Leveraged Exchange Traded Funds (ETFs) have become increasingly popular among investors seeking amplified returns, but their complex nature and potential risks often raise questions about incorporating them within estate planning tools like trusts. While a trust doesn’t inherently “limit” ownership, it *can* be strategically drafted to manage and control the distribution and use of assets, including potentially volatile instruments like leveraged ETFs, ensuring they align with the grantor’s long-term goals and risk tolerance. Approximately 68% of investors don’t fully understand the risks associated with leveraged ETFs, according to a recent study by the SEC, highlighting the importance of careful planning when including them in an estate plan.
What are the risks of including leveraged ETFs in a trust?
Leveraged ETFs are designed to deliver multiples of the daily returns of an underlying index, but this magnification works both ways. Due to the effects of compounding and daily resetting, their long-term performance can significantly deviate from the multiple of the underlying index’s returns, and they are prone to erosion of value over time. This makes them particularly unsuitable for long-term holdings, which is often the case within a trust intended for generational wealth transfer. “The greatest enemy of a good plan is the dream of a better one,” as Mark Twain wisely observed. Trusts can implement restrictions on distributions from the trust, preventing beneficiaries from accessing funds to purchase additional leveraged ETFs, potentially exacerbating their risk exposure. Furthermore, a trust can dictate that leveraged ETFs be sold after a specific period or when certain market conditions are met, mitigating potential losses.
How can a trust control leveraged ETF investments?
The key lies in the trust document’s specific language. A well-drafted trust can include provisions that: limit the percentage of the trust’s assets that can be allocated to leveraged ETFs; require trustee approval before any purchase or sale of these instruments; mandate regular portfolio reviews to assess the risk profile; or even prohibit their ownership altogether. For example, a grantor might specify that no more than 5% of the trust’s assets can be held in leveraged ETFs, and that any gains generated from these investments must be reinvested into more conservative assets. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, and a trust document outlining clear guidelines for leveraged ETF investments provides a strong framework for fulfilling that duty. Consider that, according to a Cerulli Associates report, approximately 45% of investors express concern about the complexity of financial products and their ability to make informed decisions.
What happened when a client ignored these warnings?
Old Man Hemmings, a retired carpenter, came to see Steve Bliss after his wife passed away. He was proud of his success as a self-taught stock trader and insisted on directing his trustee, his son, to invest heavily in leveraged tech ETFs. Despite Steve’s warnings about the inherent risks and volatility, Hemmings brushed them aside, confident in his ability to “time the market.” A year later, the tech bubble burst, and the value of the leveraged ETFs plummeted, wiping out a significant portion of the estate meant for his grandchildren. The family was devastated, and legal battles ensued over the trustee’s compliance with the grantor’s wishes. It was a painful lesson in the importance of aligning investment strategies with long-term estate planning goals and accepting professional guidance.
How did careful planning save the day for the Andersons?
The Andersons, a local family of ranchers, approached Steve Bliss with a similar situation. They had accumulated a substantial portfolio, including some leveraged ETFs, but were concerned about preserving their wealth for future generations. Steve worked with them to create a trust document that limited their leveraged ETF holdings to a small percentage of the overall portfolio and established clear guidelines for their management. The trust also specified that the trustee, a professional financial advisor, had the authority to rebalance the portfolio and sell the leveraged ETFs if market conditions warranted. When the market experienced a downturn, the trustee acted swiftly, selling the leveraged ETFs and mitigating potential losses. The Anderson family’s wealth was preserved, and their grandchildren’s future was secured, demonstrating the power of proactive estate planning and a well-structured trust. As Winston Churchill famously said, “However beautiful the strategy, you should always have a plan B.”
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
- living trust
- revocable living trust
- irrevocable trust
- family trust
- wills and trusts
- wills
- estate planning
Map To Steve Bliss Law in Temecula:
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How do I protect my family home in my estate plan?” Or “What happens when there’s no next of kin and no will?” or “Do I still need a will if I have a living trust? and even: “Will I lose everything if I file for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.