David Robinson, CFP

, many people designate an adult child as successor trustee—without first discussing it with that person.

As a result, many designated trustees are completely unaware that they’ll be assuming this role until the trust’s creator, their parent, become incapacitated or dies. 

When spouses are designated trustees, they tend to be aware of this eventual role far in advance, as couples usually discuss such matters. But many parents are reluctant to discuss the inevitable with their adult children and vice-versa.

Thus, successor trustees often have no awareness of this role until they must assume it. And when the time comes, even if they’re willing, they may not be prepared or able to execute the duties required.

This scenario can lead to poor estate administration, declining estate values and conflicts among heirs that can lead to litigation, resentment and a boatload of stress for everyone involved.

But if successors are aware of this role and what it involves well in advance, these problems might be avoidable.

Selection and preparation of suitable successor trustees can be assured by acknowledging the parent’s mortality and discussing eventualities (Typically, adult children are designated when only one parent is alive).

These discussions should center on the wishes of the parent creating the trust, the common interests of the beneficiary children, and the best ways to serve these interests fairly, transparently and efficiently. 

Usually, the best context for such discussions is a family meeting where all considerations are aired and, ideally, family members agree on whom the successor trustee will be. Also, families should outline the specific duties of the trustee, the guiding principles for performing them and the preparation necessary, if any, to assume them. These items can then be included in trust documents by a qualified estate attorney, contingent on that professional’s advice.

Items for discussion at such meetings include:

Trustee selection. Does the candidate have the time, skills and experience to fulfill this role? Would serving as trustee be too inconvenient? (It might be if he or she lives in a different state.) Does the person have the expertise, based on his or her education and profession?

Skills over seniority or gender. Traditionally, many parents have reflexively appointed their eldest child, especially if that child is male. But neither the eldest nor any of their male children may be the best candidate. And for many parents, of course, confining candidates to male children of course reflects an outdated view of gender roles. In a society with an abundance of women lawyers and an increasing number of women in financial professions, many trustors might have obvious candidates in their daughters. Whoever is selected, the trustee must be willing and ready to assume the role, and ideally should have the endorsement and support of their siblings. This can go a long way toward preventing problems down the road.

Specific duties. These fall into two categories: duties during incapacitation of the trustor and those assumed after the trustor’s death. Though incapacitation is common, many families don’t seem to be aware of this likelihood. For trustees, incapacitation can mean long-term handing of the trustor’s day-to-day financial affairs, ensuring that accounts are kept up to date, property is managed, and bills are paid. 

Managing principles for investment accounts. Without stipulations in trust documents, the trustee could have unlimited leeway in managing these accounts, so all family members should be on the same page about how this is to be handled. For example, it’s in all beneficiaries’ interest to avoid high-risk investments and to avoid unqualified, imprudent investment managers.

Differences between financial advisors. Trustees should know—or, if not, should become educated about—the difference between non-fiduciary advisers (such as brokers, who basically act as salesmen) and fiduciary advisors, who are legally bound to adhere to fiduciary standards requiring that they always put their clients’ interest ahead of their own.

This is only appropriate and logical, as trustees and estate executors are themselves fiduciaries. If the trustor has a relationship with qualified, professional fiduciary advisors, it’s a good idea for the trustee to meet them upon accepting the role so the relationship can be smoothly transferred. Not uncommonly, beneficiaries have had the disappointment of seeing their inheritances shrink after the trustee invested estate funds in high-risk assets that promptly went south. Placing some parameters on investments and advisors in trust documents, where legally feasible and advisable by qualified estate attorneys, can help preserve estate values and help avert disappointing investment outcomes.  

Of course, family discussions on these topics can be difficult in dysfunctional families or those where longstanding distrust among siblings fosters fears of self-dealing by the trustee.

In such cases, siblings’ fears may be allayed by including specific guidelines for estate administration, during incapacitation and after death, in trust documents.

All too often, naming a successor trustee is treated as an afterthought when creating trusts, though it’s one of the most important decisions involved.

Discussing the duties in advance with the designated trustee—and getting the whole family involved—is the best way to avoid bequeathing problems to heirs.

David Robinson, a Certified Financial Planner, is founder/CEO of

, an SEC-registered firm in Phoenix that provides fiduciary services to help clients achieve their financial goals. His practice focuses on helping wealthy individuals with custom financial plans, using a holistic approach to grow/protect wealth, manage taxes, identify insurance solutions, prepare for retirement and manage estate plans.

Articles

All too often, naming a successor trustee is treated as an afterthought when creating trusts, though it’s one of the most important decisions involved. 

Naming Successor Trustees Is a Family Matter

Anyone who owns stocks has seen their account values rise and fall widely from market volatility, wide fluctuations in company performance, or both.

Thus, the gains in their investment accounts that investors gaze at with great affection can prove evanescent. Vanishing gains can wreak havoc with your retirement planning because, when you need to make withdrawals to pay expenses during retirement, this can mean far less cash in hand than you’d expected. 

Many investors are reluctant to sell shares and take gains periodically because they expect or just hope that shares will continue to rise. Many long-term investors who take a set-it-and-forget-it approach may be slow to notice over-concentrations in some stocks or funds over time, especially if they’ve chosen to have dividends reinvested automatically.

As a result, they may develop severe over-concentrations in stocks or sectors that can render overall portfolios unbalanced. This can mean taking much more equity risk than originally intended, and a lopsided equity allocation relative to bonds.

Instead of 60/40 stocks-to-bonds allocation, they could be 70/30 or 80/20 before they realize it. Then they’re at greater risk from dips in equity values during a decline or, more pronounced, at the onset of a bear market.

The best way to deal with stock concentrations is to prune gains like fruit from an orchard by selling shares and then investing the cash in a lower-risk asset class, such as bonds. This increases the likelihood of growing your portfolio’s value over time because these gains are now exposed to less risk. Your investment principal could be viewed as the tree or bush, and gains as the fruit to be preserved.

The decision of when to sell should be governed by the growth of your position in a stock—the current value versus the value of the shares on the day you purchased them.

When should you trim? This depends on your intended allocation to stocks as an asset class and to specific sectors and industries. But a good rule of thumb for many investors is to limit a given stock position to 5 percent of your equity portfolio.

If you’re reluctant to sell winners, look at it this way: A well-performing stock can over time deliver these gains again. If it doesn’t—if it loses value—then at least you took the gains when you could.

Stay within your asset allocation. Reducing concentrations in individual stocks or sectors and reinvesting gains is a key element of rebalancing, so it’s essential to maintaining your allocation’s original risk-management goals to avoid being overweight in a given industry or sector. Holding too much asset value in any one stock or sector poses more risk.

Increase your long-term accumulation of lower-risk assets, relative to your stock holdings, in accordance with a sound asset allocation plan that should call for decreasing equity holdings as you near retirement.

Avoid a trap that many retirees fall into: Running short of resources to pay retirement expenses, too many investors are forced to sell once-appreciated shares low after they’re brought down by market volatility, a bear market, or company underperformance

Trimming or altogether eliminating appreciated stock positions can take on urgency when recognizing, from the direction a company is taking, that a company’s shares will soon be headed down. In this scenario, you might be looking not at risk but imminent reality.

Mark Fiedler, CFA, managing partner of Autus Asset Management in Scottsdale, Ariz., puts the decision to trim gains—and even your principal investment—in newly wobbly stocks this way: “To improve or sustain the health of portfolio, it’s oftentimes necessary to sell holdings that have lost their competitive advantage, have deteriorating fundamentals or have made strategic missteps. Any or all of these factors can reduce potential future cash flow and reduce the present value of an investment.”

Of course, the goal is to spot these weaknesses and sell early, rather than after steep declines. This is one advantage of having a qualified advisor managing your investments.

While many investors conscientiously harvest losses at the end of the year to reduce capital gains tax, it may not occur to them to also harvest gains because they don’t want to pay the tax.

Yet assuring that you can pay Uncle Sam is simply a matter of putting some of the gains aside. This is easily done by linking your brokerage account with an online savings account and making transfers. In tax-deferred accounts—such as IRAs—selling doesn’t incur tax for that year if you don’t remove cash from the account. 

By pruning gains incrementally over time and moving the cash into lower-risk assets, you can preserve gains and thus grow your account values in preparation for retirement.

Pruning Big Stock Gains to Preserve Them

There is perhaps no controversy in the investing world more contentious than active versus passive equity investment management — whether it’s better to have an equity portfolio that’s actively managed or one that passively gets the returns of market indexes or selected groups of stocks. The intensity of this long-running fight is on a level comparable to that of Democrats versus Republicans.

Members of both camps perennially argue that their way is unequivocally the best, despite real-world results that support one side’s argument one year and the other’s the next. As investors seem to have one religion or the other, few use both methods. Yet, when used in tandem, the two methods can work together in ways that deliver the best of both worlds while compensating for the downsides of each. 

Active management — buying and selling individual stocks rather than holding index funds or exchange-traded funds (ETFs) — has some distinct advantages, including:

The ability to apply quality standards when selecting investments to achieve desired levels of liquidity, leverage, profitability and return on equity.

Control over avoiding portfolio concentrations. To some degree, risk can be managed by limiting exposure to certain sectors, industries or companies.

Tax efficiency. Active management of stocks held in taxable accounts (as opposed to those in 401(k) plans and individual retirement accounts) enables the harvesting of capital losses for tax deductions that offset capital gains.

Yet active investing has some distinct disadvantages. Among these is company-specific risk. Because active portfolios necessarily involve far fewer stocks than passive, a decline in one stock has a proportionately greater negative effect than in a passive fund. Another disadvantage is far higher expenses because of trading costs and, if you hire a professional to manage your portfolio or own an actively managed mutual fund, management fees.

By contrast, expenses of ETFs are comparatively low. Yet passive investments have distinct disadvantages, including:

The potential for unintended concentrations in some sectors, particularly during times of irrational exuberance and inflated valuations. For example, the rush to invest in tech firms in the 1990s, leading to a market bubble, involved high concentrations of technology companies in large-cap indexes. Thus, shares purchased in passive large-cap funds conferred disproportionate ownership in these overvalued firms, exposing investors to significant risk.

Performance limitations. Passive funds are built to track indexes or groups of stocks rather than to outperform them. So the index itself will always be underperformed by the amount of the expenses of the fund, however low.

Overall market risk. As many passive stock funds track a specific index or market, when that declines, so will shares.

Of course, active management isn’t for everyone. You must either pay the expenses of mutual funds, hire a personal portfolio manager or make decisions to buy and sell stocks yourself. All of these options, especially the latter, mean you have to keep up with markets, sectors and companies; know how to read a balance sheet; and possess the skills needed to evaluate management teams, companies’ market positions and the durability of their investable propositions.

If you’re comfortable evaluating companies, this can empower an active/passive equity strategy that centers on using active equity investments in companies that are knowable — those you can reasonably expect to obtain information about — and passive ones to invest in those you can’t.

To use this dual strategy, consider starting by establishing your active portfolio in a non-tax-deferred account populated by domestic stocks. One key to selecting individual stocks correctly is to limit the universe you’re actually going to consider. Even when vetting domestic stocks, there are too many for most people to deal with when looking at small-, mid- and large-caps. So it’s best to limit this active section of your portfolio to large-cap (market capitalizations of more than $5 billion) and mid-cap (market caps of $1 billion to $5 billion) stocks.

Small-caps are not only far more numerous, but also difficult to learn much about because they’re generally not followed as closely as large companies. According to this strategy, then, investors’ research time is spent efficiently by evaluating the balance sheets and management teams of large and midsize U.S. companies in 10 or so sectors. 

Yet, this portfolio would be insufficiently diversified. So you add diversity by buying some small-cap domestic ETFs with performance histories uncorrelated with those of your large- and mid-caps, which limits downside volatility. This way, you use passive management’s strength to reduce risks posed by your larger holdings.

Similarly, you can then add global diversity through the purchase of ETFs or index funds that track international or emerging-market companies, whose dynamics are difficult for even most professional American investors to get a good feel for. What’s more, many emerging-market stocks involve significant company risk and, depending on their environments, political risk.

Such a portfolio can productively harness active and passive management’s advantages while using each to reduce risks posed by the other. This type of dual equity portfolio can work nicely with other types of investments — including bonds, real estate and commodities — to produce an overall investment portfolio that positions investors for good total returns with superior downside protection.

David Robinson, a Certified Financial Planner, is founder/CEO of 

When used in tandem, the two methods can work together in ways that deliver the best of both worlds while compensating for the downsides of each.   

Active and Passive Management Working in Harmony

We are now witnessing the beginning of the end of the Chinese economy—and of US-China trade&mdash;as we know them. Developments leading up to this have been under way for years, but the shift is now being catalyzed by geopolitical tensions stemming from the coronavirus 2019 (COVID-19) pandemic.

The shift will ultimately have a transformational impact on American investment markets, some American companies and various investment funds. Investors who get their arms around the situation sooner rather than later and assess potential impacts on their portfolios will be better able to limit damage and position to benefit.

Signs of the shift have been evident for years. China became the planet’s second-largest economy (though one with 

 before the pandemic), from decades of cash infusions from large American companies seeking a cheap place to manufacture. But the Chinese communist government has long flouted the corporate partnerships it approved by setting up competitive entities and committing flagrant patent infringement, much to the bipartisan displeasure of the US government and the dismay of the US companies financially damaged. And in recent years, costs of manufacturing in China have risen considerably. Now, the virus’ impact is awakening American companies with manufacturing operations in China to the need to site plants friendlier places.

Also, noted J. Kyle Bass, founder and CEO of Hayman Capital Management, a Dallas-based hedge fund—and a widely-quoted expert on China’s financial impact&mdash;the shrinking Chinese economy has become highly leveraged and hence, unstable. Among other experts, 

Bass has focused renewed attention on the long-overlooked situation

 wherein the U.S. and other leading Western democratic nations have relied—exclusively in some markets, such as blood-pressure medication&mdash;on the supply chains in a communist nation with an appalling record of human rights violations.

Because of the Chinese government’s actions as the virus spread—issuing propaganda and refusing to cooperate with the West--there’s growing support for Western nations to seek reparations. “There’s a tide of resentment toward China over the virus in the West, including the US, Canada, Australia and the UK,” said Bass. But this would likely result in a stalemate, considering the various implausible counter-narratives on the virus’ origins that the Chinese government is pushing. 

In recent years, U.S.-Chinese tensions have run high over various other factors, including the ongoing trade war and China’s 

 that the entire South China Sea belonged to it—and its construction of islands there, presumably for strategic military purposes.

Regarding multinational manufacturing in China, the virus has accelerated what’s becoming known as the great decoupling of the 2 nations. “As bad as the tech war between the U.S. and China [already] had the potential to become, there was worse yet to go as this split spilled into other economic areas,” says Ian 

. “Coronavirus has sped up that timeline considerably; manufacturing and services sectors have already been forced to begin reorganizing supply chains and staff.”

US-Chinese financial friction is at the highest point in decades. This scenario, heighted by issues over the pandemic, involves these developments:

, seeking to curtail its autonomy and ultimately take control of the city-state. These moves, met by protests in the streets in Hong Kong, are ratcheting up tensions with US because of American interests in sustaining the island as a democratic state.

The Senate’s approval, in late May, of sweeping Trump- administration-backed 

 156 Chinese companies now listed on US exchanges, and from other means of raising money from American investors, if they don’t comply with rules including those requiring them to submit 

to required audits conducted by the Public Company Accounting Oversight Board,

 the nonprofit entity that oversees audits of all US public companies. 

Sen. Lindsey Graham’s proposing legislation, in late May, that would allow President Trump to impose sanctions on China if it doesn’t transparently investigate the origins of the pandemic.

 to shift production from China to Southeast Asia—Vietnam and potentially Thailand. Until now, most, if not all, Google smartphones and Microsoft computers have been made in China. Also, reports surfaced in May concerning 

 plans to potentially move manufacturing from China to India.

Generally, with these developments in mind, investors should take a hard look at their portfolios and consider potential impacts. Specifically, investors should:

Assess the degree of China and China-related exposure in their overall portfolios.

Determine whether they directly or indirectly own shares of any of the 

 targeted in the Senate bill, and assess the potential risks from 

—for companies that fail to comply with the legislation’s requirements (assuming it passes the House).

a likely end to Chinese companies’ advantages from their longstanding status as emerging market companies

. An end to emerging status would mean that these companies would basically have to compete on a level playing field for investment dollars, which could lower asset values and have a major impact on international funds.

Evaluate the ultimate impact that the developing China supply chain rerouting will have on U.S.-based multinational companies, particularly those in tech, pharma and precious metals. Within these sectors, what companies are best or worst positioned to shift supply chains? And with what degree of business interruption?

Assess the investment potential of the indirect benefits of the trade shift for Southeast Asia (Vietnam and Thailand) and the Indian subcontinent (India and Bangladesh). Might this lift investments in these emerging markets?

If US-China relations were to suddenly warm up, the trade war were to end, the 2 nations were to bury the coronavirus hatchet and American multinational companies regained confidence in siting plants in China, this would be nothing short of a miracle. It seems only logical to consider investing in the other direction.

David Robinson, a Certified Financial Planner, is founder/CEO of 

The views expressed in this piece reflect those of the author, not necessarily those of the publication.

The shift will ultimately have a transformational impact on American investment markets, some American companies and various investment funds.