'Given the size and long-term nature of this gift, we want to make sure the funds are managed prudently'
"Our concern is that this rate of return may barely keep pace with inflation." (Photo subjects are models.)
Dear Quentin,
A Catholic church in central Massachusetts recently received a $1.5 million bequest from a generous parishioner who has passed away. Under the current arrangement, the bank holding the funds will distribute 4% annually for 25 years.
We understand that the funds are currently invested in a savings account earning 3.75%. Our concern is that this may barely keep pace with inflation, and there may be better investment options available to the church.
We would greatly appreciate your thoughts and insights on several questions:
-- How should the church consider investing these assets to balance growth, preservation of principal and the need for annual distributions? Should the church require the bank to enter into a formal fiduciary agreement, and what protections would that provide?
-- Would it be preferable for the bank to distribute the funds quarterly, semiannually or annually? What are the potential risks and advantages of having the bank continue to manage the funds compared with engaging another financial institution or investment management company?
-- Should the church arrange for periodic independent financial audits of the fund? Would it be advisable for the church to retain a CPA, financial adviser, or investment professional to provide independent oversight?
Given the size and long-term nature of this gift, we want to make sure the funds are managed prudently and in the best interests of the parish and its future parishioners.
A Parishioner
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No doubt this gift has raised a lot of questions, not least how to spend it.
Dear Parishoner,
Your church must have provided that parishioner with a great sense of community and spiritual healing to inspire such a generous gift.
No doubt it has raised a lot of questions, not least how to spend it. If that $1.5 million was put in a trust with instructions on how it should be distributed and invested over time, your church - as the beneficiary - may have less control over the interest rate. That would be up to the trustee. If, however, the money was given outright and the trustee are board members of your church, that's a different story. But you are correct: the consumer price index hit 3.7% in September.
A 3.75% interest rate is not a bad rate for a certificate of deposit (CD) or high-yield savings account, and slightly below what you might get for a 1-year Treasury bill. For a gift such as this, the church board or trustee is likely to prioritize safety over returns. Brian Katz, chief investment officer at Prosperity Wealth Management, agrees that 3.75% is a competitive rate. "The real question, which can only be answered by the church's decision makers, is how much risk they are willing to take," he told me.
"Given the long time horizon of 25 years and the relatively low disbursement rate of 4%, the portfolio has the leeway to take on more risk," he says. "One idea for a little higher yield without adding too much incremental risk would be an ultrashort bond fund. These can be found in both ETF and mutual fund structures. Currently, you can likely find something that yields 4.0% to 4.25%. As I said before, given the time horizon, building a diversified portfolio that includes equities, bonds, and cash may be considered, depending on the church's risk tolerance."
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Stock-market exposure
There's probably room for some stock-market exposure. "A conservative allocation of 20% equities and 80% bonds and cash wouldn't expose the portfolio to too much risk and should allow for a modestly higher return profile," Katz adds. "By focusing your equity investments on funds that favor high-quality or dividend-paying equities, the church could reduce the risk of the overall portfolio. The bond portfolio could include funds that purchase short-to-intermediate-term bonds, which would offset some of the duration risk."
The timing of distributions, if you have control over it, depends on how the church's finances are structured, but the longer you leave the money invested, the better the potential return. "The question on timing of the distributions should be made in consideration of the church's operating budget," Katz says. "From an investment standpoint, the longer the money remains invested, the more the investor benefits from compounding returns. Therefore, taking it out once at the end of the year can maximize the expected return of the portfolio."
You may also decide to use some of this money as an emergency fund, in case the church needs to replace the roof or - if you carry out broader renovations - is required to upgrade the entranceway or access to the restrooms to meet city standards. "The church should have an investment committee and a charter that defines the committee's roles and responsibilities," Katz adds. "Hiring an adviser is not a bad idea." In principle, a trust can be structured so that part of the investment income is distributed to a church while another part is reinvested.
It all depends on how the $1.5 million is held, who controls it, and what restrictions govern its use.
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The Moneyist regrets he cannot respond to letters individually. Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.
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-Quentin Fottrell
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