Trust Banking

TRUST BANKING irrevocable trusts, Beneficiaries/ remaindermen, Financial Planning and Cash Flow Analysis Trust Banking IRREVOCABLE TRUSTS, BENEFICIARIES/ REMAINDERMEN, by Sheldon F. Bernau, CPA, CGMA, CDFA FINANCIAL PLANNING will refer to an investment they have heard Linear returns, as viewed by many when AND CASH FLOW ANALYSIS about that provides “X” rate of return and BY SHELDON F. BERNAU, CPA, CGMA, CDFA researching investment returns, are often

It can be traumatic when an question why the Trustee doesn’t invest in one of the contributors to a false sense of individual passes away — whether it’s the loss of a partner, parent, relative or friend. Many have lost the one who that particular asset to generate the return needed? How do you communicate to a beneficiary how you have the funds invested? security in financial planning. How often have we heard someone say, “if you put your money in a particular investment you can It can be traumatic when an individual passes away — whether it’s the loss of a partner, parent, relative or friend. Many have lost the one who helped care of an Irrevocable Trust gives direction to the Trustee in caring for whom the Grantor wishes to provide. One of the responsibilities of the Trustee is investing assets of the helped care for them financially, who “held How do you demonstrate a reasonable retire comfortably?” Statements like this are for them financially, who “held the purse strings” or Trust in a prudent manner (read the “Uniform Prudent the purse strings” or was the one who withdrawal rate of funds that can be drawn often made for segments of asset markets, was the one who “understood finances,” leaving the Investor Act” and the “Prudent Man Rule”) to provide “understood finances,” leaving the survivor from the trust without compromising its mutual fund returns, etc., and while those survivor with additional unencountered challenges. appropriately for the needs of beneficiaries. Another with additional unencountered challenges. long-term efficacy? The world we live in as returns have been achieved over time, the Considering these issues in advance provides an purpose is the administration of the document as directed Considering these issues in advance provides Trustees has become increasingly complex, manner or variance in which those returns opportunity to name an individual or institution to act by the Grantor. Within this duty of administration resides an opportunity to name an individual or yet these questions can be answered utilizing have been achieved are of much greater as Trustee of an irrevocable trust, to stand in the gap the responsibility to make distributions within guidelines institution to act as Trustee of an irrevocable financial planning tools readily available. Two importance when you begin drawing off left by the decedent, and to act as fiduciary over the of the document, which often involves discretion. trust, to stand in the gap left by the decedent, financial planning tools of great importance those investments. Variance of returns is why financial affairs of the beneficiaries or remaindermen. The use of discretion is paramount to the administration and to act as fiduciary over the financial affairs of the beneficiaries or remaindermen. are the budget and cash flow analysis. Determining the Needs of the budgeting and investment returns alone are not enough, and the variance and consistency of portfolio investment returns are more Whether established by the maturing of a Will as a Testamentary Trust, or through a Revocable Trust funded during the lifetime of the Grantor, the general purpose of the trust document. The Grantor and attorney cannot anticipate all the future possibilities when beneficiaries, justified or not, may request the trust account pay for Whether established by the maturing of a Beneficiary through Budgeting important than the overall average return. certain expenses. Beneficiaries may not have a reasonable Will as a Testamentary Trust, or through a THE FIRST FOUR DUTIES comprehension of how long the funds will last. Perhaps Revocable Trust funded during the lifetime My personal favorite form of budgeting is Cash Flow Analysis and they will refer to an investment they have heard about AND POWERS OF TRUSTEE of the Grantor, the general purpose of an the “zero-based budget,” which analyzes Monte Carlo Simulation for that provides “X” rate of return, and questions why the ACCORDING TO THE FLORIDA STATUTES: Irrevocable Trust gives direction to the Trustee in caring for whom the Grantor wishes to provide. One of the responsibilities of the Trustee is investing assets of the Trust in a prudent manner (read the “Uniform Prudent Investor Act” and the “Prudent Man Rule”) to provide appropriately for the needs of beneficiaries. Another purpose is the administration of the document as directed by the Grantor. Within this duty of administration resides the responsibility to make distributions within guidelines of the document, which often involves discretion. needs annually and evaluates line items for reasonableness. For those living on a relatively fixed income (i.e., there aren’t virtually unlimited funds available), this is important to address early in the relationship. I compare financial planning to the proverbial road trip where, if you take a wrong turn, the earlier you address and correct it, the better. If nine hours into a 12 hour road trip you realize you took a wrong turn, the results could be disastrous. You may be hundreds of miles in the Portfolio Management Whether the terms of a document are liberal, the assets are significant, or the beneficiary has assets of their own that may or may not impact the decision to make a distribution, one truth remains clear: There is a relatively finite amount of money that can be distributed. This amount is impacted by the life expectancy of the beneficiary, the expected rate(s) of return on the underlying Trustee doesn’t invest in that particular asset to generate the return needed? How do you communicate to a beneficiary how you have the funds invested? How do you demonstrate a reasonable withdrawal rate of funds that can be drawn from the trust without compromising its long-term efficacy? The world we live in as Trustees has become increasingly complex, yet these questions can be answered utilizing financial planning tools readily available. Two financial planning tools of great importance are the budget and cash flow analysis. Determining the needs of the Beneficiary through Budgeting My personal favorite form of budgeting is the “zeroSection 736.0801 Duty to administer trust. Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this code. Section 736.0802 Duty of loyalty.— (1) As between a trustee and the beneficiaries, a trustee shall administer the trust solely in the interests of the beneficiaries. Section 736.0803 Impartiality. If a trust has two or more beneficiaries, the trustee Build a plan that is realistic The use of discretion is paramount to the administration of the trust document. The Grantor and attorney cannot anticipate all the future possibilities when beneficiaries, justified or not, may request the trust account pay for certain expenses. Beneficiaries may not have a reasonable comprehension of how long the funds will last. Perhaps they wrong direction, and depending on your plans, might find them unachievable. The same can be said for an individual who wants to spend an unrealistic amount because they perceive the portfolio to be so great it won’t run out of money. based budget,” which analyzes needs annually and evaluates line items for reasonableness. For those living on a relatively fixed income (i.e., there aren’t virtually unlimited funds available), this is important to address early in the relationship. I compare financial planning to the proverbial road trip where, if you take a wrong turn, the earlier you address and correct it, the better. If nine hours into a 12 hour road trip you realize you took a wrong turn, the results could be disastrous. You shall act impartially in administering the trust property, giving due regard to the beneficiaries’ respective interests. Section 736.0804 Prudent administration. A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. Utilize your assets in the most efficient manner Determine what is reasonable and what is not Generate a reasonable return Examine your needs annually Tailor to your needs

The First Four Duties and Powers of Trustee According to the Florida Statutes:

Section 736.0801 Duty to administer trust.

Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this code.

Section 736.0802 Duty of loyalty.— (1)

As between a trustee and the beneficiaries, a trustee shall administer the trust solely in the interests of the beneficiaries.

Section 736.0803 Impartiality.

If a trust has two or more beneficiaries, the trustee shall act impartially in administering the trust property, giving due regard to the beneficiaries’ respective interests.

Section 736.0804 Prudent administration.

A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

assets, and the volatility and distribution of the returns on the underlying assets.

Kushal Agarwal wrote an article, “The Monte Carlo Simulation: Understanding the Basics,” which gives insight into the value Monte Carlo analysis and simulation provides, along with the greatest factors impacting a simulation when used for portfolio management. Not only does the use of Monte Carlo simulation identify ranges of potential returns and reduce uncertainty in planning around those returns, it also identifies lifestyle adjustments and modifications that may have significant impact on the likelihood of a portfolio lasting throughout retirement (whether that be a traditional retirement, or the lifetime of income needs of the trust beneficiary). Our objective using the analysis should be a guide of what can be reasonably expected and understanding it is unable to account for outliers like bear markets and recessions.1

When working with beneficiaries of irrevocable trusts, they often have assets of their own, income from jobs or businesses they own, or a spouse with assets and income that may be included in the analysis. The position of the Trustee should demonstrate care and concern for the individual while remaining pragmatic in planning. Handled appropriately, the Trustee, as an advisor, demonstrates why there may not be hard and fast, “right” or “wrong” answers to risk, timeline, cash needs, expectations, etc. Each has an impact on the plan, that when considered in total, may be significant. Similarly, like the traveler who made the wrong turn, the earlier changes are addressed, the easier the journey will be.

There are times that even many small adjustments are unable to correct the course of direction a beneficiary would like to take, and it is in this scenario the budget, along with cash flow simulations, are of even greater value. Monte Carlo cash flow simulations provide support for expected outcomes, and when desired outflows are significantly greater than realistic expectations, it is a helpful tool to demonstrate benefits to delayed or reduced spending.

Lifetime Relationships

How often should a Trustee update and review the budgets and cash flow with a beneficiary? While every situation is unique, annual portfolio reviews provide an opportune time. As with our example of the traveler making changes early, the benefits of making small adjustments over large ones and timing budget and cash flow reviews to annual portfolio reviews have additional benefits. Such adjustments help tie the impact of decisions with recent portfolio returns, good and bad. Clients need to understand that the reason they don’t spend an inordinately large amount of money during or following market successes is to generate a cushion for lean years. Conversely, clients who follow this process are less likely to experience a significant budget cut after a lean year because they were disciplined during years of plenty.

Using annual budgeting and the Monte Carlo simulations, a Trustee demonstrates the impact of several variables, including individual risk tolerance, timing and amount of distributions, asset allocation, and personal assets available to the beneficiary. These tools provide the Trustee support in outlining the process to beneficiaries as they make important lifestyle choices and consider the impact of those decisions. Such planning allows a Trustee to administer the Trust in accordance with Florida Statutes and implement the Grantor’s intent of setting aside funds for the lifetime of beneficiaries.

Disclosure: The information, analysis and opinions expressed herein are for general and educational purposes only, and do not constitute investment, legal or professional advice. Opinions expressed are subject to change without notice.

Trust services for Synovus are provided through Synovus Trust Company, N.A. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank, and involve investment risk, including possible loss of principal invested.