The Finatical

Week of February 28th, 2023 - Trust Funds, VC-Driven Tech “Zombies” Hammer Company Valuations, Consumer Crypto Protection

Aditya Bagga

Sean Hwang

Ksheeraj Sanga

, and 2 others

Mar 01, 2023

Introduction

Many people have a general idea of what a trust fund is, but there is actually a little more to know about trust funds than you may think. To begin, a trust fund is a legal arrangement that involves transferring assets, such as money or property, to a trustee who holds and manages them for the benefit of one or more people who get the trust fund money. The assets can be managed and invested by the trustee according to the instructions provided in the trust document. The purpose of a trust fund is to protect and manage assets for the long-term benefit of the beneficiaries (the ones who get to use the money in the fund). In this article, we will also cover why trust funds are typically created, and how to use them in the future.

Why They Are Created

Essentially, trust funds can be created for various reasons, including to provide for the education, health care, and basic needs of children or other loved ones, to support philanthropic causes, or to provide for one's own future needs. The trustee actually needs to act in the best interests of the beneficiaries and/or must follow the instructions outlined in the trust document. Trust funds can be set up to be revocable or irrevocable. According to MetLife, “Revocable trusts last as long as you want them to and can be canceled at any time. At the time of your death, a revocable trust becomes irrevocable. Irrevocable trusts are permanent. They last for your entire lifetime and after you've passed.” Also, the assets in the trust can be distributed in various ways, such as in lump sums or periodic payments.

How To Use Them

Trust funds are often associated with wealthy individuals, but they can be used by anyone who wants to protect and manage their assets for future generations or charitable causes. Trust funds can be a useful estate planning tool, allowing individuals to transfer their wealth in a tax-efficient manner while ensuring that their loved ones are provided for. To set up a trust fund, there are a few steps that we will cover in a very simplistic way. Initially, you must decide what form of trust you want to establish, as there are many different types of trust, each with its own purpose. Then, you can determine the terms of the trust. After this, you must create your trust documents, and finally, fund the trust with assets. Although these are the general steps to creating a trust, it can actually be a complex legal process, and it is important to work with an experienced attorney to ensure that the trust is structured correctly and meets your needs.

Financial Trends

VC-Driven Tech “Zombies” Hammer Company Valuations

For the majority of venture capitalists (VC), there is starting to be a larger number of “zombies” entering the corporate world. The term “zombie VCs' ' refers to a business that while generating large amounts of revenue is simultaneously dealing with high amounts of debt, where it can only pay off its fixed costs and interests on the debts, but not the debt itself. This is a cause of concern for tech startup companies and investors because the emergence of these “zombie” VC firms is causing the tech market to face difficulty to raise their next investment funds.

In the VC market, a “zombie” is a type of investment firm that will no longer raise money through investment funds or loans for backing up new companies, hindering their potential future success. They still function as a manager of the company’s portfolio of assets and investments but cease to write any new founding checks amid the company’s struggles to generate profitable returns. Since tech companies are faced with a lot of backdrop from high-interest rates and fears of an oncoming recession, VCs expect there to be hundreds of firms gaining “zombie” status in the upcoming years. According to the CEO of Techstars, Maelle Gavet, “We expect there’s going to be an increasing number of zombie VCs; VCs that are still existing because they need to manage the investment they did from their previous round but are incapable of raising their next fund”.

Consumer Crypto Protection

This past Wednesday, the Securities and Exchange Commission voted 4-1 to propose making drastic changes to federal regulations that would primarily focus on custody rules for including assets like crypto. This would ultimately require companies to gain or maintain their registration in order to maintain their high-valued customer assets. These proposed amendments to federal custody rules would allegedly expand the growth for including client assets under the custody of an investment advisor. Under these new rules, for a company or an individual to custody any form of a client’s asset, such as crypto, would need institutions to hold the assets, and qualify as a registered broker-dealer, and futures commission merchant.

Currently, federal regulation only consists of assets like funds and securities and requires them to be managed by investment advisors, such as Fidelity, to hold those assets in the security of a federal or state bank. If the SEC’s amendments were to be accepted and upheld, then it would be their most overt effort to have control over regulated crypto exchanges that have a significant impact on custody programs serving individuals with high net worths and enterprises with investor assets. However, this new regulation poses a threat to crypto exchange custody programs, as other federal regulators constantly discourage banks from holding customer crypto assets. Additionally, these amendments would also portray the SEC as being heavily aggressive to enforce their strict regulation policies on crypto.

Financial Guidance

“Real wealth is not about money. Real wealth is: not having to go to meetings, not having to spend time with jerks, not being locked into status games, not feeling like you have to say ‘yes,’ not worrying about others claiming your time and energy. Real wealth is about freedom.” –James Clear

Wealth is not about having the most money or luxurious items; rather, it is about being able to live life on your own terms, not being involved with various pressure that comes with chasing money.

Term of the Week

USTR: The Office of the United States Trade Representative, or USTR for short, is a government agency that takes on a number of roles, such as advising the President on trade issues, taking a leading role in international deals, and settling disputes between various entities. They also serve to protect various US firms which play prominent roles in international trade.