Archives for May 2021

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Investing Blog Roundup: New Email Platform

As you’ve probably noticed, today’s email looks somewhat different. With the recent news that Google/Feedburner will officially be ending their email newsletter service in July, I have switched to the “” platform.

I hope to get everything sorted so that, from your perspective, it works the same as it has for the last 13 years (i.e., since the beginning of this blog), but there may be some glitches/hiccups along the way. My apologies in advance, and thanks for your patience.

Recommended Reading

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What’s the Point of a Trust?

A reader writes in, asking:

“Can you explain succinctly what the point of a trust is? I had thought that they were a tool for avoiding estate taxes (I don’t understand how that works, but it’s not a concern for me) but my accountant suggested I create one and I don’t really understand why.”

There are many different types of trusts, each of which serves a particular purpose.

In most cases though, the overall idea is that a trust is a mechanism for exerting some control over how your assets will be managed after your death or incapacitation. That is, a trust is a legal entity which can a) hold assets and b) outlive you. So you can create a trust, fund it with assets, and write the terms of the trust in such a way as to stipulate certain requirements as to how the assets will be invested or spent — and then those rules will have to be followed even after you die or become incapacitated.

In order to better understand the various purposes for a trust, you need to know a bit of terminology.

Parties to a Trust

A trust involves three parties: the grantor, the trustee, and the beneficiary.

  • Grantor (sometimes called the donor or settlor): the grantor is the party who transfers property to the trust.
  • Trustee: the trustee is the party in charge of managing the trust (e.g., making investment decisions, distributing assets to the beneficiary when applicable, etc.). The trustee has a fiduciary duty to the beneficiary, and the trustee must manage the trust in such a way that is in keeping with the terms of the trust.
  • Beneficiary: the beneficiary (or beneficiaries) is the party for whose benefit the assets in the trust are held/managed.

Of note: these parties may be actual human persons, or they may be legal entities. For instance, you could name a law firm or CPA firm as the trustee to a trust. And it’s common to name a non-profit organization as a beneficiary of a trust.

Also of note: while there are three parties to a trust, one person may actually be in multiple roles — or even all three roles. For instance, you may be the grantor of a trust (i.e., you are the one funding the trust with your assets). And you may set it up so that you are also the trustee and beneficiary while you are alive, with your sibling being named as the successor trustee (i.e., the person who takes over as trustee after your death) and your child being named as the secondary beneficiary.

More Trust Terminology

A trust can be an inter vivos trust or a testamentary trust. An inter vivos trust is a trust created by the grantor during his or her lifetime, whereas a testamentary trust is one created at the time of the grantor’s death. (That is, with a testamentary trust, the grantor’s will provides for the trust to be created and funded upon their death.)

A trust can be revocable or irrevocable. With a revocable trust, you can change the terms of the trust (or even terminate it completely) as long as you are alive and of sound mind. With an irrevocable trust, there are some exceptions, but you generally cannot make changes once it has been created.

Trust Usage Examples

With the above terminology out of the way, we can go through a few examples of cases in which a trust would be useful.

Example: Susie is a widow with three adult children (two daughters and a son). Her son has a long history of making poor financial decisions. In Susie’s will, rather than leaving 1/3 of her assets to each of her children outright, she leaves 1/3 to each of the daughters, and she leaves the remaining 1/3 to a trust. Susie names her son as the beneficiary of the trust, and she names her attorney as the trustee. This way her son still receives the benefits of the assets, but somebody else (the trustee) will be making the decisions as to how to invest and spend the assets.

Example: Luther and Harriette are married, in their 60s. Harriette has two adult children from a prior marriage. Luther does not get along with Harriette’s children. Harriette is concerned that if a) she dies before Luther and b) her assets are simply left to Luther at her death, he will ultimately disinherit her children. As a result, Harriette provides in her will for a testamentary trust to be created upon her death and for her assets to be placed into that trust. The terms of the trust are that Luther will receive the income from the assets while he is alive, and then the assets will be left to her children upon Luther’s death.

Example: Nigel and Veronica have an adult son who is disabled. The son is currently receiving Social Security disability benefits. And because of his low level of income and assets, he also qualifies for Supplemental Security Income (SSI) and Medicaid. If they simply leave their assets to him outright, he would lose eligibility for SSI and Medicaid. Instead, they create a special needs trust, which will receive their assets upon the death of the second spouse. Their son is named as beneficiary of the trust, and a trusted CPA is named as the trustee. Because the son has no control over the assets in the trust, it will not disqualify him from receiving SSI or Medicaid. The trustee will not be allowed to outright give the assets to the son, but the assets can be used for a variety of purposes for the benefit of the son.

And as the reader noted above, trusts are sometimes created with a goal of reducing potential estate tax costs. The general idea is to transfer assets to an irrevocable trust (thereby removing the assets from your taxable estate), often while maintaining some current benefit (e.g., the right to take income from the assets for a period of years). By transferring assets now, you will often have a taxable gift, but a significant advantage is that the gift is at today’s value, rather than at some more highly appreciated value at the date of your death. There are many different variations on this concept though (e.g., intentionally defective grantor trusts, qualified personal residence trusts, charitable remainder trusts, etc.).

In all cases with trusts, it’s critical to get expert guidance from an attorney who specializes in estate planning. If the attorney is not a tax expert, it will also be critical to get guidance from a tax professional with expertise in estate planning, as there are both income tax and estate/gift tax considerations involved with trusts.

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Investing Blog Roundup: Investors Pulling Money Out of DFA

Dimensional Fund Advisors is known for its “factor” funds (e.g., funds with heavy tilts toward small-cap stocks and/or value stocks). Collectively, investors pulled $37 billion out of DFA funds last year, and the negative fund flows have continued in 2021. In a recent article for, Allan Roth takes a look at why that might be the case.

Recommended Reading

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My Plan for Asset Allocation/Spending in Retirement

A reader writes in, asking:

“Do you plan to switch to a different all in one fund when you get older? I have been doing the 3 fund portfolio over the last couple decades and was thinking of switching to all in one fund, but I would think that an 80/20 split for someone in their 50s is a bit aggressive. So do you plan to switch to a more conservative split later in life or do you plan to stay with this all in one fund until you retire?”

I’ve written before that I don’t necessarily plan to stick with this fund indefinitely. But that has more to do with costs (i.e., lower fixed-income yields and higher expense ratios) than it does with the fact that risk tolerance tends to decline with age. (Note: this dollar cost increases over time as the size of the portfolio increases. So what makes sense at one stage may not make sense at another stage, even if you appreciate the simplicity just as much as you always have.)

In other words, at some point I may switch to a three-fund portfolio — or a two-fund portfolio using Vanguard Total World Stock ETF for the stock allocation.

Ultimately though, the plan is essentially to segment the portfolio into two sub-portfolios as discussed in prior articles:

Let’s walk through a simplified example to show the idea works. Imagine that the following figures are applicable:

  • We anticipate total spending of $85,000 per year.
  • We anticipate the lower earner filing for Social Security at age 62, with a benefit of $20,000 per year.
  • We anticipate the higher earner filing for Social Security at age 70, with a benefit of $35,000 per year.
  • We are comfortable spending from a stock-heavy portfolio at a rate of 3% per year, and assuming that such would last more or less indefinitely.

Given the above figures:

  • From age 70 onward, we would need $30,000 per year from the portfolio (i.e., $85,000 total spending, minus $55,000 of Social Security). With a 3% spending rate, that would require $1,000,000. So we would need $1,000,000 allocated to the mostly-stock (or maybe all-stock) portfolio.
  • To retire at age 62, we would still need that $1,000,000 stock-focused portfolio, and we would need an additional $35,000 per year from savings for the years 62-69, because the larger Social Security benefit hasn’t begun yet. 8 x $35,000 = $280,000. So we would need an additional $280,000 allocated to something very safe (e.g., an 8-year CD ladder and/or TIPS ladder, perhaps with some I-Bonds in that mix).
  • And then for every additional year prior to age 62, we would need an additional $55,000 allocated to the safe investment mix (because neither Social Security benefit is being received at that point). For example if we wanted to retire at age 58, we’d have 4 years of $55,000 of spending from the safe-asset portfolio, followed by 8 years of $35,000 of spending from that portfolio. And the whole time, the remaining ~$30,000 would be coming from the stock-focused portfolio.

In other words, $500,000 in the safe-asset portfolio, plus $1,000,000 in the stock-heavy portfolio would let us retire at age 58, with a spending level of $85,000 per year. At the beginning, that’s a 5.67% spending rate from the portfolio. A lot of people would balk at that, especially beginning at age 58. But in terms of risk level, it’s mostly just the 3% spending from the $1,000,000 portfolio that generates much risk. The rest of the spending is coming from sources with very little risk (i.e., a combination of CD/TIPS/I-Bonds earlier, and Social Security later).

With regard to the 3% spending rate, I would likely be comfortable using a higher rate if stock valuations were lower or if we were talking about retirement at a later age. Also, I anticipate using something along the lines of a hybrid method in which the spending each year is an average of “last year’s spending plus inflation” and “x% of the portfolio balance” — as opposed to one or the other.

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