Irrevocable Trust Product Planned
August 2, 1999
Texas money manager J. Paul Hamilton is getting into a part of the mutual fund business that does not get a lot of attention - the irrevocable trust business.
An irrevocable trust is used to hand down money from one generation to the next, and the money from the trust must go to a beneficiary at a specified time.
A few mutual fund companies, including American Century of Kansas City, Mo. and the Royce Funds of New York City, have their own irrevocable trust products.
But that does not worry Hamilton, who has worked in several bank trust departments in the past, and says he believes he can compete in that marketplace with his own product, the 10k Smart Trust. Hamilton filed the fund with the SEC on July 2.
The 10k Smart Trust will be run by Monument Investments, Hamilton's money manager, as a fund of funds. Investors must put at least $10,000 in the trust for at least 10 years.
The benefits of the trust accrue not only to the beneficiaries, but also to the investor who gets tax deductions. By law, individuals are allowed to give $10,000 to someone annually without paying taxes on that amount. They are also allowed a $650,000 lifetime exemption on their estate taxes that will rise to $1 million by 2006. Hamilton says that by setting up an account with his 10k Smart Trust, individuals can pass on their wealth to their children and grandchildren while reducing their estate taxes.
Without investing in one of these trust mutual funds, investors seeking the tax break must do the work themselves - hiring an attorney, someone to manage the money and someone to act as a trustee. Hamilton says that could cost an individual between $1,500 and $3,000 just to set up.
The 10k Smart Trust charges investors a two percent sales load and 2.5 percent in annual operating expenses. Investors in the trust are also charged $25 for each tax return they file for the trust and a $100 administrative fee when the account reaches maturity.
Irrevocable trust funds have been criticized recently in the media. The American Century Giftrust, which has assets of $1 billion, was the subject of a recent story in Barron's. One investor who was disappointed with the fund's results sued successfully to get out of the trust.
The Giftrust, which is very aggressive and invests in small and mid-cap stocks, has had a few rocky years of performance but has rebounded lately. In 1997, it lost 1.2 percent, and in 1998, the fund lost 13 percent, according to American Century. But since October of last year, the fund is up 58 percent. It returned 1.02 percent for the past three years and 10.63 percent for the last 10.
American Century officials defended the trust, saying that all small and mid-cap stocks have performed poorly in the last several years and that the fund is designed for long-term investors.
"It's one of our most aggressive domestic equity funds," said American Century spokesperson Chris Doyle. The fund is designed for a 10-year investing horizon and will experience volatility, he said.
"We still stand by the design of the trust," Doyle said.
The Royce Trust & GiftShares Fund, a small-cap value fund, has performed better over the past few years, returning 16. 5 percent year-to-date as of June 30, and 24.3 percent over the past three years.
Hamilton says that his fund will avoid the volatility of the American Century Giftrust because he will be investing in a fund of funds and can shift market sectors whenever it is necessary.
His product is also unique because the investor can choose several dates of maturity for the beneficiary so he does not have to receive his money all at once, said Hamilton. That is a good idea for giving money to young people who may not be responsible with a large sum of cash, he said.