Absolutely, you can include a requirement that trust assets be rebalanced yearly, and in fact, for many trusts, particularly those designed for long-term growth or income generation, it’s a very prudent practice, and Ted Cook, as an estate planning attorney in San Diego, often recommends it to clients.
What is Trust Asset Rebalancing and Why Does it Matter?
Trust asset rebalancing is the process of periodically adjusting the mix of investments within a trust to maintain a desired asset allocation. Over time, different asset classes (stocks, bonds, real estate, etc.) will grow at different rates, causing the original allocation to drift. For example, a trust initially set up with a 60/40 stock/bond ratio might, after a period of strong stock market performance, become 75/25. This shift increases risk exposure. Rebalancing involves selling some of the overperforming assets and reinvesting in underperforming ones, bringing the allocation back to the target levels. According to a study by Vanguard, rebalancing can potentially increase returns by 0.35% annually, while also reducing portfolio volatility.
How Often Should a Trust Be Rebalanced?
While yearly rebalancing is a common and effective approach, the ideal frequency depends on several factors, including the trust’s objectives, the volatility of the underlying investments, and the size of the trust. Some trusts might benefit from quarterly or even monthly rebalancing, while others might only need it every few years. A tolerance band is often set, say 5% deviation from the target allocation, triggering a rebalance only when that threshold is crossed. Ted Cook explains to clients that consistently monitoring and adjusting is crucial, and a yearly review is a good starting point, providing an opportunity to assess the trust’s overall performance and make necessary changes. Around 68% of financial advisors recommend rebalancing at least annually, highlighting its widespread acceptance as a sound investment strategy.
What Happens if I Don’t Rebalance?
I once worked with a client, Eleanor, a retired teacher who established a trust to provide for her grandchildren’s education. She’d been meticulous in setting up the trust, but life got busy, and she neglected the annual rebalancing requirement. Over a decade, her initial 60/40 stock/bond allocation drifted to 85/15. When the market corrected sharply in 2022, the trust’s value plummeted, leaving a significant shortfall for her grandchildren’s college funds. The emotional toll was immense, and while we were able to partially recover the losses through strategic adjustments, it underscored the importance of staying proactive. It’s easy to forget about these details when markets are doing well, but it’s during downturns that a properly balanced portfolio truly shines. According to a Cerulli Associates report, failing to rebalance can lead to a 1-2% reduction in annual returns over the long term.
How Did We Fix it With Proper Planning?
Fortunately, I recently helped another client, George, a local business owner, create a similar trust for his grandchildren, but with a clear rebalancing requirement built in. We established a yearly review process, assigning a financial advisor to monitor the asset allocation and automatically rebalance the portfolio whenever it deviated from the target. This year, despite a volatile market, George’s trust not only maintained its value but also generated a healthy return, all thanks to the disciplined approach. He even remarked that knowing the trust was being actively managed gave him immense peace of mind, allowing him to focus on enjoying his retirement. The key is consistency and a proactive mindset. We used a diversified portfolio with low-cost index funds, a common strategy for long-term trust management. By following these best practices, we ensured George’s grandchildren would have the resources they needed for their future education.
Including a yearly rebalancing requirement is not only permissible but often recommended, and Ted Cook, as an estate planning attorney, can help you incorporate this crucial provision into your trust document, alongside other essential safeguards to protect your assets and achieve your long-term financial goals.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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