Charitable IRA Gifts

Dear Garden State Trust:

I’ve heard of something called a “charitable IRA rollover.” What is that?

—Generous But Prudent

Dear Generous:

Those who are older than 70½ are permitted to arrange for a tax-free transfer of up to $100,000 per year from their IRA to the charity of their choice. This is the technique you are referring to, although strictly speaking it isn’t a “rollover.”

The other thing that those of that age must do is take required minimum distributions (RMDs) each year from their IRAs. These two things can go together. A direct transfer to a charity from an IRA counts toward the RMD for that year. Some retirees simply direct their IRA custodian to send the RMD to a charity, without worrying too much about the amount.

There’s no tax deduction when one does this, because there is also no inclusion of the distribution in taxable income, which would be the usual case with an RMD. Avoiding income inclusion is more valuable than getting a tax deduction. For example, it may avoid additional income taxes on Social Security benefits that otherwise could be triggered by an RMD.

This year many fewer taxpayers will be itemizing, thanks to the doubled standard deduction. For these taxpayers, arranging for a transfer to charity from an IRA will have better tax results than simply making a gift of cash in the same amount.

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

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

IRAs

Dear Garden State Trust:

Which is better, the traditional IRA or the Roth IRA?

—Future Retiree

Dear Future:

There is no simple answer to your question, unfortunately.  The traditional IRA offers an immediate income adjustment and savings in federal and state income taxes.  Taxpayers who are short on cash may need the deduction to be able to make a full $5,500 IRA contribution ($6,500 for those 50 and older).  The income adjustment also may affect eligibility for other tax credits.

The downside for the traditional IRA is that all retirement withdrawals are fully taxable as ordinary income, even long-term capital gains.  If one is in a lower tax bracket in retirement, this may not be a concern, but future tax brackets are unpredictable.  What’s more, distributions from a traditional IRA are required once one reaches age 70½. Taxable IRA distributions also may increase the taxes on one’s Social Security benefits and one’s Medicare premiums.

These potential tax traps are avoided with the Roth IRA, as all distributions will be fully tax free after age 59½, provided only that the account has existed for five years.  There are no required minimum distributions.  A Roth IRA may be an especially good choice for a bequest, as tax-free distributions may be spread over the beneficiary’s lifetime. (Estate taxes will be due on the Roth IRA in very large estates.)  The difficulty with the Roth IRA is that the hit to one’s cash flow is more severe without the current deduction.

These tax considerations, although significant, are less important than making a full contribution to one or the other IRA form early in one’s career.  The more time that one is invested in the market, the better the odds of having a financially secure retirement.

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

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

Stock Markets

Dear Garden State Trust:

How about that stock market? Can it last?

—Happy Investor

Dear Happy:

Higher stock prices are driven by two factors: increasing earnings, and increasing investor speculation. The good news for investors is that the stock market records set in August were grounded upon increased earnings and a strongly growing economy. We do not seem to be in a bubble.

Second-quarter GDP growth was revised upward, to a strong 4.2%, by the Commerce Department. The third quarter growth looks likely to be over 4% as well. Second-quarter after-tax profits rose 16.1%, the largest year-over-year gain in six years.

Sales of the S&P 500 companies grew by 9.5% in the second quarter, leading to a 24.8% increase in earnings. A strong economy translates to increasing consumer confidence. The Conference Board reported in August that its consumer confidence index reached 133.4, the highest reading since October 2000.

Interestingly, as a result of the booming economy federal tax revenue has gone up, not down, following enactment of the Tax Cuts and Jobs Act last year. The Congressional Budget Office reports that income and payroll tax collections rose 5% through the first nine months of this fiscal year, a whopping $105 billion. This more than offset the decline in corporate tax collections of $66 billion. Overall tax receipts are up 1%.

However, this torrid rate of growth is expected to slow. The current bull market is a long one by historical standards. Eternal vigilance is the price of owning a stock portfolio.

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

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

Longevity

Dear Garden State Trust:

I’m turning 65 this year and thinking about retirement. How long should I plan for?

—Anxious Pre-Retiree

Dear Anxious:

According to the latest data from the National Vital Statistics Reports (August 2017, reporting on 2014 experience), a male age 65 should expect to live 18 more years (to age 83) and a female 20.6 years (to age 85.6). Half of 65-year-olds will die sooner, half later.

That tells us nothing about you, of course. How’s your health? Your family history? You’ll want to take these into account, and you probably should plan for longer than you expect to live.

Here’s another way to look at the numbers from that report. For every 100,000 men, how many reach age 85? 35,518 men do. For every 100,000 women, 49,225 reach age 65. Mortality increases precipitously after that, as shown in the table below.

At AgeMenWomen
7564,06675,495
8051,40764,616
8535,51849,225
9018,649
30,228
956,21412,697
1001,0772,974

Source: National Vital Statistics Report, Volume 66 Number 4, August 14, 2017

Does that help answer your question?

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.

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.

Are the Tax Cuts Working?

Dear Garden State Trust:

Are the tax cuts enacted last December having the hoped-for impact? How is the economy doing?

—Eternal Optimist

Dear Eternal:

Too soon to say, but we have a number of good portents. Gross Domestic Product was up 2.2% in the first quarter. In the last four years, the first quarter of the year has tended to be disappointing, with an average growth of just 1%, so 2.2% is quite strong by comparison.

Even better, the profits of the companies in the S&P 500 were up a remarkable 26.3% in the same period. The strong global economy, a decline in the value of the dollar, and the cut in the corporate tax rate all contributed to this good performance. However, another contributor was the record buyback of $178 billion in shares. Because profits are reported on a per-share basis, the buybacks create an artificial lift in the percentages.

A broader measure of corporate profits is created by the Commerce Department. This figure excludes foreign operations, and it includes all U.S. companies, privately as well as publicly held firms. The Commerce Department also includes any one-time charges to earnings that are usually excluded from the S&P 500 numbers. The government measured profit growth at just 0.1% in the first quarter. What’s more, were it not for the reduction in the corporate tax rate, profits would have fallen by 6% instead of growing.

That shows that the benefits of the tax cuts are flowing to businesses as intended. Whether that will translate into sustained above-average economic growth is still an open question.

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

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

“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.

 

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.

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.

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.