# Long-term shares investing strategy for family members when you're gone



## TPI (16 January 2015)

Hi,

I'm in the process of doing a new will and estate plan and am wondering if anyone here has put much thought into how your family members with limited or no investing experience would manage a large share portfolio they might inherit on you're passing.

My plan was to have my somewhat actively managed portfolio liquidated and invested in an equally-weighted portfolio of the 5 listed investment companies I am most familiar and comfortable with: AFI, ARG, MLT, WHF, MIR.

This would give long-term capital growth, a passive, relatively stable and predictable dividend income stream that at least keeps pace with inflation (that can either be used for lifestyle purposes or re-invested), is tax advantageous with high franking credits, is low cost, easy to implement and requires very little ongoing work or monitoring.

Any other approaches?

Thanks.


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## Bill M (16 January 2015)

I went through all this recently. Basically most of my funds are tied up in my Super Account and on the event of my death the Trustee (The Super Trustee) will liquidate all my stocks, convert it to cash and pass it on to my dependent, in other words no tax to pay as my wife is the nominated dependent beneficiary. In this case, should it arise, I told my wife to just put it in her Super account which is a well managed industry fund. She has no idea about share market investing so her super fund is the best bet for her.

All people should make sure that they have nominated a binding beneficiary/s with their super, that way it goes to who it is intended for and the Trustee is bound by your nomination.

TPI, your approach is ok too, particularly if people need the money to live off now (not Super age yet). For me though, Super is more suitable as it is a better option tax wise, my wife can use it now, and then she can set it up as an Account based Pension.


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## systematic (17 January 2015)

Warren Buffett's plan for his cash (after his Berkshire shares are given to charity) is something like: 10% short-term bonds, 90% stocks...in basic (cheap) index funds...like Vanguards.  Completely passive.


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## Julia (17 January 2015)

There's also a case for making the same considerations in the event you were to meet with catastrophic accident or medical event, and lose capacity, even if you don't die.
This is probably more important than what happens when you die as there would be care costs etc to be thought about.

Thanks for raising the issue, TPI.  It's one to which I've given a lot of thought yet failed to come up with an ideal solution for the people holding EPOA for me, neither of whom know anything about investing other than with respect to property.  There's only so much you can expect other people to do on your behalf when they lack expertise.   

A FP should be the answer, but we've all seen too many examples of bad advice and self interest to have much confidence in that option.

Bill, good point about the binding nomination.


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## craft (18 January 2015)

TPI said:


> Hi,
> 
> I'm in the process of doing a new will and estate plan and am wondering if anyone here has put much thought into how your family members with limited or no investing experience would manage a large share portfolio they might inherit on you're passing.
> 
> ...




My instructions

For the equity component - The broadest based, lowest cost and low turnover ETF that actually holds the underlying shares. (nothing synthetic) 

Some thought needs to be given to how much of the exposure is international in conjunction with how much consumption is likely to be Australian based. 

(I have nominated the particular ETF's and international mix I think fit the bill best in my instructions)


For the cash( ~5 years of spending)  - High yield bank account from an Australian regulated bank. 

Keep a fixed ratio ( ie 10% cash / 90% Equity). Rebalance after ETF distributions.


For me the what to do part of the instructions are the easy part - the harder part is the transition - changing structures where things are held, *taxation* etc. (actually these complexities should be factored in when  deciding how I invest now, but to make ex-post correct decisions I need to know by _how much _I can outperform the market via active management and for _how long _or in other words when will I die or otherwise become incapable of outperformance - two unknowables)


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## The Falcon (18 January 2015)

Vanguards "Lifestrategy" Balanced/Growth/high growth wholesale unlisted index funds would do the job in one simple product. No fuss required.


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## waimate01 (21 January 2015)

I have the same issue, and embarked on the process of financial education with my daughter (now 14) from an early age (probably started around 6 or 7 when I would let her "invest" her pocketmoney savings with me in "bank of daddy TDs")

In particular, she understands the nature of debt and the power of compounding. She also understands simple equities investment. There's a particular shop she's quite keen on, and I bought some shares in the parent company. I go through the dividend statements with her, and every so often we review how our holding is travelling. This company is the only one for which I elect to get a physical annual report delivered, and we go through that too, with me pointing out the important-looking boss-like people in suits are actually working for us. When we walk past one of the shops, I usually ask her whether she thinks it seems busy, well-run, etc).

From about the age of 10 she had her own iTunes account, topped up with gift-cards for birthday/xmas, but up to her to manage her spending. She made some bad choices with in-app purchases, but seems to have learned from that.

When she turned 13, I made her responsible for her own mobile phone bill. I know many parents say they've done this, when what they mean is they yell at their kids if the bill is too big, but pay it for them anyway. In our case, I sat with her and we calculated her average weekly spend over the last six months, and I then increased her pocketmoney by that amount. She pays the bill herself, and when she has a blow-out she wears it. If she can find a cheaper option, she gets to keep the saving.

Every so often, I'll show her my credit card bill and the impact of making the minimum payment. She has a bank account and a debit card.

It's a work-in-progress. I know if I sat her down to teach her stuff, she'd run a mile. Particularly now the teenager stuff is happening. But by drip-feeding the basics at a very low-rate over a long period, my hope is that it will soak in. A few weeks ago I was driving her to sport and apropos of nothing she asked me about the tax benefits of family investment companies.

From the mechanics point of view, we have wills that create a testamentary trust with directions for the trustee to manage conservatively, ASX200, forbidding debt, etc. Over time, she goes from beneficiary to co-trustee,  to trustee, etc. At certain points portions of the capital may be released to her.

If I don't go under a bus in the near term, my plan is to gradually bring her more into the hands-on running of our portfolio, with the goal that she'll be running it capably and confidently when I'm chasing imaginary butterflies.


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## Julia (21 January 2015)

Great stuff, waimate.   
I wonder what % of parents do actually do this?

Mine did and I've been grateful all my adult life.


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## VSntchr (21 January 2015)

waimate01 said:


> I have the same issue, and embarked on the process of financial education with my daughter (now 14) from an early age (probably started around 6 or 7 when I would let her "invest" her pocketmoney savings with me in "bank of daddy TDs")




Great Post Waimate, it seems like your covering all bases and this education at a young age is invaluable in the head start it will give her.
Plenty of people in their 20's and even older wouldn't know as much!


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## Ves (22 January 2015)

craft said:


> For the equity component - *The broadest based, lowest cost and low turnover ETF that actually holds the underlying shares. (nothing synthetic) *
> 
> Some thought needs to be given to how much of the exposure is international in conjunction with how much consumption is likely to be Australian based.



I really agree with the bolded bit as I'm really adverse to churn in my own investing style,  but I admit that I haven't done much research on the ETFs themselves.

Do you mind sharing with ETFs  (either domestic /  international / mixed)  you found to be most fitting of this criteria?


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## Bill M (22 January 2015)

Ves said:


> I really agree with the bolded bit,  but haven't done much research on the ETFs themselves.
> 
> Do you mind sharing with ETFs  (either domestic /  international / mixed)  you found to be most fitting of this criteria?




VAS (domestic) is probably the best example. It's returned around 14.55% per annum for the last 3 years. I posted about this ETF here: https://www.aussiestockforums.com/forums/showthread.php?t=28360&p=857835&viewfull=1#post857835

---
The Vanguard Australian Shares Index ETF provides exposure to approximately 290-300 of the largest companies and property trusts listed on the Australian Securities Exchange (ASX). It is a low-cost*, diversified investment option, which through its buy and hold investment approach offers investors the potential for tax-effective returns.

https://www.vanguardinvestments.com.au/retail/ret/investments/etfdetailVASIFE.jsp
---

I do not hold VAS but I do hold the high yield ETF VHY which is also a Vanguard product.


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## Ves (23 January 2015)

Thanks very much Bill.    Vanguard seems to be the prominent (and maybe original) player in this space...  they have always had a pretty good reputation from what I have seen.


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## TPI (13 February 2015)

Thanks for the replies.

I've opted for LICs rather than ETFs due to better dividend stability and predictability and as dividends maybe used for consumption.

The mechanics of it all I plan to discuss with a solicitor soon, but I think a testamentary trust will probably be involved.

I've just finished typing up a detailed 15 page "how to manage my investment portfolio" guide for my heirs, which I will refine over time.

And also setup an investment bond for my child that is separate to the rest of my financial affairs.


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## TPI (13 February 2015)

TPI said:


> Thanks for the replies.
> 
> I've opted for LICs rather than ETFs due to better dividend stability and predictability and as dividends maybe used for consumption.
> 
> ...




Also did non-lapsing binding death benefit nominations for my SMSF and industry super fund.


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## McLovin (13 February 2015)

TPI said:


> Thanks for the replies.
> 
> I've opted for LICs rather than ETFs due to better dividend stability and predictability and as dividends maybe used for consumption.
> 
> ...




Don't you end up paying more tax with LIC's than with ETFs because they pay a flat 30%?


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## TPI (13 February 2015)

McLovin said:


> Don't you end up paying more tax with LIC's than with ETFs because they pay a flat 30%?




I didn't think LICs were at a disadvantage in this regard.

There's something on this in this article:

http://cuffelinks.com.au/caveat-emptor-lics-versus-etfs/

_"The trickiest part of the comparison is the franking credits and tax payments. Here is a simple example. A fund receives $100,000 in fully franked dividends and $100,000 in unfranked dividends. Harry the Investor owns 1% of the fund.

If the fund is an ETF everything flows through. It distributes $2,000 to Harry, made up of $1,000 in franked dividends and $1,000 in unfranked dividends.

If the fund is a LIC, the LIC needs to pay 30% tax on the unfranked dividends. It then declares whatever dividend its board deems appropriate. If we assume it chooses to pass on all of the dividends it receives, Harry is only going to receive $1,700 in cash because of the tax that had to be paid. The offset to this is that the $1,700 dividend from the LIC is fully franked.

After Harry receives credit from the Tax Office for the franking credits, he is in the same position whether the fund was an ETF or LIC. The steps are different but the final outcome is the same (with timing differences)."_

Also with regards to dividend stability a good comparison is with the AFI listed investment company and the STW exchange-traded fund:


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## McLovin (13 February 2015)

TPI said:


> I didn't think LICs were at a disadvantage in this regard.
> 
> There's something on this in this article:
> 
> ...




I actually meant wrt CGT, not divvies.


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## TPI (13 February 2015)

McLovin said:


> I actually meant wrt CGT, not divvies.




Refer to the following table, where it mentions that LIC capital gains are entitled to the CGT discount.

Not sure if that answers the query.


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## waimate01 (15 February 2015)

TPI said:


> ...
> The mechanics of it all I plan to discuss with a solicitor soon, but I think a testamentary trust will probably be involved.
> 
> I've just finished typing up a detailed 15 page "how to manage my investment portfolio" guide for my heirs, which I will refine over time.
> ...




A good piece of advice I received was to sit down one evening with a bottle of red wine and a piece of paper, and start killing people off in different combinations to see what happens. 

For example, here's one possible sequence: vending machine falls on you and kills you, wife remarries, new husband already has two kids from previous marriage, wife then dies from bee sting, husband leaves all assets to his children and not yours. 

It might seem unlikely, but these things do happen.

Another: a meteor falls on you and your wife. You child inherits, turns 18 and marries the kid across the road. Wildly in love, your child invests most of the assets into the new spouse's business idea for hemp-based breakfast cereal. The venture fails, and they divorce with a 50:50 property settlement. Your child is now 20 and 90% of the money is gone.

Piece of paper and a bottle of red wine. Decide what you want to have happen for every possible combination of outcomes.


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## TPI (16 February 2015)

waimate01 said:


> A good piece of advice I received was to sit down one evening with a bottle of red wine and a piece of paper, and start killing people off in different combinations to see what happens.
> 
> For example, here's one possible sequence: vending machine falls on you and kills you, wife remarries, new husband already has two kids from previous marriage, wife then dies from bee sting, husband leaves all assets to his children and not yours.
> 
> ...




Thanks waimate01, I read somewhere about a blood line trust that could help in these situations and will look further into this.


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