1. Well-Performing Portfolios and Well-Disguised Insolvency Patrick J. Collins, Steven M. Fast & Laura A. Schuyler

2. Page 2 “Annual income 20 pounds, annual expenditure 19 pounds, 19 and 6, result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and 6, result misery.” The Secret to Life According to Charles Dickens:

3. Page 3 Trust Assets > Trust Liabilities... Result = Happiness Trust Assets < Trust Liabilities... Result = Misery  The Secret to a Successful Trust Portfolio

4. Page 4  Distributions to Current Beneficiaries  Capital Preservation/Growth for Remainder Beneficiaries Trust Liabilities:

5. Page 5 Monitor the trust portfolio and inform the beneficiaries in a meaningful way. Key Duties of a Trustee:

6. Page 6 Monitor the trust portfolio and inform the beneficiaries in a meaningful way.  How is the trust portfolio doing relative to its liabilities? NOT how the trust portfolio is doing in relation to the S&P Key Duties of a Trustee:

7. Page 7 Monitor the trust portfolio and inform the beneficiaries in a meaningful way.  How is the trust portfolio doing relative to its liabilities?  Are there enough assets to distribute amounts to the current beneficiary and preserve capital for the remainder beneficiaries?  Sequence Risk  Feeding the Bear Key Duties of a Trustee:

8. Page 8 1. Use Risk Models Judiciously.

9. Page 9 Simple, 2-Asset Class Portfolio

10. Page 10 Diversified Portfolio

11. Page 11 Diversified Portfolio + Fees

12. Page 12 Diversified Portfolio + Fees + Longevity

13. Page 13 Diversified Portfolio + Fees + Longevity + Taxes

14. Page 14 Summary

15. Page 15  Results range from an 8% risk of bankruptcy to a 53% risk of bankruptcy. Summary: Model Risk

16. Page 16  Results range from an 8% risk of bankruptcy to a 53% risk of bankruptcy.  The “NH” model (simple Monte Carlo model) produces the most optimistic results in each case, perhaps underestimating risk. Summary: Model Risk

17. Page 17  Results range from an 8% risk of bankruptcy to a 53% risk of bankruptcy.  The “NH” model (simple Monte Carlo model) produces the most optimistic results in each case, perhaps underestimating risk.  The “Bear” model (regime-switching model, assuming initial bear market) produces the most pessimistic results in each case, perhaps overstating risk. Summary: Model Risk

18. Page 18 2. Locate the Free Boundary.

19. Page 19 The Free Boundary

20. Page 20 Present Value of Trust Assets ≥ [Stochastic Present Value of Distributions to the Current Beneficiary + Stochastic Present Value of Capital Preserved for Remainder Beneficiaries + Stochastic Present Value of Fees and Investment Expenses.] The Free Boundary

21. Page 21 Present Value of Trust Assets ≥ [Cost of an Annuity for the Current Beneficiary + Stochastic Present Value of Capital Preserved for Remainder Beneficiaries + Stochastic Present Value of Fees and Investment Expenses.] The Free Boundary

22. Page 22 Wealth to Annuity Cost Ratio (WACR) = The Ratio of the Trust’s Value to the Cost of Purchasing an Annuity for the Current Beneficiary and Returning Capital to the Remainder Beneficiaries The Free Boundary

23. Page 23 Assumptions:  Bob’s Goal: Provide for his wife Joanna for her lifetime.  Initial Trust Value = $1 million  Joanna is 70 years old.  Joanna needs distributions of $61,800 per year. Example 1: Bob & Joanna

24. Page 24 Is Bob’s goal feasible? Example 1: Bob & Joanna

25. Page 25 Is Bob’s goal feasible? Example 1: Bob & Joanna

26. Page 26 5 Years Later... Is Bob’s goal feasible? Example 1: Bob & Joanna

27. Page 27 Assumptions:  Bob’s Goals: (1) Provide for his wife Joanna for her lifetime and (2) preserve the original principal (as adjusted for inflation) for his children.  Initial Trust Value = $1 million  Joanna is 50 years old.  Joanna needs distributions of $42,000 per year. Example 2: Bob, Joanna & Children

28. Page 28 Are Bob’s goals feasible? Example 2: Bob, Joanna & Children

29. Page 29 20 Years Later... Are Bob’s goals feasible? Example 2: Bob, Joanna & Children

30. Page 30  If the only goal is to provide for the current beneficiary, the free boundary is located at a WACR of 1. Free Boundary: Summary

31. Page 31  If the only goal is to provide for the current beneficiary, the free boundary is located at a WACR of 1.  If there are dual goals of providing for the current beneficiary and preserving capital for the remainder beneficiaries, a higher WACR is necessary because the portfolio must grow to sustain the remainder beneficiaries’ interest on a constant dollar basis. Free Boundary: Summary

32. Page 32 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. What Are My Options?

33. Page 33 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. 1.Stay the course? What Are My Options?

34. Page 34 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. 1.Stay the course? 2.Change the asset allocation? What Are My Options?

35. Page 35 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. 1.Stay the course? 2.Change the asset allocation? 3.Reduce distributions to the current beneficiary? What Are My Options?

36. Page 36 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. 1.Stay the course? 2.Change the asset allocation? 3.Reduce distributions to the current beneficiary? 4.Divide the portfolio into two funds? What Are My Options?

37. Page 37 Based on your analysis of the risk models and the location of the free boundary, you know you’re in trouble. 1.Stay the course? 2.Change the asset allocation? 3.Reduce distributions to the current beneficiary? 4.Divide the portfolio into two funds? 5.Buy an annuity and invest the balance? What Are My Options?

38. Page 38 Monitor the trust portfolio and inform the beneficiaries in a meaningful way.  Use Risk Models Judiciously.  Locate the Free Boundary.  Review Options. Summary