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Being a trustee in a challenging economy: Four things to keep in mind

January 13, 2023 Article 6 min read
Diana Fluegge Wealth Management Jonathan S. Grossman Wealth Management
Market volatility impacts all levels of investors. The concerns are compounded for trustees who must navigate tumultuous markets in the interest of both current and future beneficiaries. Here’s our top four considerations when serving as trustee during a challenging economy.
Financial advisor meeting with a couple.As the economy experiences its worst inflation in 40 years, consumers are experiencing a huge rise in the cost of living. Alongside this, volatility in the financial markets is putting serious downward pressure on investment portfolio returns. For many trustees, this is a worst-case scenario: a significant reduction in the value of investment assets intended to be passed on to future generations, but coupled with lower valuations and in-turn buying opportunities in the equity markets, accompanied by a greatly improved yield in the income market that discourages current income beneficiaries from being inclined to take more risk in the trust portfolio.

As a trustee, how do you balance the needs of current beneficiaries with future beneficiaries during this type of market environment? Current conditions are causing income beneficiaries to maintain, if not reduce risk, with the improved yields on the income market, while future beneficiaries, with plenty of time to handle a market recovery, want to see additional investments in the equity markets. Most trusts provide some leeway to make changes to investments. But when considering changes to investment strategy, you have a responsibility to follow the trust document and use your best judgment to manage risk, monitor liquidity needs, and ensure assets are preserved. This can be a tough balancing act — and one that may seem impossible in weak financial markets.

Here are four suggestions to help make better decisions as you navigate the economic storm.

1. Maintain discipline

There’s no question: market volatility causes a lot of fear, anxiety, and uncertainty. It’s natural to consider emotionally driven steps to reduce financial pain — particularly when it has an impact on the beneficiaries you’re entrusted to support. But as a trustee, your first obligation is to uphold the trust. This means removing emotion from the situation and sticking to the long-term goals that were set in the investment plan during quieter times. Stay disciplined, have patience, and be comfortable sitting with the uncertainty — you should find that it pays off.

Stay disciplined, have patience, and be comfortable sitting with the uncertainty — you should find that it pays off.

Beyond the emotional factors, there are other good reasons to stay the course.

  • History is on your side: Markets ebb and flow; there are good times and bad. But overall, historical data shows that markets correct themselves, and over 100-plus-year period returns have historically gone up more than they’ve gone down.
  • It’s hard to time the market: If you pull out of the market now, you’ll be faced with the market timer’s dilemma: the risk of missing out on the high market days to come and, when you decide to get back in again, you could be faced with buying in at a higher price, thereby losing buying power in the process. History has many examples of missed opportunities when trying to time the market. A recent example occurred when the COVID-19 pandemic sparked a severe market downturn in February and March of 2020 causing the Dow Jones Industrial Average to lose 37% of its value over a six-week period. The market quickly recovered, and investors that stayed the course were rewarded with an epic recovery — the market increased over 43% that year with the Dow actually ending the year up over 6%.
  • There could be tax implications: Indiscriminate selling could trigger tax liabilities that can intensify the losses.
  • You may have limited capacity to make large changes to investment directives: Most trusts provide trustees discretion over investment decisions, but some limit their capacity to make major changes to investment directives. This could be an impediment to the reallocation of funds, especially if it’s an irrevocable trust.

2. Review the trust investment portfolio

As a trustee, you’re responsible for periodically reviewing the trust portfolio and investment goals. In normal times you’d review the time horizon, the returns, liquidity and cash flow needs, check risk tolerance, and optimize portfolio returns to maintain distribution needs for current beneficiaries while balancing growth for future beneficiaries. During times of extreme market volatility and falling returns, your review should also include the long-term strategic plan and investment policy of the trust, previous planning for volatility throughout the life of the trust, and relevant financial independence projections to understand current and future needs. This review should give you a sense of how well things are working and evaluate whether changes need to be made. Questions to ask include:

  • Do I understand the investment goals of the trust? Are they currently being followed?
  • Do I understand the trust’s time horizon?
  • Do I understand the needs of the various classes of beneficiaries and how they’ll be impacted if distribution levels change?
  • Is the trust’s cash flow sufficient to support current and projected levels of spending and distributions in a down market?
  • Will projected changes in the portfolio’s net income trigger adjustments to distributions? 
  • What are the trust’s requirements to preserve assets for future generations? Does the current investment plan meet those requirements? If not, what are the available options for realigning the portfolio to current market conditions?
  • Have I identified cash needs over the next six to 12 months? If there are upcoming cash needs, consider maintaining them in a short-term fixed income investment vehicle that provides positive, low-risk returns.

3. Look for opportunities to adjust investment allocations

Most trusts allow adjustments between principal and income as long as trustees manage trust assets as a prudent investor, follow the trust’s terms, and genuinely believe they can’t produce a fair and reasonable result for all beneficiaries without an adjustment.

If you believe changes are justified, work with your trust’s investment advisor to find opportunities to rebalance the portfolio in a way that maximizes income returns for current beneficiaries while positioning it for long-term growth. Review the investment policy statement (IPS) to ensure it’s aligned with the evolving needs and look for opportunities to revisit strategies to rebalance or take advantage of tax planning opportunities such as tax loss harvesting. This review will encompass the key components of the IPS, including time horizon, risk tolerance, and return, liquidity, and cash flow needs.

If you believe changes are justified, work with your trust’s investment advisor to find opportunities to rebalance the portfolio.

There may come a time when the investment goals of the trust change and you’re required to update the IPS to reflect this new reality. For example, you may determine that it’s prudent to change the investment mix to increase allocations to investments that get lower returns but will sustain the funds for longer. Work with your trust’s investment advisor to run projections that account for estimated inflation, various market cycles, and the age of the beneficiaries.

4. Consider hiring an agent for trustee

If the situation gets to a point where you feel like you’re overwhelmed by your duty to serve as a trustee, or you lack the skills to manage a trust during times of market of volatility and turmoil, an agent for trustee can help protect you. They have the experience and resources to review the long-term financial goals of the trust, provide advice on any adjustments that may be needed, and offer calm, dispassionate advice in times of maximum pressure.

Managing a trust during times of high market volatility is challenging. When making decisions, stay calm, follow the trust document, communicate with your advisors, and always execute the grantor’s wishes as intended.

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