Part 1

General Information

Chapter 1

General Information

The following information relates to either a trust or endowment fund. It provides some basic information on trusts and endowments as well as an understanding of how quickly money can accumulate and double through the magic of compound interest.

Briefly, trust and endowment funds are financial methods of saving money and assets for use later on. Rather than being a single account with a trust company, a trust or endowment can be a collection of financial instruments set up ‘in-trust’. For example, a trust or endowment fund can include one or more monetary accounts, mutual funds, investment portfolios, land or building ownership, insurance policies, art and other collectibles and more.

Trusts, for our purposes, are set up to provide long-term funds and assets for financially dependent loved ones. These trusts can be used before and/or after the creators of the trust die. In particular, discretionary trusts are established to provide finances to dependent adult children in a way that prevents the loss of government benefits to the child.

Endowment funds are specifically for organizations (not-for-profit and charitable) and are established with a specific goal in mind. This might be the ongoing funding of a specific project or for the long-term viability of the organization’s own operational funds. For example, an organization might create an endowment fund to support its home renovation project for families in need or to help cover its own day-to-day expenses including salaries, overhead and services.

Choosing Your Advisors

Nothing is more important in financial planning than choosing your advisors. How do you choose the right ones?

People have different backgrounds, experiences and needs. My accountant may not be the accountant you need. Your lawyer may not be the right lawyer for someone else’s family.

First you need to make a list of the things you want this professional to do for you. You will not need a corporate lawyer that specializes in helping companies buy other companies if all you want is a lawyer to write your will and help with your estate when you die. Nor do you want an accountant who has little or no experience in not-for-profit organizations or tax law for endowment funds.

Once you have made your list of needs you can check with your family, friends and colleagues at work for different referrals. You can also call the professional associations of the different groups to ask for a referral to a certified professional in your area.

When you make your first appointment with the person, tell their receptionist that you are looking for a new lawyer/accountant/financial planner and you want to meet them to see if they meet your needs. You should also tell them that since you are not coming for their professional advice, you do not expect to pay a fee for the visit. Make sure that you do not ask for more than a half-hour of their time and that you, in fact, do not spend this free time getting professional advice about your situation. Concentrate on their professional qualifications, abilities and interests.

At the beginning of this appointment, remind the professional that this is a get-acquainted visit at no charge to you. Trust your instinct when you meet the person for the first time. Your first appointment with them is really an opportunity for you to find out if you can talk comfortably with them and whether you feel that they are concerned with your needs, what their expertise is and what fees you can expect to pay. The tone of your questions should be respectful while finding out if this person is the right one for you. Try to determine whether this professional will work with you to meet your financial, legal or medical needs. At the end of the appointment, tell them that you will call them if you decide to use their services.

The following is a list of possible questions you can modify to find out if this is the person you want to entrust with your financial and legal concerns. You will not be able to ask all of the questions. You can find out some of the answers by asking the people who refer you, from their office receptionist or secretary and from degrees and certificates on the wall. Interview several professionals, if possible, before choosing one. You want a working relationship that will last for many years so spending time up front will benefit you in the long run.

You will learn a lot about the person you meet by the way they answer your questions. Although you are the client and, ultimately the person in control, it is rare for professionals to meet people who assert their control throughout the working relationship. Some professionals will be apprehensive and others defensive. Those among them who are confident will be pleasantly surprised and positive about the value of having such an involved, respectful client.

You may also have to decide if it matters to you that the professional shares your moral beliefs and principles. For example, if you want funds invested only in companies that have ‘ethical’ standards regarding environmental and human rights issues, then your advisor may need to share that interest and make it a priority in researching your investments. If you have a strong need for an advisor who can educate you through the process, then you will need to choose an advisor who values teaching clients as much as getting commissions.

Possible Questions to Ask

What is your formal and informal training? How long have you practiced and where?

What types of services do you provide? Do you do the type of work I need to get done? [Show them your list of the work needed and by when.]

Are you flexible with your hours in emergency situations (e.g., explaining financial processes after the death of a spouse)? Can I reach you, or a colleague, 24 hours a day, seven days a week in case of emergency?

Will you help me learn more about financial and legal issues related to my situation so that I can become a more knowledgeable consumer?

Do you prefer to provide advice and information and help the client make the best decision possible in the situation or do you prefer to work from specific instructions from the client?

How do you keep up-to-date in your field and will you provide me with up-to-date information to help me make decisions?

Who will take over for you when you are on vacation, ill or near retirement?

With what organizations are you affiliated?

What is your fee schedule or basis for billing?

What options are there, if any regarding your billing?

What is the timing of payments?

What retainer, if any, is required?

Other questions that you come up with:

The Glossary

It is impossible to write about legal and financial matters without using some of the jargon used by professionals in the field. Professionals have a good understanding of all of these terms so they should also be able to explain them to you. However, it is good if you already have a basic understanding of the terms before you meet with them.

Use the glossary at the end of the book to familiarize yourself with the jargon. Do not try to understand all the terms on first reading. You will see the terms, and their definitions, throughout this book. By the time you finish the book, a quick review of the glossary will help you remember the terms most important for your needs and you will be surprised how much legal and financial jargon you know!

Named Funds Within Your General Fund

Throughout the chapters on trust and endowment funds there will be mention of ‘named funds’. The term simply means dividing your trust or endowment fund into smaller funds so that people can have their name attached to their contribution. It is similar to how mutual funds work where there is only one actual fund but administratively it is divided so that each person has a portion of the fund.

For example, a family creating a trust fund for a dependent loved one may decide that named funds could be established within the trust to recognize contributions made by a grandparent, an uncle, two neighbours and the immediate family. A small charity may decide to create different levels of named funds to encourage larger contributions to their endowment fund.

Named funds can be very helpful in raising funds. For example, a donor may want to make a substantial contribution to your fund if you will allow them to name their portion of the fund after them or in honour/memory of a loved one. You might think this an unlikely situation for your trust or endowment fund. Consider, however, someone who has few or no heirs or whose heirs do not need their money. Such a person may have contributed regularly to your organization or the person may be a relative or friend of the person for whom you are establishing a trust fund. Knowing that their name will carry on well into the future and believing that your efforts deserve support may be all the person needs as incentive to contribute.

Organizations such as Community Foundations are experts at having many individually named funds within their general fund. They do this in similar ways as mutual funds do in selling units within their funds. (More on Community Foundations later.)

One method, as an example, could be a fund that starts with $10,000 and fund creators decide that each unit in the fund will have an initial unit value of $10. For larger funds, they may decide that each unit will have a value of $100 or $1000. In our example, however, there will be 1,000 initial units valued at $10 each. The next day, Wilma Peters contributes $5,000 to the fund in honour of a parent who has died. She is acknowledged as having contributed 500 units, at $10 each, to the fund. Over the next 12 months the units are invested in a mixed portfolio of equities (shares in companies) and fixed-income instruments (bonds, GICs) and the value of the units fluctuates with market conditions. After 12 months the fund is worth $16,500 (10% increase). At that time each unit is now worth $11 ($16,500/1500 units). Ron Williams now wants to contribute $10,000 to be named after their son who died in the war. His fund is credited with 909.1 units ($10,000/$11).

Keep in mind that this process is administrative; not financial. In other words, the fund is invested as a whole. You are dividing it between named funds and the general, unnamed portion to give people a sense of pride and honour for their contribution and to help them keep track of how their donations are adding to the long-term success of the fund.

The value of each unit can be determined at the beginning of each quarter and contributions that come in during the quarter are added to the fund on the first day of the following quarter. Income (i.e., interest on the principle) distribution between the named funds within your endowment can be done quarterly as well. For example, if distribution of income earned during the quarter is figured out to be 15 cents per unit, then the original named funds would each get $150 (1,000 units x 15 cents); the Peters fund $75 (500 x 15 cents), and the Williams fund $136.37 (909.1 units x 15 cents).

On Our Own...Together

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Copyright © 2002 Harry van Bommel

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