Retirement readiness

Dear Garden State Trust Company:

How much money must I have in order to be able to retire?  Is $1 million enough?—Peak Earning Years

Dear Peak:

The better question is: How much income will you need during your retirement?  If you will have a pension and Social Security checks coming in, $1 million might easily be enough money to make you financially independent.  If not, you might be surprised at how quickly you can run through your nest egg. The adequacy of your retirement fund will depend upon your expenses, your health and your longevity, as much as upon your investment returns.

Instead of focusing on the size of your portfolio, consider how much income that it generates, ignoring the volatility of asset values.  These are particularly difficult economic times in which to generate reliable income, given our unprecedented period of low interest rates.  Bonds are important for providing steady returns, but the interest payments that they generate just aren’t as generous as most retirees expected them to be. Some investors are looking to dividends instead of interest to meet their income goals. Because some dividends may be increased over time, they may also add an element of inflation protection to the portfolio.

The only rule of thumb that seems to work for everyone is that “you just can’t have too much money for retirement.”

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

© 2016 M.A. Co.  All rights reserved.

Inherited IRAs

DEAR GARDEN STATE TRUST COMPANY:

I’ve inherited a substantial IRA from my parent. What are my choices?  Can I roll over the money into my own IRA? What I’d really like to do is convert the inherited IRA to a Roth IRA.

—FORTUNATE HEIR

 

DEAR FORTUNATE:

Those approaches are not available to you.  Because you are not the spouse of the decedent, you only are permitted to arrange a trustee-to-trustee transfer of the money to another IRA in the name of the decedent and yourself.  A death triggers the process of exposure of the IRA accumulation to taxation. Although that taxation can be extended over your actuarial lifetime, it can’t be delayed beyond that, which is why the decedent’s name always must appear on the IRA.

If you attempt to convert an inherited IRA into a Roth IRA, the conversion will be treated as a complete and taxable distribution of the IRA followed by an excess contribution to the Roth IRA.  Similarly, if you attempt a trustee-to-trustee transfer from the inherited IRA to one in your own name, it will be treated as a complete distribution followed by a regular contribution to your IRA (not a rollover contribution).

 

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

© 2016 M.A. Co. All rights reserved.

 

Living Trusts

 

DEAR GARDEN STATE TRUST COMPANY:

My parents are retired, living in another state.  They have a sizeable investment portfolio and are financially comfortable. However, as they are getting older, they are having trouble keeping up with their paperwork.  Last year they were late in making tax payments, very unlike them.  I would help them, but I just live too far away.  Is there a service that a bank offers retirees to help in managing their money? Does it cost a lot?

—WORRIED CHILD

DEAR WORRIED:

Your parents should look into establishing a living trust.

They would transfer their investment assets into the trust, which then would be managed by a trust department or trust division, such as us.  We would remit income to them as needed, file tax returns, and pay bills if they so desired. We could continue to provide this financial service even if one of your parents became incapacitated.  The trust could continue to operate through both of their lives, and it would avoid probate at their deaths.

The annual fees for our trust service are determined as a percentage of the size of the trust.  We do not earn commissions on sales, and we are not paid for generating transactions.  Our fees grow only if the value of the trust grows.

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

 

(March 2016)

© 2016 M.A. Co. All rights reserved.

I need protection for my 401(k) distribution

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 accepting 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 plan, 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.

(February 2016)
© 2016 M.A. Co. All rights reserved.

Values-based estate planning

DEAR GARDEN STATE TRUST COMPANY:

My religion is very important to me, and I have tried to instill that faith in my children and grandchildren. However, in today’s secular world that is no easy matter, and I worry that I haven’t succeeded. My will creates a trust for my grandchildren. Would it be possible to include a clause providing an inheritance only for those who marry within our religion? —KEEPER OF THE FAITH

DEAR KEEPER:  You are in tricky territory with such a bequest. As a rule, the courts will not enforce bequests that interfere with marriage. For example, say that you hated one particular son-in-law. You might have good reasons; he might be a real louse. But if your will conditioned a bequest upon divorcing him, that condition would most likely be unenforceable. You could, however, take steps to see that he never has a chance to inherit your money. For example, instead of leaving a bequest to your daughter, you could make her the beneficiary of a trust, as you have done for your grandchildren. The trust could permit distributions only to her, not to the lousy son-in-law.

On the other hand, in a 2009 Illinois case, a trust stipulated that in order to inherit, the grandchildren would either have to marry within the grandparents’ faith, or the spouse would have to convert within one year of the marriage.  One grandchild met the condition; four others did not. That clause was upheld.

However, the long and bitter legal fight may have left permanent emotional scars on the family. One wonders whether this was truly the outcome that the grandparents wanted

Sincerely,
Garden State Trust Company

 

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

 

Federal estate tax exemption

DEAR GARDEN STATE TRUST COMPANY:

My estate is about $5 million—do I have to worry about federal estate taxes?

—AFFLUENT, NOT RICH

DEAR AFFLUENT:

You are very close to the boundary for exposure to the federal estate tax. The exemption for 2016 has been increased to $5.45 million, which would seem to let you off the hook.  However, how accurate is your estimate of your estate?  Have you included the full value of your home and other real estate? Do you own interests in a closely held business that might be worth more than you realize? Do you own any fine art?  Values in some parts of the art market have boomed recently.  Getting a precise fix on the value of an estate is not an easy matter. What’s more, if your assets grow in value faster than inflation, you could easily find yourself in taxable territory.

On the other hand, are you married?  If so, to the extent that your property passes to your surviving spouse, federal estate taxation will be deferred until the survivor’s death, no matter how large your estate is when you die. What’s more, your surviving spouse may inherit any federal estate tax exemption that goes unused by your estate.  That means your spouse won’t have to worry about federal estate taxes unless the estate grows to over $10 million (plus accumulated inflation adjustments).

However, there is one more point to consider—state death taxes (estate taxes, inheritance taxes, or both).  Do you live in a state (or own property in a state) that has “uncoupled” from the federal estate tax regime?  A few states impose their death taxes on much smaller estates than does the federal government. If you live in one of these states, you should see an estate planner promptly to explore your options.

Sincerely,
Garden State Trust Company

Donor-advised funds

Dear Garden State Trust Company,

Tell me about donor-advised funds. What are the advantages and disadvantages?

—BUDDING PHILANTHROPIST

DEAR BUDDING:

A donor-advised fund provides a mechanism for you to dedicate significant resources to charity, securing an immediate tax deduction, while leaving to a future date the identification of the specific charity for your philanthropy. Funds contributed to a donor-advised fund grow tax free. All contributions are irrevocable.

The donor-advised fund is sometimes considered as an alternative to a private family foundation. There is less regulatory overhead for the donor with the fund approach and no requirement that 5% of the assets be distributed each year. As a practical matter, however, about 20% of fund assets have been distributed each year, according to the National Philanthropic Trust.

Appreciated stocks are a good choice for contribution to a donor-advised fund, because the tax deduction will be based upon the fair market value of the securities on the date of contribution. Thus, the donor avoids capital gains tax on the built-in gain, yet gets a full charitable deduction.

Donor-advised funds have boomed in popularity in recent years. Assets in these funds nearly doubled from 2008 though 2013, reaching $53.74 billion, according to wealthmanagement.com. There are an estimated 217,000 donor-advised funds, up 34% over the past seven years.

Sincerely,
Garden State Trust Company

Saving on Income Tax

DEAR GARDEN STATE TRUST COMPANY:

Can I use a trust to save on my income taxes?

—PINCHING MY PENNIES

 

DEAR PINCHING:

As a general rule, trusts have limited potential for creating on income tax savings, so the general answer for family trusts is no. If you hear the phrase “tax-saving trust,” the reference is more likely to be to death taxes, not income taxes. For example, if a married couple uses a “two-trust estate plan,” they may be able to double the amount that stays within the family free of federal estate tax. Trusts typically distribute their income to beneficiaries, who pay income taxes on the distributions. If the trust retains income, it must pay fiduciary income taxes.

However, there are important income tax savings available with charitable trusts, so if you are philanthropically minded, this could be a good avenue to explore. Such a trust must be irrevocable in order to achieve tax benefits, which means that the commitment to charity will be permanent.

Sincerely,

Garden State Trust Company

Charitable trusts

Dear Garden State Trust Company,

What is a charitable remainder trust?

—BUDDING PHILANTHROPIST

DEAR BUDDING:

A charitable remainder trust is a tool for dividing your wealth between private and philanthropic beneficiaries.  Private persons—yourself, you and your spouse, other family members, there are no restrictions—receive the income from the trust. The trust may last for a set number of years, or for the life of an income beneficiary, or for the joint lives of more than one beneficiary. When the trust ends, the charity receives all the remaining assets. Continue reading “Charitable trusts”

QLACs

DEAR GARDEN STATE TRUST COMPANY:
WHAT THE HECK IS A QLAC?  IS THIS SOMETHING I NEED TO CONSIDER?
 —EXPECTING RETIREMENT

Dear “Expecting”,

A QLAC is a “Qualified Longevity Annuity Contract.”  The idea has been in the financial press because the IRS finalized regulations on these instruments in July.

A QLAC resolves two potential problems of retirement financial management.  The first is the worry about running out of money during a long life.  The second concern is taking required minimum distributions from IRAs and other qualified retirement accounts upon reaching age 70½, having that nest egg diminished by taxation.  For example, a retiree at age 65 may feel that she has enough retirement income and resources to last until age 80, when she would like to bump that income up.  Given the choice, she’d like to defer IRA distributions until then.

Under the IRS Regulations, if this retiree has a substantial IRA, she could spend up to $125,000 (or 25% of the IRA, if that is less) on a QLAC to begin making payments when she reaches 80.  The Regs. provide that payments must begin no later than age 85.  When this retiree turns 70½, the amounts spent on the QLAC will not be counted in determining the required minimum distributions from the balance of her IRA.

QLACs must be fixed annuities, not variable or equity-indexed annuities.  They may not provide for a cash surrender value or a similar feature. They are permitted to offer a return of premium, should the annuitant die before collecting an amount equal to the premium paid.

The QLAC is a brand new financial product, with which no one has much experience.  It may be appropriate in certain circumstances, depending upon the client’s wealth levels and life expectancy.  As with all annuities, the longer one lives the more financial benefit one derives.