Author Topic: SO inherited trust fund full of expensive securities & an "advisor"  (Read 4687 times)

softlyraining

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I've been a long-time reader of the blog and I really want to transition my spouse and I to FIRE. We are working on our spending and trying to max out our non-taxable retirements account. However, the main obstacle I see to our FIRE is their trust fund. They inherited a trust that has about $1 million in various securities. Its being held at Wells Fargo and is being managed by an "advisor" who is essentially a banker/broker. If you are feeling a little sick to your stomach, believe me, I am right there with you.

The brokerage account in the trust is full of a mix of mostly mutual funds and individual company stocks that tend to pay out dividends. As you can imagine, its a tax nightmare. Beyond the high fees on the MFs and the capital gains from the dividends and MFs, we are paying this "advisor" quarterly fees (and probably commissions) to "manage" this account. This situation is basically making us nothing betweens the taxes and fees.

My ideal situation is to fire the advisor, move the securities to a brokerage account we can manage, and transition everything to low-fee tax efficient index funds. Why I'm posting is because my spouse and I don't know the nitty gritty logistical steps to do this. I'm not sure how much people are able to help, but here are my questions:

- Is it possible to just move everything in the Wells Fargo managed account to a brokerage account at Etrade, Charles Schwab, or Vanguard and what are the steps to do that?

-How do we transition the portfolio away from mutual funds and individual stocks to index funds? And is there a best strategy to manage the transition over time?

-What are the criteria we need to take into consideration before sells current holdings, to then buy index funds?

-How will transitioning the portfolio affect our taxes?

Any and all help with these questions or others we didn't think of would be appreciated. My instincts are to hire a tax professional or something similar to help us make this transition, but I'd like to know enough to do it ourselves. Its a blessing to receive this kind of money, but right now the situation its in is like a monkey on our back, when we know the money could be working so much better for us.

Some additional info about us:

-We are 28
-No kids
-No house (we currently rent an apartment)
-No debt (no student loans, car loans, or credit card debit)
-We made $120,000 last year between the two of us and expect to earn a little more than that this year
-Our household expenses last year were about $44k, not including taxes paid out of pocket for the brokerage acct and the fees for the "advisor"
-We have about $60K in non-taxable retirements accounts
-Our income will decrease when we have a baby in the next couple years and at least one of us transitions to part-time work

Thanks!

chemistk

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #1 on: February 25, 2016, 06:00:37 AM »
Just a word of caution, I'm not nearly as experienced as others who will come along and be able to explain exactly how you have to do what you have to do, but I can kind of help in that my wife and I were in a similar situation recently (albeit, with a much smaller fund).

First off, at the end of all of this you'll probably have the option to be FIRE within the next year or two...that's a HUGE stash!

Anyway, my wife has a trust in her name that she learned of when she turned 21. She has been using it to fund her education (almost done) and most recently, we spoke with the fund manager about fees, etc. and she showed us that the fund was losing money on top of her being charged quarterly fees. It was not a pretty sight. We went back and reviewed the initial trust agreement from when it was established and determined that she was able to choose to close the account if she saw fit. So that's what we did, and the manager was happy to oblige because at then end of the day, it's her job. My wife has re-allocated the funds (which are better off as a whole). As a precaution, we have cash set aside for the impending tax bill next year.

Your situation is a little different. I would start by reviewing the terms of the initial trust and seeing just what your spouse has the ability to do. If the amount were smaller, and if it were within the bounds of the trust to do so, I would definitely say cut your losses, drain the trust, and properly re-allocate the funds - making sure you have enough liquid assets set aside for your tax bill next year.
However, with that amount of money, you're looking at a hairy situation. If it were my wife and I in your position, I would start making sizable withdrawals that you then put into accounts where your money can actually grow, taking enough money to make dents in the fund without sticking you with astronomical taxes. Again, though, I'm still not that well versed in optimizing these kinds of things so i caution you to take my advice with a grain of salt.

Essentially, the first thing you need to do is to sit down and review the terms of the trust and then discuss with your spouse just what you want to do with the money.

ShoulderThingThatGoesUp

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #2 on: February 25, 2016, 06:15:38 AM »
Walk into Schwab, explain the situation, sign paperwork, and they'll transfer everything. Then you can sell all that crap for about $9 per security and buy Schwab's extraordinarily low cost ETFs with no commission. You don't even have to talk to Wells Fargo.

Schwab will bend over backwards to get an account of that size.

terran

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #3 on: February 25, 2016, 06:26:36 AM »
Be careful with how fast you sell things. The high tax brackets start a lot lower for trusts than they do for people.

pbkmaine

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First, find out the tax basis for what you have. Ask Wells Fargo for a detailed account. Then, transfer in kind. Schwab is fine; I use Vanguard. As Shoulder said, the new vendor will be happy to help. Before you sell securities or otherwise move things around, find a good CPA and enlist his or her help. A CPA can help you match gains and losses to minimize taxes, very important here.

TrMama

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First, find out the tax basis for what you have. Ask Wells Fargo for a detailed account. Then, transfer in kind. Schwab is fine; I use Vanguard. As Shoulder said, the new vendor will be happy to help. Before you sell securities or otherwise move things around, find a good CPA and enlist his or her help. A CPA can help you match gains and losses to minimize taxes, very important here.

This. I wouldn't worry one iota about the actual transfer process. Just pick your new firm and they'll jump through burning hoops to get the money from Schwab. The things you need to worry about are minimizing your tax liability and reallocation.

softlyraining

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #6 on: February 25, 2016, 12:58:56 PM »
Thank you everyone for the replies! This has helped confirm a lot of my ideas about how we need to move forward. Looks like the basic plan is:

-Check the trust to make sure we can move accounts
-If yes, reach out to Vanguard to have them assist with an in-kind transfer
-Get a knowledgable CPA to help us minimize tax liability while transitioning to more tax efficient securities

Once we get those steps done, I think my spouse and I can finally start thinking more seriously about FIRE.

ysette9

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #7 on: February 25, 2016, 02:26:34 PM »
I have nothing useful to add, but just wanted to say that in spite of all the headache it will be dealing with this, you are in such a kick-a$$ position! Congrats to both of you, and to you especially for marrying well. :)

pbkmaine

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Thank you everyone for the replies! This has helped confirm a lot of my ideas about how we need to move forward. Looks like the basic plan is:

-Check the trust to make sure we can move accounts
-If yes, reach out to Vanguard to have them assist with an in-kind transfer
-Get a knowledgable CPA to help us minimize tax liability while transitioning to more tax efficient securities

Once we get those steps done, I think my spouse and I can finally start thinking more seriously about FIRE.

And get tax basis info BEFORE you transfer! Have Wells Fargo prepare you a report.

cheddarpie

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And get tax basis info BEFORE you transfer! Have Wells Fargo prepare you a report.

+1 to this. I had a very simple situation where I had transferred some stock to Schwab and then had a huge headache trying to figure out the basis when I sold it a few years later. The basis information doesn't transfer automatically with other account details (or at least it didn't 10 years ago), so collect all the information you can in advance.

In general, I love Schwab. They are super helpful any time I've called to ask for help, but my calls have been few and far between because their website interface is easy to figure out and it's pretty clear how you buy/sell things yourself. I would imagine Vanguard is similar, but I haven't tried it. I own several Vanguard funds through Schwab, as well as automatic investing into Schwab's super-low-cost ETFs.

dess1313

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #10 on: February 25, 2016, 09:01:53 PM »
Thank you everyone for the replies! This has helped confirm a lot of my ideas about how we need to move forward. Looks like the basic plan is:

-Check the trust to make sure we can move accounts
-If yes, reach out to Vanguard to have them assist with an in-kind transfer
-Get a knowledgable CPA to help us minimize tax liability while transitioning to more tax efficient securities

Once we get those steps done, I think my spouse and I can finally start thinking more seriously about FIRE.

the CPA is going to be a key.  you may need to do this in a few smaller stages depending on how bad of a tax hit this may be.

chesebert

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #11 on: February 26, 2016, 02:09:04 AM »
Whats your experience with managing a 7 figure account (it's fucking scary if you have never done it before)? I use WF for a portion of my assets and have been with them for 5+ years. I have mix of Russell funds, low cost ETF and individual stocks with WF. Have you talked to your advisor about fees and asset allocation? My advisor is usually pretty good and he looks at my total assets including my Vanguard and retirement accounts when he makes investment suggestions. I probably spend anywhere between 1-5 hours a month talking/trading emails with him (a lot more during the scary days). I think at the end of the day, an advisor's job is to make sure you get appropriate risk-adjusted return and prevent you from doing stupid things like chasing return or panic selling.
« Last Edit: February 26, 2016, 02:16:24 AM by chesebert »

Interest Compound

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #12 on: February 26, 2016, 03:48:50 AM »
+1 for the advice here. Find out your cost basis, determine if you can transfer in-kind to Vanguard, and if it seems you'll have a large tax burden (and you aren't comfortable doing the math) then talk to a CPA.

Woody Viet

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Re: SO inherited trust fund full of expensive securities & an "advisor"
« Reply #13 on: February 26, 2016, 04:52:14 AM »
I agree with most of the advice offered so far, especially getting your tax basis information. I don't know how trust law works in the USA but it might be a good idea sitting down with a lawyer/tax advisor. In the UK assets inherited outside of trusts have their cost basis reset to their value when the trustee receives them. So all the undeclared capital gains go to zero (at least that's what I think, I'm not even an expert in my own country).

- Is it possible to just move everything in the Wells Fargo managed account to a brokerage account at Etrade, Charles Schwab, or Vanguard and what are the steps to do that?

As mentioned the recieving broker should be able to do everything. If you have the time also sit down with the old advisor and explain that you want to leave to manage the money yourself. He could be a good guy or robbing you blind but the courtesy can help smooth out the whole process. If something goes wrong you don't want to be on bad terms with anyone.

-How do we transition the portfolio away from mutual funds and individual stocks to index funds? And is there a best strategy to manage the transition over time?
The biggest issue here is taxes. If you have to pay 15-20% of your portfolios value in taxes then it might make holding somewhat inefficient assets either for the long run or until the next big crash occurs and you can get out at lower cost. I think with funds I would probably sell out entirely, but with individual companies if they are large and established businesses they will probably do fine in the long run. A small well diversified portfolio of large caps is going to stick mightily close to that index fund in terms of performance.

-What are the criteria we need to take into consideration before sells current holdings, to then buy index funds?

These come to mind for me: Potential capital gains, difference in annual management fees between funds (work out how much you're losing over 30 years and compare this to the cap gains loss), the size of your holdings (you don't want all your eggs in one basket, smaller holdings might be more tolerable), premia-discounts on active funds, management (you can look at factor loadings to see an active managers investment style, they can add alternative sources of beta that might be worth it), your own knowledge and ability to judge investments

Overall you guys are in a great position. You are pretty much FI now if you wanted to be, although I'd push for a 3% WR. My biggest piece of advice would be to start devouring everything you can on investing. You might want to consider hedging against so called deep risks by having accounts at different brokers (to stay under the $500k insurance limit on investments), holding assets across a variety of countries and asset classes, and keeping costs and activity low

Hope this all helps