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.

Timing Your Passing

It’s never a “good year” to die; however, if you live in New Jersey and made it to 2018 with a sizable estate, it’s possible your estate’s tax exposure just fell considerably.

The amount exempt from the federal estate and gift tax had been scheduled to rise to $5.6 million so as to take into account inflation since 2011. With the tax legislation signed on December 22nd 2017, the exemption doubles, to $11.2 million in 2018. Should both partners of a married couple die in 2018, the exemption potentially could shield $22.4 million. However, the higher exemption expires in 2026.

Additionally, New Jersey finished phasing out its state estate tax completely for deaths after January 1st 2018. We still have an inheritance tax, so that’s something to consider depending on the relationship the beneficiary or transferee has to the decedent.  For the most part, no tax will be due if the beneficiary will be a spouse, parent, grandparent, or child (relationship defined as Class A). However, brothers, sisters, and more distant transferees may face an inheritance tax.

Click here for a chart of what the tax rates will be for 2018.

Click here to see which class someone would belong to.

Consider gifting

A program of tax-free annual gifts (up to $15,000 per beneficiary in 2018, $30,000 per couple) can be an easy and effective method for reducing future estate taxes. For example, grandparents with three children and seven grandchildren can give up to $300,000 to their descendants every year, or $1.5 million in just five years.

If the transferees or beneficiary are not as closely related, so that they would fall into class C, or class D, a gifting strategy could help avoid the New Jersey inheritance tax, but only if the gifts are not “death-bed gifts”. Under New Jersey law, any gift made within three years of death is presumed made “in contemplation of death”, and would have the inheritance tax applied as a death-bed gift. So this strategy should be started early on.

Should you worry?

It’s been estimated that perhaps only 1,000 estates nationwide will pay the federal estate tax in 2018. However, the higher exemption expires in 2026, and some politicians already have announced an intention to reduce the exemption should they come into power.

Estate plans will need to remain flexible as tax laws change.

The greatest reason to have an estate plan is still to decrease hardship for the beneficiaries, reduce arguments and fights, and clarify your preferences for how your property should be distributed.

Our Professionals at Garden State Trust Company

We have experience dealing with the problems and pitfalls of families’ wealth management and transfer. Our staff is sensitive to the types of issues that could arise, and would be glad to speak with you about how to best achieve your goals.

Click here to schedule a meeting.

Review Estate Plans in 2018

Dear Garden State Trust Company:

I heard that the exemption from the federal estate tax has doubled. What does this mean for my estate plans?

—Following Up

Dear Following:

Whenever there is a major change in the federal taxation of estates and gifts, that moment is a good one for the review of estate plans already in place. In most cases, nothing will need to be changed, but sometimes adjustments will be in order.

The amount exempt from federal estate tax is now $11.2 million per taxpayer (so $22.4 million for a married couple). That means the federal estate tax becomes a remote concern for the overwhelming majority of Americans. However, this increase expires in 2026, when we go back to something in the $5+ million neighborhood (depending upon inflation).

Families with fortunes that may be vulnerable to the federal estate tax will want to look into lifetime transfers to capture the enlarged exemption from federal gift tax.

Families whose fortune never is likely to cross the $5 million line still will need to answer these questions:

Do you live in a state that still imposes death taxes (that is, estate or inheritance tax)? If so, the taxable threshold is likely far below the federal one.

Does your will or trust include a formula clause that refers to the amount exempt from federal estate tax? If so, the interpretation of that clause has now been called into question.

Have there been any changes of circumstances that render your estate plan less than optimal? Have there been any births, or any deaths or divorces, that should be taken into account? Have any asset values changed dramatically, so that specific bequests no longer match earlier intentions?

Are the beneficiary designations on nonprobate property (life insurance, retirement plans and the like) correct? Neglected beneficiary designations have been the source of many a lawsuit over an estate.

You should plan to meet with your estate planning advisors in the first quarter of 2018.

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

© 2018 M.A. Co. All rights reserved.

Dow 24000

Dear Garden State Trust Company:

Wow, the DJIA crossed 24000! No one told me to expect that when the year started. How much higher can the stock market go?

—Nervous Investor

Dear Nervous:

Monty Python famously said, “Nobody expects the Spanish Inquisition.” In much the same way, no one will ever predict a 20% rise in the stock market, even when they are optimistic. Surprises on the upside are pleasant ones, so prognosticators are happy to make such a mistake.

We can’t know how much farther this bull has to run, but at the moment the economic indicators are positive. Consumer spending jumped 0.9% in September, followed by a 0.3% rise in October. Gross Domestic Product grew 3.1% in the second quarter and 3.3% in the third. Most estimates for the fourth quarter are between 2.5% and 3.0%. New home sales in October reached a 10-year high, and consumer confidence is at a 17-year high, the highest in this century, according to the Conference Board.

These indicators suggest that this economic expansion has plenty of life left in it. On the other hand, it’s been a long time since the last stock market correction (a price drop of 10% or more), and market tops are impossible to predict. If inflation heats up, the Federal Reserve Board may act more aggressively to increase interest rates, and that action could, in turn, bring the rise in stock prices to an end.

Does that answer your question?

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

© 2017 M.A. Co. All rights reserved.

End of Year Review

As we are nearing year-end it makes a lot of sense to review your current Will, especially if any of the following occurred during 2017 –

  • A named beneficiary died
  • A possible beneficiary was born
  • A named beneficiary divorced
  • A named beneficiary is very sick or has a drug dependency
  • You are moving or moved to a different state
  • The value of your assets changed significantly

These are just a few events that should prompt a review of your Will and your Estate Plan.

The professionals at Garden State Trust Company will be happy to meet to review your Will and Estate Plan at no obligation to you.

http://www.gstrustco.com/boomers—beyond.html

Federal Estate Taxes

Dear Garden State Trust Company:

What is going to happen with federal estate taxes in 2018?

—Interested Observer

Dear Interested:

The IRS has announced that, under current law, the inflation-adjusted exemption from federal estate and gift tax will grow to $5.6 million in 2018. For a married couple, that means a total estate of $11.2 million may be kept in the family tax free. By the way, the Service also announced that the gift tax annual exclusion will grow to $15,000 in 2018, the first increase in several years.

Into this mix we add the tax reform legislation working through Congress this November. The initial draft calls for an immediate doubling of the exempt amount in 2018, and eventual repeal in 2024.

Interestingly, the doubling of the estate tax exemptions has less “revenue cost” than one might expect. According to the most recent IRS statistics, roughly half of taxable estates fall in the range of $5 million to $10 million, yet they pay only 11% of the total net estate tax. Estates larger than $50 million pay 42% of the total federal estate tax, though they represent less than 6% of taxable estates.

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

© 2017 M.A. Co. All rights reserved.

Vacation Homes

The last recession took a toll on the value of vacation homes. The National Association of Realtors reports that, from the end of 2007 through 2012, when primary homes were dropping in value by 14.8%, the value of vacation properties fell by 23%. The good news is that prices have come back strongly. The median price of a vacation home rose 28% in 2015 and another 4.2% in 2016, reaching $200,000.

The main reason for owning a vacation home is—or should be—for rest and relaxation. The vacation home also may serve as a “tryout” for a destination for retirement living. In some cases, it may become the home one retires to.

But vacation homes have investment and tax angles to consider as well.

Rental income from the property may help cover some of the expenses of maintenance and improvement. If the property is rented for 14 or fewer days, the income is tax free. Rentals for longer periods may be offset with income tax deductions for mortgage interest, property taxes, insurance premiums, utilities, and other expenses, but the biggest tax benefits are available only to owners who use the property for 14 or fewer days during the year.

When It’s Time To Sell

The $250,000 exclusion from capital gains ($500,000 for married couples filing jointly) for the sale of a principal residence does not apply to the sale of a vacation home. At one time, it was possible to get around this rule by selling one’s principal residence and moving into the vacation home, living in it as the principal residence for at least two years. At that point a new exclusion would become available. This strategy was curtailed, beginning in 2009. Now the exclusion is not available for the portion of your ownership attributable to vacation home use.

Example. You bought a $1 million vacation property in 2010. In 2017 you sold your primary residence to begin living in the vacation home. Now assume that you decide to sell that home in 2020, after living in it for three years, when it is worth $1.5 million. That period is 30% of your total ownership, so only 30% of your gain of $500,000 ($150,000) is excludable from income. The same dollar limit of $250,000 also applies.

Query: Did the adoption of this tax rule in 2009 contribute to the decline in the value of vacation homes around that time? No one can say with certainty.

Estate Planning

The issue of capital gains taxes evaporates if ownership of the vacation home continues until the death of the owner. At that moment the tax basis of the property steps up to fair market value, so there would be no capital gain on a sale soon after.

If there is an intention to keep the vacation home in the family, a Qualified Personal Residence Trust (QPRT) should be considered. One can think of this as a major gift scheduled for a future date. The home is placed in a special trust that lasts for a specific number of years. The homeowner retains the right to live in the home for the full duration of the trust, and the children (or other beneficiaries) receive the home when the trust terminates.

The home transferred to a QPRT must be a personal residence, but it does not have to be a primary residence. Vacation homes and associated property, for example, are eligible for this estate planning strategy. And the trust may include other structures on the property if they are suitable for a personal residence, taking into account the neighborhood and the size of the house.

A gift tax return will be required when the home is placed in the QPRT.

However, the value of the gift will be discounted to reflect the delay until the gift takes effect. The discount can be very substantial, and it is a function of the current market interest rates as well as how many years will elapse before the gift takes effect.

For the strategy to succeed, the owner must survive to the end of the trust term. But if the owner dies during the trust term, the estate is in no worse position than if the QPRT had not been undertaken.

© 2017 M.A. Co. All rights reserved.

IRAs for Charity

Charitable giving in the U.S. rose 2.7% last year, reaching an all-time record of $390.05 billion. That’s also a record in inflation-adjusted dollars, reports the Giving USA Foundation in its annual report on philanthropy. Individuals, foundations, and corporations contributed to the robust growth in philanthropy, while bequests were projected to have declined by 9.0%. Some 72% of charitable gifts come from individuals—an average of $2,240 per U.S. household.

Religious organizations are the largest beneficiaries of charitable giving, receiving 32% of the total gifts. Education comes in a distant second, at 15%, followed by human services with 12%.

The charitable IRA rollover

One reason for the growth in giving may be the growth in assets. As the stock markets touch new highs, people can afford to be more generous. Another factor might be that as top marginal tax rates have increased, the value of charitable deductions for top taxpayers has grown as well.

A popular charitable giving tax break has been made permanent, one that has been dubbed the “charitable IRA rollover.” Those who are over age 70½ may want to consider the gift of a direct distribution from their IRAs. Up to $100,000 may be transferred to charity in this manner. Couples may transfer up to $200,000 if each partner has an IRA. In contrast to normal IRA distributions, amounts transferred directly to charity won’t be included in ordinary income (and so no charitable deduction is appropriate).

The definition of who is permitted to take advantage of this tax strategy dovetails perfectly with those who are required to take required minimum distributions (RMDs) from their IRAs. So some taxpayers simply opt to direct their required minimum IRA distributions to charity, because the distribution requirement will be satisfied, even though the amounts distributed aren’t included in taxable income.

Extra tax advantages

In some sense, the income tax exclusion for a transfer to charity from an IRA might not seem like such a big deal. After all, one always has been allowed to follow an IRA withdrawal by a charitable contribution and claim an income tax deduction. However, the full benefit of that deduction is not available to all taxpayers.

  • Nonitemizers. There are a great many taxpayers who do not itemize their deductions, even in the upper tax brackets.
  • Big donors. Percentage limits on the charitable deduction mean that some donors can’t take a full charitable deduction in the year that they make a gift.
  • Social Security recipients. An increase in taxable income may cause an increase in the tax on Social Security benefits for some taxpayers. The direct gift from an IRA avoids this problem.

Accordingly, if you are 70 ½, you should consider a charitable gift from your IRA if:

  • You do not itemize tax deductions;
  • Your charitable deductions have been maximized; or
  • You do not need the additional income made necessary by your required minimum distribution.

As welcome as this tax planning opportunity is, every taxpayer’s situation is unique. See your tax advisor before taking any action.

© 2017 M.A. Co. All rights reserved.

The IRS Opens a Facebook Page. Yours.

Two law professors at Washington State University have warned that the IRS has turned to data mining of social media in their enforcement efforts [Houser and Sanders, “The Use of Big Data Analytics by the IRS: Efficient Solutions or the End of Privacy as We Know It?”, 19 Vand. J. Ent. & Tech. L. 817 (2017), http://www.jetlaw.org/wp-content/uploads/2017/04/Houser-Sanders_Final.pdf]. The demise of the Taxpayer Compliance Measurement Program left a data gap that needs to be filled, and social media may provide part of the solution.

The professors warn of the dangers of abuse of secret data collection systems. Taxpayers may have an expectation of privacy when they are online, but this is an error. Anything that may be seen by the public may be seen by the IRS. The Service then pairs this information with its own databases in a process of data analytics. “For the IRS, data analytics is not trying to predict the future behavior of taxpayers, but predicting data that it does not have; that is, predicting whether tax returns are compliant with the tax law.” Given the data breaches that the IRS itself has experienced, as well as questionable IRS targeting practices of recent years, the concerns raised by the professors seem warranted.

Don’t publish anything on social media that would make you uncomfortable if you saw it on the front page of The New York Times.

© 2017 M.A. Co. All rights reserved.

Who Owns Mutual Funds?

There are an estimated 94 million mutual fund investors in the U.S., reports the Investment Company Institute in its 2017 Investment Company Fact Book. Those investors represent 54.9 million households, or roughly 43.6% of all U.S. households. That level of mutual fund ownership has held steady during this century.

43.6% of U.S. households own mutual funds

Year% households
19805.70%
198514.70%
199025.10%
199528.70%
200045.70%
200544.40%
201045.30%
201543.00%
201643.60%

Source: 2017 Investment Company Fact Book

The explosive growth in mutual fund ownership after 1980 may be attributable to the advent of 401(k) plans. Indeed, for 67% of households their first mutual fund purchase was through an employer-sponsored retirement plan. Some 37% of those who own mutual funds own them only inside such plans. Mutual funds owned in IRAs, which first became widely available in 1981, may also account for this spectacular growth.

As one might expect, as household income rises, the odds of finding mutual fund investors rises also. Some 80% of U.S. households with income over $100,000 are mutual fund owners. Still, mutual funds are certainly not just for the very affluent. 17% of mutual fund-owning households reported income of less than $50,000. The median income of households owning mutual funds was $94,300.

Why invest in mutual funds? According to the survey, which permitted multiple answers to the question, 92% are saving for retirement, 46% hold mutual funds to reduce taxable income, 46% are saving for emergencies, and 22% use mutual funds to save for education. For 64% of these savers, more than half of their financial assets are mutual funds.

U.S. mutual funds grew to $16.3 trillion in 2016. Domestic and international equity funds compose 52% of the total industry assets, bond funds 22%, money market funds 17%, and hybrid funds 8%.

© 2017 M.A. Co. All rights reserved.