Successfully managing a modest-sized family trust portfolio during a bear market can be difficult when the trust is making distributions. Both personal and corporate trustees face the task of providing adequate and sustainable cash flow to the current beneficiary from a diminishing pool of capital and meeting obligations to remaindermen. Although bear market environments generally increase the desirability of capital preservation strategies, winding down equity risk in a low-interest rate environment may place the trustee in a further bind. As global stock values sink, a flight to quality often means acceptance of extraordinarily low yields on principal-guaranteed investments. Even at low rates of inflation, historically low yields on default-free fixed income investments cannot protect against erosion of purchasing power.
“How can trustees best discharge their obligations regarding (1) impartiality, and (2) duty to inform beneficiaries regarding important developments? Poor investment returns represent a special challenge to modest sized family trusts seeking to balance the interests of all beneficiaries. ”
Unfortunately, this type of economic climate creates a favorable habitat for a variety of reach-for-yield strategies which, historically, have been as safe as storing nitroglycerine in a mix-master. The pressure to pursue such strategies may increase by virtue of the presence of current beneficiaries anxious to continue generous distribution streams and remainder beneficiaries expecting to receive generous terminal wealth distributions. Even total-return distribution formulae (based on a percentage-of- corpus policy or on the power to adjust principal and income) may not be able to solve the dilemma of too little resources and too much demand. In a nutshell, the trustee faces a situation where interested parties demand the removal of fifteen pounds from a ten pound sack.