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.

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.

Continuing Low Interest Rates

Dear Garden State Trust Company:

I am so tired of these low interest rates. Can we expect another uptick sometime soon? Earlier this year there was talk of one more bump before the end of the year as I recall.

—CAUTIOUS SAVER

Dear Cautious:

I am afraid that you may have to get used to disappointment. Your memory is correct; many observers expected another interest rate increase in the second half of this year. New developments have made that unlikely, but not impossible.

The economy has been doing better, and inflation has lagged. In fact, inflation is down all around the world, raising the real possibility that the linkage between growing economies and rising prices has been broken. In July the U.S. consumer price inflation was just 1.7%, below the Fed’s target, even as the economy grew at an annualized 3% in the second quarter of the year.

A more immediate concern is recovery from hurricane damage. It will take some months to assess fully the situation and get rebuilding under way. An interest rate hike during that time would be most unwelcome, and seems unlikely.

Finally, there is the practical problem of staffing the seven-member Federal Reserve Board. There are three vacancies at the moment, Vice Chairman Stanley Fischer announced that he is stepping down early, in mid-October, and Fed Chairwoman Yellen’s term of office expires in early February. “Don’t rock the boat” may be the easier decision for the Fed to make while awaiting the appointment of new members.

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

© 2017 M.A. Co. All rights reserved.

Debts and Death

Dear Garden State Trust Company:

What happens to my debts when I die?

—STILL PAYING THE MORTGAGE

Dear Still:

According to a study by the credit bureau Experion, released in December 2016, some 73% of consumers have debts when they die, including mortgage debt.  Some 68% have credit card debt; 37% have mortgage debt; 25% have car loans; 12% have personal loans, and 6% are still paying off student loans.  The average total debt at death for these consumers was $61,554.

That does not mean all these people died virtually bankrupt.  The study does not include an assessment of how large the estates were. Most likely, most estates were large enough to retire the debts.

At your death, your debts pass to your estate, just as your assets do. Your executor will be responsible for paying off those debts. All debts and taxes must be paid before any inheritance is distributed to your heirs.  

If there are not enough cash or life insurance proceeds in the estate to meet the debt and tax obligations, some assets may have to be sold to raise the money. This could include the family home.  If there is a mortgage on the house, the heirs may be able to take over the responsibility for paying the mortgage, to avoid a forced sale.

If you should die without any assets at all, your debts die with you.  But try not to let that happen.

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

© 2017 M.A. Co.  All rights reserved.

Tapping Retirement Funds to Pay for College

Dear Garden State Trust Company:  

Should I withdraw or borrow from my 401(k) plan to help pay for my child’s college expenses?—PUZZLED ON FUNDING

Dear Puzzled: 

As a general rule, impairing your retirement savings to meet current spending needs is not a good idea, even for higher education expenses.  There are other sources of funds for education needs—in contrast, in retirement, when one is on a fixed income, borrowing to meet expenses is problematic. 

What you take out of your plan now can be hard to replace later.  It’s been estimated that it can take six to ten years to fully restore a retirement account that has been tapped to meet four years of college expenses.  In part, that’s because one misses out on the compounding of investment income during the period.  For longer time frames, the stock market has produced higher total returns than the interest rates on student loans.  The other part is that it can be hard to get back into the saving habit.

The better approach is to save for higher education early, separately from retirement savings, so as to put time on your side and minimize the need for loans when the college years arrive.

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

© 2017 M.A. Co.  All rights reserved.

401(k) Protection Programs

Dear Garden State Trust Company:

When I retire in about a year, I’m expecting a six-figure distribution from my employer’s 401(k) plan.  The success of my retirement turns on what I do with this money, and I’m more than a little unsettled by the prospect.  What should I do to keep my all my options open?

—LOOKING AHEAD TO FINANCIAL INDEPENDENCE

Dear Looking: 

I have two words for you: IRA Rollover.  With this arrangement, you can continue the tax deferral that your 401(k) account has enjoyed so far.  Be sure that you use a “trustee-to-trustee” transfer of the funds to avoid the 20% tax withholding that otherwise would apply to your distribution.

Will your distribution include shares of stock in your employer?  If so, you should consider not rolling those shares over, but accept them for your taxable portfolio.  Income taxes on “net unrealized appreciation” in those securities may be deferred in this manner.  Your accountant can give you more details.

You’ll also need an investment plan for your retirement money.  When you undertake this, consider your taxable and tax-deferred funds as part of one large portfolio.  The plan that you or your investment advisors come up with needs to take all of your resources into account, as well as your retirement income needs.  You are wise to be looking into these questions a year before you retire.  We can help you with all of these questions if you wish.

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

© 2017 M.A. Co.  All rights reserved.

Retirement Tax Trap

Dear Garden State Trust Company: 

My wife and I have been spending our winters in our Florida home for several years.  What steps do I have to take to change my residency to Florida, so I can stop paying income taxes in my home state?  —FLYING THE COOP

Dear Flying: 

This is a complicated problem, with some angles that you may have overlooked.

My friend Jerry and his wife, Liz, successfully became Florida residents.  About five years later, they decided to sell their lifelong home here.  They had paid $30,000 for it 35 years ago and were told that it now was worth $400,000.  They were excited by the prospective windfall.  Then their accountant gave them the bad news.

Because Jerry and Liz were now Florida residents, their northern home was no longer their principal residence.  Accordingly, the sale of that home would not be eligible for the exclusion from taxes on the capital gain for the sale of a principal residence (up to $500,000 for married couples).  The entire $370,000 profit would be taxed, and the bill might easily come to $100,000.

They immediately took the home off the market.

You should see a lawyer before taking the step of formally changing your residency.

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

(March 2017)

© 2017 M.A. Co.  All rights reserved.

DJIA 20000

Dear Garden State Trust Company: 

How should the fact that the Dow Jones Industrial Average crossed the 20000 barrier affect my investment strategy? —Numbers Maven

Dear Numbers: 

Passing a stock index milestone is not a signal to buy or sell.  However, it does focus attention on the market, and it may cause some investors to evaluate their portfolio.  There can be a strong temptation to “take some money off the table.”

How close are you to retirement?  How much risk are you willing to assume?  Those answers are better clues to making an investment decision that allows you to sleep well at night.

This could be a time for portfolio rebalancing, if you haven’t made this assessment recently.  If your asset allocation target was 60% stocks, 40% bonds, you may find that the stock portion has now grown to 70%.  That means your portfolio is now riskier than it used to be.  If that makes you uncomfortable, you need to sell some stocks and invest in bonds, to keep your allocation steady.

On the other hand, bonds have risks of their own, as interest rates are likely to rise in the coming years, to return to more normal levels.  That will push down the value of previously issued bonds.  What’s more, if you share in the optimism about the economy this might not be the right time to reduce your exposure to growth.

If you might benefit from a second opinion on your investment strategies or the composition of your portfolio, we would be pleased to meet with you to discuss your situation.  Investment management throughout market cycles is a core element of our daily business. We will be pleased to share our expertise with you.

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

(February 2017)

© 2017 M.A. Co.  All rights reserved.

Companion animal planning

Dear Garden State Trust Company: 

Can I provide something for my pets in my will?  —THOUGHTFUL ANIMAL LOVER

Dear Thoughtful:

More and more states are changing their laws to permit pet owners to provide lifetime financial support for their companion animals.  About 40 states provide for simple “statutory pet trusts” as a method for implementing such wishes.

Alternatively, you may want to explore having more specific instructions identifying the caregiver for your pets, the standard of living to be provided, the schedule of vet visits and the plan for financial distributions.

These are matters that you should explore with the attorney who handles your estate planning.  Don’t feel embarrassed to bring up the subject of planning for your pets.  As the Leona Helmsley case from some years ago shows, estate planning for pets is going mainstream.

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