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.

Elusive Treasures

St. Patrick’s day brings to mind the Irish legend of the pot of gold guarded by a leprechaun at the end of the rainbow. The pot of gold is simply unreachable because its location changes as soon as the treasure hunter’s location changes to investigate. The refracted light on water droplets that creates the rainbow effect is replaced with a different rainbow effect with even a single step towards it.

Perhaps there is some gold at the end of the proverbial rainbow, just waiting to be found. In the style of uncovering and cracking a code in Dan Brown’s novels, here are two interesting treasure hunts that Americans are undertaking to find gold:

  1. The Beale Cipher. There was a pamphlet sold in 1885 containing three ciphers, with one decoded that described the treasure, including gold coins buried in Virginia (estimated value of $43 million). The other two ciphers described the location and heirs for the treasure that was allegedly buried in 1820. Many attempts have been made to break the cipher, but none with recognized success to date. Several books and TV shows have mentioned the topic. Want to try to crack the code? It can be found on Wikipedia here.

Perhaps it’s real, or perhaps a ploy to sell pamphlets to eager treasure hunters.

  1. The Fenn Treasure. Noted millionaire author Forrest Fenn allegedly has hidden a treasure box of gold coins in the Rocky Mountains worth over $1 million, with the clues to find it buried in his book, The Thrill Of The Chase. The mountains can be dangerous, and Fenn has reportedly urged caution upon seekers. He suggested that the treasure is not hidden in a dangerous place, because it must be somewhere an 80-year-old man can access. Nevertheless, four hopefuls have lost their lives since the book was published, as they have been identified by authorities to be seekers of Fenn’s treasure.

Perhaps it’s real, or perhaps a ploy to sell books to eager treasure hunters.

At Garden State Trust Company, we’ll stick with focusing on a reasoned and conservative approach to building and preserving wealth for our clients rather than chasing rainbows or buried treasure.

Happy St. Patrick’s Day!

Roth Conversions

Dear Garden State Trust Company:

Last year I converted my traditional IRA to a Roth IRA. However, now that I see the income tax that will be due, I’m not so sure it was a great idea. Can I change my mind?

—Second Thoughts

Dear Second:

You have until October 15, 2018, to recharacterize your 2017 Roth IRA conversion, to turn it back into a traditional IRA.

But that option is not available for conversions for 2018 and later years.

The tax reform legislation enacted last December changed the rules for Roth conversions from traditional IRAs, SEPs and SIMPLE plans. After January 1, 2018, such conversions are irrevocable once made. The legislative language was ambiguous, and some exeprts were concerned that it might retroactively affect 2017 conversions as well.

In January the IRS issued a clarifying Q&A on the subject. The new law does not apply to 2017 conversions, so you are free to reverse course.

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

© 2018 M.A. Co. All rights reserved.

Think Hard Before Tapping Your 401(k) Balance

One of the features that make 401(k) plans so attractive is that your money is not completely out of reach should an emergency need arise. Most plans allow for loans that are completely tax free if repaid as agreed. (Interest payments will be required, but they will be credited to the account.)  In a major emergency, a hardship withdrawal may be permitted, subject to income tax and, usually, a 10% penalty as well.

Borrow?

At first glance 401(k) loans may look particularly appealing. After all, you make those payments of principal and interest to yourself. However, if the interest that you pay is less than your borrowed dollars would have earned in the plan, you will slow the growth of your retirement nest egg. Moreover, you pay with after-tax dollars—replacing your original tax-deferred contributions.

Loans must be repaid in no more that five years. (Fifteen-year terms are allowed for loans to purchase a home.) If you leave your job before a loan is repaid, you’ll have to pay it off, or the open balance will be considered a premature withdrawal subject to income tax and penalty.

Potentially more serious yet, the burden of loan payments may make it impossible to continue your 401(k) contributions.

Withdraw?

It’s not easy to make a hardship withdrawal from your 401(k) account. You must show an “immediate and heavy financial need” for: medical expenses not covered by insurance; the purchase of a principal residence; postsecondary tuition; or to avoid eviction from or foreclosure on a principal residence. Many plans also include funeral and child support expenses. You also must show that you have no other resources reasonably available to meet these costs. This means that you first must fail to qualify for a plan loan. Once you take a hardship withdrawal, you will be barred from contributing to your plan for at least 12 months.

Pay now or pay later

To examine the effect of these options, let us compare the long-term results for Nancy Needful, a hypothetical 35-year old worker with a $30,000 balance in her 401(k) plan. Nancy contributes $150 monthly to her account. Faced with a sudden emergency need for $10,000, Nancy has three options.  Nancy can:

  1. Take a loan of $10,000 from her plan at an 8% interest rate and cease making contributions until the loan is repaid in five years, making monthly payments of $202.76, and resuming her $150 contribution after five years.
  2. Make a hardship withdrawal of $12,500 to provide the cash that she needs and cover her income tax and penalty, resuming her participation in the plan after one year.
  3. Obtain a $10,000 advance on an inheritance, continuing her participation in the plan.

Here’s how those choices will play out:

The long-range cost of raising $10,000
Reduced plan accumulations

 At age 55At age 60At age 65
Loan$199,384$310,352$470,186
Withdrawal$166,609$259,317$397,437
Advance$236,007$362,709$551,476

As we see, by taking the advance on her inheritance and continuing plan contributions, earning a moderate 8% return (high today, but average in the long term) on her investments, Nancy ends up at age 65 with 17.4% more than if she had taken the loan and fully 38.8% more than with the withdrawal.

The lesson: tapping into your retirement plan assets should be your very last resort.

© 2018 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2018, are not reflected in this article.

Lavish Gifts and Sudden Wealth

Some call Valentine’s Day an excuse to spend money, and with over 15 billion dollars spent each year for the last five years, it’s not very hard to see why.

According to the National Retail Federation, the top five gifts that were planned last year were: candy, greeting cards, an evening out, flowers, and jewelry. While jewelry ranks last on that list of five in percentage of givers (19%), it ranks #1 in terms of dollars spent ($4.4 billion). Click here to see more details from their survey.

What might the affluent or very wealthy be buying? We can’t know for sure, but here’s something in each of the categories that might fit the bill:

Candy: High-priced chocolate. At www.toakchocolate.com, one might be able to have a chocolate experience like no other since they trace the lineage of their cocoa trees back 5300 years to the first that were ever domesticated. Starting at $270 for a 50 gram bar.

Greeting Cards: Sending a card could be sending a piece of art: At www.GildedAgeGreetings.com, you can do just that and order a artisan’s hand-crafted Valentines day card for your loved one. The cards have limited editions, and start at $395.

An Evening out: Elton John announced last month that he’s retiring after his final 2018-19 tour. Unfortunately none of the venues are in NJ, but one could take a sweetheart to hear Sir Elton sing “can you feel the love tonight” at Madison Square Garden in October. Ticket price at this writing was starting at $343 per ticket.

Flowers: How about real roses that will last from one Valentine’s Day to the next? Called the “Eternity DE Venus™ – Square”, these real roses will last a whole year without watering or maintenance. A small square starts at $299, has 16 roses, and can be purchased online here: https://www.venusetfleur.com

Jewelry: Though not a Valentine’s Day gift, Edward McLean and his bride Evalyn bought “The Star of the East” as a wedding present. It is a 94.8-carat diamond, which cost $11.9 million.

Speaking of huge diamonds, last month the fifth largest diamond in the world was discovered in Lesotho. Analysts’ project it could be worth over $40 million.

Not surprisingly, finding a huge diamond isn’t the most common source of sudden or new wealth. Lump sum distribution of retirement benefits, insurance settlements, inheritance, or the sale of a business or investment real estate can create large sums of money for talented people who may not have experience with wealth management.

We can provide that experience and explain whether a trust could be useful.