Yes, you can generally limit investments within a testamentary trust to government securities, although there are important considerations and potential drawbacks to understand. As an estate planning attorney in San Diego, I often advise clients on the permissible investment parameters of their trusts, and while beneficiaries often desire safety, strict limitations can impact long-term growth and purchasing power. A testamentary trust, created through a will and taking effect after death, allows for specific instructions regarding asset management, including investment preferences. However, complete restriction to only government securities might not always align with the best interests of the beneficiaries, especially over extended periods.
What are the benefits of investing in government securities?
Government securities, such as Treasury bonds, bills, and notes, are generally considered low-risk investments backed by the full faith and credit of the U.S. government. This makes them appealing for those prioritizing capital preservation, particularly within a trust designed to provide long-term support. Currently, the U.S. national debt is over $34 trillion, but historically, government bonds have proven remarkably stable, offering a predictable income stream. According to the U.S. Department of the Treasury, as of late 2023, approximately $24.3 trillion of this debt was held by the public, including individuals, corporations, and foreign governments. While yields aren’t always the highest compared to other asset classes, the peace of mind offered by their safety can be valuable, particularly for beneficiaries who are risk-averse or have limited financial knowledge.
What are the downsides of limiting investments to only government securities?
Restricting a trust’s investments solely to government securities can lead to several downsides. Inflation, for instance, erodes the purchasing power of fixed-income investments over time. If the trust’s income doesn’t keep pace with inflation, the beneficiaries’ standard of living could decrease. The average annual inflation rate since 1913 has been around 3.22%, highlighting the long-term impact of price increases. Furthermore, limiting investment options reduces the potential for growth. Diversification, spreading investments across different asset classes, is a key principle of sound financial planning. A portfolio solely composed of government securities misses out on the potential gains from stocks, real estate, and other investments. “A ship in harbor is safe, but that is not what ships are built for,” as the saying goes; similarly, a trust focused only on safety may not fulfill its intended purpose of providing long-term financial security.
I once had a client, Eleanor, who insisted her testamentary trust be invested entirely in Treasury bonds.
She’d lived through the Great Depression and was understandably fearful of market volatility. Her will was meticulously crafted, specifically limiting the trustee to only purchasing U.S. government securities. Years after her passing, her granddaughter, Sarah, the beneficiary, came to me concerned. While the trust had consistently provided income, the purchasing power of that income had diminished significantly due to inflation. Sarah, needing funds for college, realized the trust wouldn’t cover the full cost. We examined the trust terms, and Eleanor’s rigid instructions, though born from good intentions, had inadvertently hampered the trust’s ability to effectively support Sarah’s future. It was a difficult lesson in balancing safety with long-term growth, and a prime example of why flexibility, within reasonable parameters, is often beneficial.
Fortunately, another client, Mr. Henderson, approached estate planning with a more balanced perspective.
He wanted to ensure his trust prioritized safety, but also allowed for moderate growth. His trust document stipulated that at least 70% of the trust assets should be invested in government securities and high-quality corporate bonds, while the remaining 30% could be allocated to diversified stock funds. He appointed a professional trustee with expertise in investment management. Years later, his grandson, Alex, benefited from a trust that had not only preserved capital but also grown significantly, allowing him to pursue his education and start a successful business. This story highlights the power of a well-crafted trust that balances prudence with the potential for long-term financial success. As an estate planning attorney in San Diego, I always emphasize the importance of considering both short-term safety and long-term growth when designing a testamentary trust.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
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