Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Neither Udell Associates nor Pendragon Financial Services are affiliated with Kestra IS or Kestra AS. This site is published for residents of the United States only. Registered Representatives of Kestra Investment Services, LLC and Investment Advisor Representatives of Kestra Advisory Services, LLC, may only conduct business with Imageresidents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact our Compliance department at 512-697-6000.

Estate Planning Life Insurance Charitable Gift Annuity Risk Management Deferred Annuities

money bag

Investing in your estate plan

Whether your wealth matches that of Bill Gates or Warren Buffett, or your resources are more modest, the purpose of estate planning is the same: to ensure your assets are distributed according to your wishes and to preserve those assets so there’s something left to distribute when you die.

Asset preservation involves several components, including asset protection* techniques (such as creditor protection trusts), minimizing estate taxes and other expenses, and investment strategies designed to provide long-term growth. Let’s
focus on the investment component.

A balanced approach

Your investments should support the legal and tax planning aspects of your estate plan, so it’s important for your lawyers, tax advisors and investment advisors to work together. Designing an investment strategy is challenging because you need to strike a balance between current income or liquidity needs and long-term growth.

As with other types of investment planning the key to investing for your estate plan is asset allocation** – that is, identifying the right mix of stocks, bonds, real estate, life insurance and other investments in light of your specific goals, time horizon and risk tolerance. At the same time, estate planning raises unique issues that may require a departure from traditional investment principles.

Many trusts, for example, provide income for you or other “current” beneficiaries and transfer what’s left at the end of the trust term to one or more “remainder” beneficiaries. From an investment perspective, these types of trusts put the trustee in a difficult position because investment strategies that maximize current income are often at odds with strategies that maximize long-term growth.

To avoid conflicts between current and remainder beneficiaries, consider providing
the trustee with detailed instructions on the investment strategies he or she should follow. Another option is to design the trust as a total return unitrust. This trust type pays out a set dollar amount or percentage of the trust’s initial value to the current beneficiaries, allowing the trustee to focus on long-term growth without sacrificing current income needs.

A GRAT strategy

A grantor retained annuity trust (GRAT) can transfer wealth tax free, but you may need to adjust your investment strategy.

A fundamental principle of sound investing is to diversify** your portfolio. By spreading your funds over different asset classes, funds, companies, industries, sectors and geographical regions, you reduce the risk that poor performance in one area will negatively affect your overall portfolio. But a GRAT turns this principle on its head: For this type of trust to be successful, the less diversification the better.

A GRAT is an irrevocable trust that pays you an annuity for a term of years and then transfers any remaining assets to your children or other beneficiaries. When you contribute assets to a GRAT, you make a taxable gift equal to the present value of your beneficiaries’ remainder interest, which is determined using a rate of
return established by the IRS – the Section 7520 rate. If the assets in a GRAT outperform the Sec. 7520 rate, the excess earnings are transferred to your beneficiaries tax free.

There are two keys to a successful GRAT. First, you must survive the trust term; if you don’t, the assets will be pulled back into your taxable estate. (This is known as mortality risk.) Second, the GRAT’s investments must outperform the Sec. 7520 rate. Your best chance for achieving that is to segregate different asset classes into separate GRATs. Why? Because it insulates high-performing assets against losses generated by underperforming ones.

For example, let’s say Michelle wants to invest $2 million in a five-year GRAT for the benefitof her daughter, Hazel, at a time when the Sec. 7520 rate is 4%. She selects an annuity payment of $449,255, which “zeroes out” the GRAT. In other words, assuming a 4% rate of return, the remainder interest would be zero, so there’s no taxable gift. Suppose that the trustee splits the $2 million between two mutual funds. One earns a 6% return over the GRAT’s term, while the other earns only 2%. Because the overall return, 4%, merely matches the Sec. 7520 rate, the GRAT is unsuccessful – that is, it fails to transfer any assets tax free.

Suppose, instead, that Michelle had set up two separate $1 million GRATs investing in the same two mutual funds. The one investing in the 2% fund would fail, but the one investing in the 6% fund would outperform the Sec. 7520 rate, generating a tax-free gift to Hazel of more than $70,000. This isn’t to suggest that you should throw diversification out the window. To minimize your risk, it’s important to balance investments in a GRAT with an appropriate mix of assets outside the GRAT (in separate GRATs or individual investments, for example).

In addition to segregating assets into separate trusts, you can also help improve your results by using “rolling GRATs” to segregate assets over time.

Which powers should your trust protector have?

There's no one right answer to this question. It depends on the nature of your estate plan, your family's situation, the capabilities of the trustee and your specific estate planning objectives. But in most cases, it's advisable to limit the trust protector's authority to relatively narrow circumstances.

For one thing, if the trust protector's power over day-to-day management of the trust is too broad, he or she will effectively serve as a co-trustee. Then the question becomes "Who will protect your trust from the protector?"

Is a trust protector a fiduciary? Another issue is whether the trust protector is considered a fiduciary. Fiduciaries are held to a higher standard of care than nonfiduciaries and, therefore, may be exposed to liability if a court determines that they failed to act in the best interests of the trust and its beneficiaries.

There's some uncertainty about whether a trust protector is a fiduciary. In some states, for example, a trust protector is presumed to be a fiduciary unless the trust agreement specifies otherwise. But many states' laws are silent on the issue. Arguably, the broader a trust protector's powers, the more difficult it will be to argue that he or she is not a fiduciary.

Trust protectors may be more valuable if they're not considered fiduciaries. There are two reasons for this: First, without fear of liability, a nonfiduciary is free to make major decisions without the added expense and delay of seeking court approval. Second, it's easier to attract qualified trust protectors if liability isn't a big concern.

However, keep in mind that, unless your state's law specifically addresses the role of trust protector, there may be some uncertainty over a trust protector's legal obligations. Some commentators argue that a trust protector should be considered a fiduciary regardless of the language of the trust agreement or the extent of his or her authority. A fiduciary can be defined as someone in whom another has placed the utmost trust and confidence to manage and protect property or money. A trust protector seems to fit that description.

Many happy returns

These examples are just a few of the investment considerations that can affect your estate plan. By incorporating these considerations into your planning, you may improve the chances of achieving your goals.

* Asset protection plans should be developed and implemented well before problems arise. Due to the fraudulent transfer laws, asset transfers that occur close in proximity to the filing of a lawsuit or bankruptcy can be interpreted by the court as a fraudulent transfer. Proper structuring of these assets is imperative please seek proper legal and tax advice prior to engaging in re-titling/structuring of any assets. Please note that laws are subject to change and can have an impact on your asset protection strategy.

** Neither Asset Allocation nor Diversification guarantee against loss. They are methods used to help manage investment risk.
back to top back to Insights


We are a wealth management and estate planning firm specializing in estate
and trust planning, income tax planning, philanthropy and asset management.