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.

Advisor Fees

DEAR GARDEN STATE TRUST COMPANY:
WHAT’S THE DIFFERENCE BETWEEN A “FEE-ONLY” INVESTMENT ADVISOR AND A “FEE-BASED” ADVISOR?  THEY SOUND ABOUT THE SAME TO ME.  WHICH TERM APPLIES TO YOU?
 —GRAMMARIAN

Dear “Grammarian”,

An investment advisor has two potential sources of income.  The advisor can earn commissions from the sale of securities to his or her clients, and he or she can charge the clients a fee for the services provided.  A “fee-only” advisor does not accept commissions.  In theory, this removes any chance for a conflict of interest in the advice offered by the advisor. He or she has no financial incentive to recommend one product over another. A “fee-based” advisor, on the other hand, is free to accept commissions as well as fees paid directly by clients.  Given the dual sources of income, the initial cost of working with a fee-based advisor may be lower.

The trust industry always has charged only fees for services.  The fees are expressed as a percentage of the assets under management, with lower percentages applying to larger accounts. If you are interested, I would be pleased to provide you with our fee schedule.

Travel Trusts

DEAR GARDEN STATE TRUST COMPANY:
  I IMMIGRATED TO THIS COUNTRY FROM NORWAY AS A CHILD, AND I HAVE RELATIVES THERE WITH WHOM I REMAIN CLOSE.  ONE OF MY CHILDREN LIVES IN OSLO NOW AND MAY BE SETTLING THERE PERMANENTLY. FOR THE PAST SEVERAL YEARS, I’VE HELPED FUND SOME FAMILY REUNIONS.  THE GET-TOGETHERS ALTERNATE BETWEEN THE U.S. AND OSLO, AND I HELP PLAN THE TRIPS AND SIDE TOURS.  I ALSO COVER THE COST OF AIRFARE. IT’S BEEN A GREAT THING FOR CEMENTING THE BONDS OF THE EXTENDED FAMILY.  WHAT I’M WONDERING IS, CAN I ADD SOMETHING TO MY WILL TO KEEP THIS TRADITION GOING?
—FAMILY TRAVELER

Dear “Family Traveler”,

I suggest that you consider an irrevocable trust in your will, with the express purpose of providing financial support for travel for your heirs.  The trust will likely include other provisions related to the financial security of your heirs.  The trustee can be given some discretion in these matters, but only within the parameters that you and your attorney set out in the trust agreement.

If you choose a corporate fiduciary, such as us, your trust will have the additional benefit of professional investment management.  We are well-versed in all aspects of fulfilling fiduciary duties.

Social network investing?

DEAR GARDEN STATE TRUST COMPANY:
  I’VE HEARD THAT SOON WE’LL BE SEEING LEGITIMATE INVESTMENT OFFERINGS ON LINKEDIN AND FACEBOOK.  IS THAT TRUE?
—SOCIAL NETWORK SKEPTIC

Dear “Social”,

Maybe. The rules for advertising investment solicitations were overhauled in the Jumpstart Our Business Startups Act of 2012.  The goal was to make it easier for young companies to raise capital.  In theory, yes, companies now can use social media in their efforts to attract investment capital.

In practice, few companies have taken the plunge as yet.  The SEC remains concerned about fraud, and issued a 180-page memo last year proposing additional requirements to be met by such investor outreach. Perhaps most significantly, these investments are not open to everyone. Investors need to have $1 million in liquid assets or $200,000 in annual income, and the companies seeking funding need to take reasonable steps to learn these details about their investors.

Still, it is worth remembering, should you see an investment offering on social media, that it may not be just a scam after all.

Split-Interest Charitable Trusts

DEAR GARDEN STATE TRUST COMPANY,
 I’M GOING TO MAKE A MAJOR CHARITABLE GIFT TO MY ALMA MATER, BUT I ALSO NEED TO PROVIDE FOR MY HEIRS. HOW CAN I BALANCE THESE COMPETING INTERESTS?
—BUDDING PHILANTHROPIST

Dear “Budding”,

Explore a split-interest charitable trust.  Such a trust has both private and charitable beneficiaries (hence, the “split”). You contribute assets to an irrevocable trust, either for a set number of years, a beneficiary’s lifetime, or the lifetimes of more than one beneficiary.  The private beneficiaries receive trust distributions that are defined either as a specific dollar amount annually (an “annuity trust”) or a specified percentage of the trust’s value, determined annually (a “unitrust”).  In periods of inflation, growth in asset values will lead to growing distributions to beneficiaries. In periods of economic uncertainty, on the other hand, the annuity trust alternative gives beneficiaries the peace of mind of a set number of dollars coming in, regardless of what the markets do.

When the trust terminates, the assets pass to a designated charity, your alma mater.  This facet of the plan gives rise to income, gift and estate tax charitable deductions, stretching the financial protection of your resources.  A charitable remainder trust may be established during life or in your will.  It can be especially appropriate if you wish to diversify a portfolio with highly appreciated assets.

Be sure to consult with your tax advisors before making any irrevocable decisions.