Here’s to Five More Decades!

Fifty years ago a goal of inclusion for those with special needs was set through the establishment of the Special Olympics, and this year we celebrate getting closer and closer to that goal each year. The community supporting those with special needs grows larger each year ,as well as the community of Special Olympics athletes themselves.

At this point, there are 4.9 million Special Olympics athletes from 172 countries!

Why sports? Their website says it well:

“Through sports, our athletes are seeing themselves for their abilities, not disabilities. Their world is opened with acceptance and understanding. They become confident and empowered by their accomplishments. They are also making new friends, as part of the most inclusive community on the planet — a global community that is growing every day.”

To celebrate, last month the organization put a festival on Soldier Field with celebrities and live entertainment among other events, such as a historical and cultural walk and the first ever Special Olympics Unified Cup.

To see videos that show some of the milestone moments from their history, click here.

Supporting those with special needs.

This has been a real goal in the trust industry, far beyond when “Special Needs Trusts” or “Supplemental Needs Trusts” have been around.

One of the fundamental motivations for creating a trust often can be to create a professionally managed lifetime income stream, for a spouse or child who does not have a way to earn an income stream themselves. When you add into the scenario a case where the person’s needs are greater than average due to disabilities, creating a trust seems like it would be the natural choice.

So… why the distinction of “Special Needs Trust”?

It’s because the usual ways of providing for your loved ones with special needs such as gifting or inheritance may place governmental assistance programs in jeopardy. Many government programs have strict need-based requirements, and if the assets were transferred directly they may end up paying for basic services instead of the quality of life improvements that could be otherwise created by an outside provider.

There are other benefits too, such as the trust being able to be customized to provide the disabled beneficiary’s specific needs, and avoiding family conflict regarding who the caretaker would be.

Special Needs Trusts are complex, so a qualified attorney should be consulted to ensure that they are properly drafted.

Garden State’s trust professionals have years of experience working with special needs trusts. We’re glad that the community that supports those with special needs is growing, that we get to be part of it, and look forward to many more years of increasing inclusion.

Marital Trusts

Dear Garden State Trust:

Now that the federal estate tax exemption is over $10 million, do I still need a marital deduction trust in my will for my wife?

—Concerned Husband

Dear Concerned:

Most likely, yes. If your current will includes a trust for a surviving spouse, you probably will want to keep it.

A trust for a surviving spouse provides important asset management benefits that can be vitally important to a person who is entering widowhood. For most affluent families, a marital trust is the way to go.

Blended families are a special case for which provision may be made for a spouse and children from an earlier marriage. The tool is called the Qualified Terminable Interest Property Trust, or QTIP trust. Even if the marital deduction allowed for the QTIP trust is not needed, securing the inheritance for all beneficiaries may be an important enough consideration to employ the trust in wealth management.

If you live in one of the states that still imposes an estate or inheritance tax, you may want a marital deduction trust even if the estate isn’t large enough to incur a federal estate tax.

Finally, keep in mind that the larger exemption expires after 2025.

If you are married and don’t yet have a will, make an appointment to see an estate planning attorney soon. Your spouse will thank you for it.

Do you have a question concerning wealth management or trusts?  Send your inquiry to contact@gstrustco.com

(July 2018)
© 2018 M.A. Co.  All rights reserved.

An Exception for an Exceptional Case

When Paul Newman died in 2008, he left his ownership of Newman’s Own food company to Newman’s Own Foundation. The food company is a for-profit venture, but it gives all of its after-tax profits to charity.

The Foundation acquired all “Publicity and Intellectual Property Rights” of the Newman estate. He urged vigilance upon his executors in protecting his image after his death, hoping that his likeness would never be used in ways that he did not approve of during his life, nor to sell food products inferior to the current Newman’s Own line.

The problem is that the tax code prohibits private foundations from owning more than 20% of a for-profit company (35% in some circumstances). This law is meant to prevent individuals from using private foundations as a tax shelter for their active businesses. The Foundation had until November 2018 to divest 80% of its ownership of the food company, or it would face crippling excise taxes.

It has lobbied for years to be able to continue on its current path, and a legislative change to the tax law this year added into the Bipartisan Budget Act of 2018, called the Philanthropic Enterprise Act of 2017, allows it to do just that.

This case is exceptional, because there is no individual who could be benefiting from a potential tax shelter. Nevertheless, a legislative exception can’t be made for a single business, and generalities could cause potential misuse.

Thus, the legislation has been very carefully constructed to restrict the usage of this exception – so much so that it’s unlikely that it will ever apply to any other entity. On the other hand, perhaps Paul Newman’s estate planning could become a model for future charitable estate planning of those in a similar situation to his.

The primary restrictions for this exemption include:

  • The private foundation has exclusive full ownership of the for-profit business, which was acquired under the terms of a will or trust.
  • The for-profit business gives 100% of its profits to the private foundation.
  • The private foundation can’t be controlled by its original creator, or family members.
  • The for-profit business cannot have outstanding loans to substantial contributors to the private foundation or family members.

Basically – It would have to follow Newman’s Own story.

The full text of the exception can be found here.

Paul Newman’s estate planning beyond the foundation

The cornerstone of Paul Newman’s estate plan, mentioned in his will, is the “Amended and Restated Living Trust Number One,” executed before the will. The terms of that trust were not published, nor what assets it held. We do know that the living trust was the residuary beneficiary of Newman’s estate; that is, any property not identified and transferred specifically by the will passed to the trust. We know from a provision in the will that the living trust provided for Newman’s descendants, and that for descendants less than 35 years old when Newman died, separate trusts were to be created. Finally, we can tell from the will that a marital deduction trust was carved out of the living trust for the benefit of Newman’s surviving spouse, Joanne Woodward. The will provided that the marital trust would be funded with Newman’s interests in production companies and the royalties and residuals due Newman from his acting career. Newman’s will also mentions that he may provide a memorandum to his executors.

The memorandum would suggest various gifts, but it would not be binding on the executors, nor would it be published, securing an additional zone of privacy. Somewhat more detail was provided regarding the legacy to Newman’s Own Foundation, which has continued his philanthropic work.

Key takeaways: An estate plan can support philanthropy as well as private beneficiaries. A living trust is a great mechanism for managing wealth that will stay in the family.

Interested in how trust services might help your family? Contact a Garden State Professional to learn more.

Photo By TriviaKing at English Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=4939146

Who Really Made It?

The Museé Terrus in Elne, France, recently cut its collection by more than half when it was revealed that 82 of the museum’s 142 works were fakes or forgeries.

The museum relied on its founder to acquire works by Terrus, and the museum spent over $190,000 on these fakes and forgeries over two decades.

In this case a guest curator, Eric Forcada, discovered discrepencies and started investing further. He noticed many details the untrained eye might not, such as featured landmarks, like castles, that were built after Terrus had passed away.

Some of the painting were misidentified and instead painted by Terrus’ contemporaries like Pierre Brune, Balbino Giner, and Augustin Hanicotte.

Read the full story here.

Sometimes the opposite happens, when a piece of “unexceptional” art is discovered to be done by a notable artist and can be authenticated. Last year in Madison, NJ, a sculpture that had been boxed up and stored for years, and then positioned in a corner of the Hartley Dodge Foundation (it doubles as the town hall) was investigated further by a temporary archivist.

At the time of the discovery, they had no idea how the piece even came into the possession of the Foundation. Scholars were able to uncover the statue’s history and verify that this sculpture was not only done by the legendary Auguste Rodin, but that it was also the only known political or military figure sculpted by Rodin. It now has an estimated value of $4 million.

Read the full story here.

Where there is wealth transfer, there is the IRS, and they need a representation of value so that they can impose taxes.  If one needs to be certain of the value of a piece of art, they can request a direct IRS statement of value of art appraised on $50,000 or more (plus a $2,500 filing fee).

If the taxpayer has his or her own appraisal done, there may be an audit on the items worth $20,000 or more by the Commissioner’s Art Advisory Panel. This panel is made up of 25 non-compensated art experts who do not know the tax consequences of the valuation (higher is better for charitable contributions, and lower is better for estates keeping the art in the family).

The IRS panel may not agree with the appraisal for a number of reasons. The marketplace may have shifted and the value of all sales of that style of art may have increase/decreased. The authenticity of the art could was not determined well enough by scholars, museum curators, dealers, auction houses, or others. The provenance and title isn’t well enough documented.

There is a standard for professional art appraisals: Uniform Standards of Professional Appraisal Practice (USPAP), which the IRS requires to be used.

“Impact” Investing

Dear Garden State Trust:

What is this “impact” investing I’ve been hearing about? Can trust assets be invested for social impact?

—Seeking Social Justice

Dear Seeking:

There is no simple definition of “impact” investing. One writer called it “a movement that aims to force social change by minimizing or eliminating investors’ exposure to companies that harm the world” while still achieving a solid return. Putting a more positive spin on the idea, another writer suggested “a movement that aims to maximize investors’ exposure to companies that improve the world.”

This approach can include negative screens—avoiding tobacco and liquor companies, say—or positive screens—looking for companies that have women in leadership positions, or strong environmental records, for example.

Trust assets are invested according to guidelines provided in the trust instrument. The grantor of the trust is free to impose any desired restrictions on the buying and selling of holdings for the trust. However, in most cases the grantor plans to rely on the investment expertise of the trustee, rather than put handcuffs on the decision.

If the trust does not provide specific guidance for investment decisions, might the trustee take the initiative? When this question came up in the 1990s, when the concept of “socially responsible investing” was popularized, the initial answer was no. A trustee who invests for any purpose other than risk-appropriate return on assets would, it was thought, be violating a fiduciary duty to the trust beneficiaries. In part this observation may have been influenced by the fact that some socially responsible strategies were seen as significantly underperforming the market.

Proponents of “impact” investing have argued that their more sophisticated approach may prove less risky than the market as a whole, without sacrificing returns. Time will tell.

Do you have a question concerning wealth management or trusts?  Send your inquiry to contact@gstrustco.com

(May 2018)
© 2018 M.A. Co.  All rights reserved.

 

April Showers Bring May Flowers

Whether you’re at the stage in your life where you have a work-optional lifestyle, or just have a green thumb and time to garden on the weekend, it’s time to plan and plant.

At Garden State Trust Company, we believe there are many parallels between having a successful garden and successfully managing wealth. “Garden” is right there in our name, after all.

Here are our top three tips for gardening and thoughts on them:

  1. This location vs. that location

What nutrients exist in the soil that can promote your plant’s growth? How will the climate affect your plants? Will they get enough, or too much sunlight?

Just as there are some areas where there is little or no potential for the growth of a particular plant, there are also areas where there is little or no potential for growth of an investment.

Sometimes the potential is in tech stocks, sometimes in utilities, sometimes in energy stocks. Sometimes bonds are the better bet. There are a lot of variables to consider when considering if a particular investment will flourish. Our investment advisors can tell you more about today’s potential.

  1. Cultivating vs. weeding

What forces are preventing the perfect growth of the most beautiful flowers, vegetables, or fruits? What can you do to combat those forces?

Just as there are many dangers that arise in a garden – not enough water, weeds, other flora or fauna that wants to take over, there is also a constantly changing environment for your investment portfolio.

An untended garden will quickly become overrun with weeds and be difficult to fix, but cultivating daily will preserve the garden in a fraction of that time. Cultivating is the process of turning over the soil before aggressive seeds can take root and then steal precious resources from the plants that you are tending.

Similarly, with an investment portfolio, economic forces can take root and quickly change the risk dynamics, but daily supervision and automatic asset allocation adjustments can ensure that the portfolio remains appropriate for the investor.

  1. Annual (plant every year) vs. perennials (come back from their root structure)

What is the life cycle of your plants? Will they need to be planted every year, or will the come back on their own?

There are many beautiful and delicious plants that exist as annuals and need to be planted every year, but also some that will develop roots to grow the following year without planting.

Asparagus is considered a cash crop plant, and it’s not hard to see why. It’s a perennial plant that lasts from year to year without needing to be planted over again, and it can be harvested as often as twice a day and a single 100 foot row could yield 25 pounds (see a crop profile on hobby farms here).

With an investment portfolio, you do want something that will develop a root structure and provide growth every year rather than something that will get used up and needs to be planted again.

At Garden State Trust Company, we tend to our clients’ investment gardens, so they have time to relax and tend to their plant gardens. We’ve shared our gardening tips; feel free to share your gardening tips with us too by clicking here.

P.S. In New Jersey, even though we are small in area, we are the fourth largest grower of asparagus in the nation (see the list of top grown exports here) with 5.6 million pounds grown over 1500 acres.

Borrowing From a 401(k) Plan

Dear Garden State Trust:

I’m going to buy a new car.  Can I borrow money from my 401(k) plan for this purpose?

—Trading Up

Dear Trading Up:

If you do borrow from your 401(k), you will have lots of company.  According to a new national survey from the Profit Sharing Council of America, 25.8% of plan participants had loans outstanding in the most recent reporting year (2016), a level that has held fairly steady over the last ten years.  The average reported loan per borrower has fallen somewhat in recent years, now standing at $8,042.

Whether your plan administrator will approve a loan for a new car is an open question.  Generally, such loans are supposed to be for sudden, unexpected financial needs. Still, the requirements for granting a loan are usually less stringent than for plan withdrawals.  Years ago one plan administrator told us that the number one reason for granting participant loan requests should be “because they asked for it—it’s their money, after all.”

Just because you can do it does not make it a good idea.  When you borrow money from your 401(k) account, you have less money in the market, growing to meet your retirement needs.  That deficit can be hard to overcome in future years. Most financial advisors recommend that borrowing from a 401(k) account to meet current ordinary expenses (such as a car) should be a last resort.

Do you have a question concerning wealth management or trusts?  Send your inquiry to contact@gstrustco.com

(April 2018)
© 2018 M.A. Co.  All rights reserved.

Spring Cleaning

The winter is finally over, and with spring comes new fragrances and pollens outside. To fully embrace the new season, some decide to clean their homes inside as well, moving everything and doing a full clean and assessment of what should be kept or thrown out.

We collect treasures over our lifetimes that represent memories, and letting go of those treasures can be hard.

A recent article from the Journal of Gerontology: Series B, titled “The Material Convoy after 50” discusses how people divest themselves of possessions as they age. The article can be found here.

David J. Ekerdt and Lindsey A. Baker through analysis of data from a national panel conclude that “After age 50, people are progressively less likely to divest themselves of belongings. After age 70, about 30% of persons say that they have done nothing in the past year to clean out, give away, or donate things, and over 80% have sold nothing.”

Although the authors suggest that with a larger set of possessions, “their continued keeping can be a predicament for oneself and others,” they explore many reasons why less is divested as we age.  The reasons they bring up that we find compelling are:

  1. The longer we live, the more possessions we accumulate that signify our identity and “The ongoing collection of belongings can secure continuity of the self in the face of aging and vulnerability.”
  2. As we age, we feel less up to the task of assessing value and divesting where there isn’t any: “a major reason for less possession management is the rising risk of poor health at older ages that can limit the capacity to carry out the cognitive, physical, social, and emotional tasks of divestment.”
  3. We’ve divested already: “Most obviously, people may have already divested (perhaps by having moved) and so are content with their collection of belongings.”

At Garden State Trust Company, we deal with inter-generational wealth transfer and help people make the transition easier for their beneficiaries. Here are some questions to consider when you’re deciding if something should be kept for a beneficiary:

In regard to pragmatic value: Have I used this possession in the last five years? Would any of my beneficiaries use this possession, or do they have something already that replicates it’s use they prefer?

In-Law Protection

Dear Garden State Trust:

I have two grown children, both married.  One couple is financially secure; the other is less so.  Candidly, I don’t trust the spouse of my child who is struggling.  Is there something I can do to keep that child’s inheritance from the spouse’s hands?  How do I treat the children differently without provoking a family feud?  

— Discriminating Parent

Dear Discriminating:

The best way to protect an inheritance is by using a trust, giving the beneficiary a financial resource instead of financial assets.  The trust may distribute income to the beneficiary each year but include restrictions on principal distributions.  For example, the trust might be invaded for medical or education expenses, or to purchase a home, or upon reaching certain milestones.  The trust beneficiaries may be limited to your descendants, excluding sons-in-law and daughters-in-law.

The terms of a trust are not normally made public, but are known only to the creator of the trust, the trustee and the beneficiaries.  Accordingly, if you have two trusts for your two children, you may provide different restrictions for each.  They don’t have to be told about the differences.

Do you have a question concerning wealth management or trusts?  Send your inquiry to contact@gstrustco.com

© M.A. Co.  All rights reserved.

An Introduction to ABLE Accounts

On December 3, 2014, Congress passed the Achieving a Better Life Experience Act, or as it’s more commonly known as, the ABLE Act. The ABLE Act authorized a new type of tax-favored savings account for blind or disabled individuals with a qualifying disability incurred prior to age 26.  As of January 1, 2018, these individuals may receive up to $15,000 per calendar year in an ABLE account, without having the funds in the account counted against them for Medicaid or SSI eligibility purposes.  The ABLE account beneficiary is able to manage the funds on deposit in the account and may use the account proceeds to pay for “qualified disability expenses (QDEs).” As long as the expenditures of funds from the ABLE account being attributed to the blind or disabled account beneficiary are used for QDEs, the dollars will not be subject to federal income tax, nor will they be deemed as countable resources in determining eligibility for most federal welfare benefit programs.

So why is the ABLE account such an important vehicle?  Simply put, many disabled individuals and their families can’t afford the rising costs of care related to their lives with disabilities. Medicaid and SSI only provide so much, and eligibility requirements force the beneficiary to have no more than $2,000 of countable assets at any time. ABLE accounts can protect additional resources for the disabled beneficiary, whose friends, family members, or the disabled individual himself, may transfer up to $15,000 per calendar year per disabled beneficiary into the ABLE account. Undistributed earnings will not be taxed, and no 10% penalty will apply on distributions.  The funds may accumulate in the account year after year, up to the applicable state 529 cap for Medicaid purposes. For SSI purposes, the limit is $100,000, after which eligibility for SSI is suspended until the account proceeds are spent down below the $100,000 SSI threshold. Therefore, assuming the account owner follows the rules of ABLE accounts (outlined below), he or she can not only receive Medicaid, SSI and/or SNAP (food stamps), but can also use the ABLE funds to supplement those benefits with tax-free dollars.

In order to be eligible to open an ABLE account, you must be deemed a disabled individual by the Social Security Administration, and need to have incurred such disability before turning age 26 (NOTE: This does not prohibit applicants aged 26 or older from applying, only those whose disability began after age 26). Should you meet the eligibility qualifications, the following financial regulations apply:

  • “Qualified disability expenses” or QDE’s are defined as “any expense related to the beneficiary as a result of living a life with disabilities1.” Examples of such expenses can include education, housing, assistive technology, transportation, health care expenses, and other expenses that help improve the individual’s quality of life1
  • As of January 1, 2018 until December 31, 2025, the funds on deposit in a 529 educational savings account may be rolled over into an ABLE account if the beneficiary of the 529 account, or a family member of that individual, is a qualified disabled beneficiary.

Similar to a First-Party Special Needs Trust (more information in future blog), there is a payback provision associated with ABLE accounts. This provision requires that upon the passing of the ABLE account owner, the state Medicaid agency that provided benefits to that individual is allowed to reclaim or recoup all or a portion of that individual’s ABLE account remaining after death, equal to the amount of dollars expended on behalf of the individual, beginning from the time their ABLE account was opened.

Ultimately, the supplemental financial support afforded to the beneficiary during lifetime almost always outweighs the downside of the Medicaid payback after death. Regardless, it’s imperative to speak with your tax, legal, and financial advisors before opening or contributing to an ABLE account

For more information on ABLE accounts and their potential utility for a loved one with disabilities, contact Sean Rice, CTFA, srice@gstrustco.com, (856)-281-1300.

1 http://ablenrc.org/