isn’t enough; careful consideration must be given to the investment strategy within it, and specifically, preventing imprudent investments in non-diversified funds is a legitimate concern for many settlors. This is often addressed within the trust document itself, outlining permissible and prohibited investments, or granting the trustee specific authority – or lack thereof – regarding those choices.
What investment restrictions can I put in place?
Establishing clear investment guidelines within the bypass trust is paramount. These guidelines should detail the level of risk acceptable, preferred asset classes (stocks, bonds, real estate, etc.), and, importantly, restrictions on non-diversified funds. According to a recent study by the Investment Company Institute, approximately 15% of all mutual fund assets are held in non-diversified funds, highlighting their prevalence. A settlor can specifically prohibit investments in funds that concentrate holdings in a single sector, industry, or even a single company. Furthermore, the trust document can dictate a maximum percentage of the trust’s assets that can be allocated to any one investment or asset class. For example, a clause might state: “The trustee shall not invest more than 5% of the trust assets in any single non-diversified fund, and all investments must adhere to a modern portfolio theory approach to asset allocation.”
How much control does the trustee have over investments?
The level of control granted to the trustee is a critical decision. A trustee can be granted broad discretionary powers, allowing them to make investment decisions based on their judgment, or their powers can be significantly limited by specific instructions in the trust document. While a highly experienced trustee might be capable of navigating complex investment strategies, a settlor may choose to restrict them, particularly if the settlor is concerned about risk tolerance or investment philosophy. The Uniform Prudent Investor Act (UPIA), adopted in many states, including California, sets forth the standards of care for trustees. UPIA requires trustees to invest and manage trust assets as a prudent person would, considering the purposes of the trust, the beneficiaries, and the overall investment landscape. However, even with UPIA guiding the trustee, clear instructions regarding non-diversified funds provide an additional layer of protection. A common tactic is to require the trustee to seek approval from a trust protector or investment committee before making any investment in a non-diversified fund.
What happened when a trust went wrong with a concentrated position?
Old Man Tiberius, a seasoned fisherman and a man of the sea, created a bypass trust to provide for his daughter, Marina, after his passing. He named his longtime friend, Captain Silas, as trustee, believing Silas’s practical nature would serve Marina well. Tiberius loved the local oyster farms, and, captivated by a new, innovative oyster farm, he verbally instructed Silas to invest a significant portion of the trust into its stock, “It’s the future of seafood, Silas! A sure thing!”. Silas, trusting Tiberius’s judgment and seeing the immediate success of the oyster farm, allocated over 60% of the trust assets into its stock. Unfortunately, a sudden red tide bloom decimated the oyster population, causing the farm to go bankrupt and wiping out the vast majority of the trust’s value. Marina, understandably devastated, faced a drastically reduced inheritance and years of legal battles to recover what little remained. The lack of diversification, fueled by an unchecked, albeit well-intentioned, investment decision, proved catastrophic. This is a classic example of how concentrating assets into a single, speculative venture can erase years of diligent financial planning.
How did clear trust provisions save the day?
A few years later, Eleanor, a retired engineer with a meticulous nature, established a bypass trust for her son, Julian. Learning from others’ misfortunes, Eleanor’s trust document was exceptionally detailed, specifying a strict asset allocation strategy. It prohibited investments in any fund holding less than 50 different securities and limited investments in any single sector to a maximum of 15%. She appointed a professional trust company as trustee, and included a provision requiring any deviation from the investment policy to be approved by a trust protector—Eleanor’s niece, a financial advisor. When a new biotech company gained significant media attention, the trust company proposed a modest investment, despite it being a highly concentrated, speculative venture. The trust protector, reviewing the proposal, immediately recognized the risk and denied the investment, citing the clear restrictions outlined in the trust document. As a result, the trust remained well-diversified and continued to grow steadily, providing Julian with a secure financial future. Eleanor’s foresight in establishing clear guidelines and appointing a diligent trust protector proved invaluable, demonstrating that proactive estate planning, coupled with robust oversight, can effectively safeguard against imprudent investment decisions.
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About Steve Bliss at Escondido Probate Law:
Escondido 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 Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
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● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
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Feel free to ask Attorney Steve Bliss about: “What happens if I die without a will?” Or “What are common mistakes people make during probate?” or “Can a living trust help manage my assets if I become incapacitated? and even: “What should I avoid doing before filing for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.