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© 2008 Northern Trust Corporation northerntrust.com
The Northern Trust ExperienceThe Northern Trust ExperienceA C C E S S . E X P E R T I S E . S E R V I C E .
R. Hugh MagillExecutive Vice President and Chief Fiduciary Officer
Trends in Trust Law: Implications for Estate Planning and Fiduciary Administration
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The Northern Trust Experience
Demographic Trends
Death & Taxes 2001 Tax Act (EGTRRA) Continued evolution of Estate Planning Strategies
Changes in Capital Markets
Prudent Investor RuleUniform Prudent Management
of Institutional Funds Act
Evolution of Securities Markets and Asset Management Practices
Decline in Yields Unitrusts and Principal / Income Adjustments
Changes in Asset Allocation and Distribution Practices
Client Mobility Uniform Trust Laws Non-Uniform State Tax Laws
Changes in Estate Planning & Trust Administration
Wealth Formation Tax Rate Environment Asset Diversification
Deal Flow, Liquidity, Philanthropy
New Generation of Clients
Legacy Planning, Family Governance, Modification of Trustee Duties, Situs Shopping
Inter-generational Wealth Transfer, Trust Friendly Jurisdictions, Consumerism
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The Northern Trust Experience
Asset Concentrations and the Duty of Diversification
Maximizing Opportunities
Minimizing Risks
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The Northern Trust Experience
Concentrations and Trust Documents
Retained AssetsRetention is permissible
Retention is strongly suggested
Retention is mandatory
Fiduciary AuthoritySole trustee
Co-trustees
Advisors
Advisory Committees
Modification of Fiduciary ResponsibilityHold Harmless / Indemnification Agreements
Virtual Representation
Court-Ordered Reformation
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The Northern Trust Experience
Concerns About Diversification
Adverse Income Tax Consequences
Unfamiliarity with other Asset Classes
Loss of Control
Performance Expectations
Impact on Portfolio Yield
Fees
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The Northern Trust Experience
Reasons for Non-Diversification
Purpose of Trust
Legacy Holdings
Termination Date of Trust Interests of Beneficiaries
Step-Up in Basis
Illiquidity
Loss of Controlling Interest
Related Trusts
Beneficiaries’ Assets
Adverse Income Tax Consequences
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The Northern Trust Experience
Retention Language
Identify the Asset
Waive the Duty to Diversify
Articulate the Reasons for Retention
Address Asset “Conversion” IssuesEquities: Mergers, Acquisitions, Spin-offs
Real Estate: Sale, Reinvestment
Identify the Circumstances under which, and by Whom, Sale Should be Considered
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The Northern Trust Experience
Concentration Risk Management Process
Definition and Identification
Evaluation of Fiduciary Responsibility
Review Process
Evaluation of Strategies
Implementation and Periodic Review
Documentation
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The Northern Trust Experience
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© 2008 Northern Trust Corporation northerntrust.com© 2008 Northern Trust Corporation northerntrust.com
Unitrust Conversions
When Should a Fraction Trump a Yield?
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The Northern Trust Experience
Unitrust Conversions – Interest Rates
0
2
4
6
8
10
12
14
2/28/1985 2/28/1990 2/28/1995 2/29/2000 2/28/2005
10 Year Government Yields
Percent
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The Northern Trust Experience
Unitrust Conversions – Stock Dividends
'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06
1
1.5
2
2.5
3
3.5
4
4.5
©FactSet Research SystemsData Source: Compustat
S&P 500 Dividend Yield28-Feb-1985 to 31-Jan-2007 (Monthly)
Dividend Yield
S&P 500 Dividend Yield
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The Northern Trust Experience
Reviewing Trusts for Potential Conversion
Income only (mandatory or discretionary)
Income with narrow power to discrete principal
Income with moderate power to discrete principal
Income with broad power to discrete principal
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The Northern Trust Experience
Unitrust Conversions – Issues to be Analyzed
Governing law
Nature, purpose, duration of trust
Settlor’s intent
Duty of impartiality vs. permissible partiality
Beneficiary expectations
Discretionary authority over principal distributions
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The Northern Trust Experience
Unitrust Conversions – Portfolio Issues
Asset composition
Asset allocation
Portfolio size
Reinvestment alternatives
Re-allocation impact
Investment management limitations
Fixed income; taxable vs. tax-exempt
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The Northern Trust Experience
Conversion Analysis – Critical Assumptions
Time horizon
Inflation rate
Capital market assumptions
Tax impact of portfolio re-allocation
Rebalancing frequency
Management costs
Payout ratio
Liquidity needs
Return methodology
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The Northern Trust Experience
50 / 50 Asset Allocation
Large Value Stocks50%
Corporate Bonds50%
$2.5 MM
$5 Million Portfolio
$2.5 MM
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The Northern Trust Experience
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
$5 Million Portfolio
0%
Conservative
Moderate
Aggressive
5% 10% 15%
50 / 50 Asset AllocationEfficient Frontier
Standard Deviation
Return
50 / 50 Asset Allocation
20% 25%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$5 Million Portfolio
50 / 50 Asset Allocation
Monte Carlo Simulation Analysis – 3% Payout
Payout 3%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$150,000 $161,112 $176,106 $194,360 $213,415
$5
$6.15
$4.33
$12.60
$4.42
$7.46
$9.02
$10.65
$4.10
$4.10 $4.16
Inflation: 2.5%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
$16
$5 Million Portfolio
50 / 50 Asset Allocation
Monte Carlo Simulation Analysis – 4% Payout
Payout 4%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$200,000 $206,488 $214,787 $225,620 $235,748
$5.70
$4.40
$9.93
$3.55
$5
$6.73
$7.88
$8.88
$3.90
$3.69
$3.57
Inflation: 2.5%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
$5 Million Portfolio
50 / 50 Asset Allocation
Monte Carlo Simulation Analysis – 5% Payout
Payout 5%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$250,000 $247,988 $245,565 $245,177 $243,597
$5.65
$4.34
$8.16
$2.89
$5
$6.42
$7.15
$7.67
$3.70 $3.3
2$3.0
6
Inflation: 2.5%
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The Northern Trust Experience
Large Cap Stocks37%
International Stocks18%
Emerging Markets2%
Corporate Bonds16%
Mid Cap Stocks4%
Small Cap Stocks2%
Global Real Estate5%
High Yield Bonds7%
Commodities3%
Cash6%
Diversified Portfolio
$4,714,249 Million Portfolio
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The Northern Trust Experience
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
$4,714,249 Million Portfolio
0%
Conservative
Moderate
Aggressive
5% 10% 15%
Diversified Portfolio Efficient Frontier
Standard Deviation
Return
Diversified Portfolio
20% 25%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
Diversified Portfolio
Monte Carlo Simulation Analysis – 3% Payout
Payout 3%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$141,427 $156,954 $177,897 $201,886 $231,170
$4.71
$5.05
$4.19
$13.94
$4.48
$4,714,249 Million Portfolio
$7.16
$9.28
$11.44
$3.93
$4.01
$4.19
Inflation: 2.5%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
$16
Diversified Portfolio
Monte Carlo Simulation Analysis – 4% Payout
Payout 4%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$188,570 $201,218 $217,233 $234,549 $255,658
$5.48
$4.16
$11.50
$3.67
$4,714,249 Million Portfolio
$4.71
$6.84
$8.44
$9.91
$3.73
$3.62
$3.59
Inflation: 2.5%
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The Northern Trust Experience
$0
$2
$4
$6
$8
$10
$12
$14
Diversified Portfolio
Monte Carlo Simulation Analysis – 5% Payout
Payout 5%
Asset Range ($MM)
1 Year 5 Years 10 Years 15 Years 20 Years
$235,712 $241,748 $248,247 $255,022 $264,519
$5.41
$4.10
$9.47
$2.99
$4,714,249 Million Portfolio
$4.71
$6.53
$7.67
$8.57
$3.54
$3.27
$3.09
Inflation: 2.5%
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Thank You
Trends in Trust Law: Implications for Estate Planning and Fiduciary Administration