If I am 80 years old and want to invest $300,000 in a trust for my grandchildren, should I invest this money in mutual funds, indexes, ETFs, or something else?

I am 80 years old and have 15 grandchildren. I have about $300,000 that I will put in an irrevocable trust for my grandchildren. The beneficiaries range in age from 4 to 28. The distribution will be based on education, health and welfare. The exact amount distributed will be up to the trustee.

Given at least a seven-year time horizon, should I invest this money: in mutual funds, indexes, ETFs, or something else?

Estate Planning, Investing, ETFs, Mutual Funds
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September 2018

A detailed analysis may reveal other important factors for your gifting goals, but it sounds like ETFs may be your best option. ETF’s are usually more tax efficient. Mutual funds usually have a some realized gains annually in appreciating markets. (This varies from fund to fund and past distributions can be looked up on mutual fund websites.)

Mutual funds do have the advantage of auto reinvesting dividends (and realized distributions although gains are taxable) back into the fund saving trading fees. Trading fees for your starting account of $300K may not be significant, but a pitfall to watch out for if any of your heirs might leave the money invested over a long time.

Example 2% in dividends from $20,000 in ETFs/Mutual Funds is $400. So a trading fee of $4.95 is not a big deal but if you have 5 ETFs that is $24.75 or 6.18% of your gain or you have $400 a year accumulating in cash that is not participating in the markets. The lost compounding effect is important over time.

I would suggest @5 different ETF index exposures for diversification and rebalancing purposes that can be carried out by your individual heirs or trustee(s) assuming some won’t liquidate at the 7-year mark or simply leave the assets alone. You might DIY your allocation, but consider a planner who does hourly/small project fees, is inexpensive and will point you to low cost and a properly mixed set of ETFs.

I do want to ask why an Irrevocable trust? There are many legitimate reasons to use that tool, but a revocable trust that becomes irrevocable at your death could get a step in in basis, assuming you aren’t already utilizing your $5.5 Million Estate Tax exception in other ways. ETFs are generally going to get more benefit from a step up in basis.

For Example: $300,000 ETF Trust that earns 5% appreciation and 2% dividends. The 5% appreciation by itself for 7 years grows the fund to $422,130 for a $122,130 taxable gain.  Without a basis step up at 15% that is $18,319 in net taxes. But with a basis step up that tax is avoided saving each heir $1,221. ($18,319/15) This is equivalent to almost another year of appreciation at over 4.5%

The dividends will be taxable in any case. But they will make the tax savings even higher if you pay the tax each year on dividends and reinvest the remainder. If you want the more complicated calculation feel free to contact me. A free consultation with a planner or estate attorney is worth your time if you haven’t done so.

I trust that your grandchildren will enjoy and appreciate your generousity!


David Nash, CFA, CFP®


September 2018
September 2018
September 2018