When do federal estate and gift taxes kick in?

DEAR GARDEN STATE TRUST COMPANY,  
WHAT’S THE STORY WITH ESTATE AND GIFT TAXES?  DO I NEED TO WORRY?
—AWARE OF TRANSFER TAXES

Dear “Aware”, 

Most people don’t need to worry about estate and gift taxes, but for those who do, it can be a very important worry indeed.

First, you have the annual exclusion from the gift tax, which is $14,000. That means you can give up to $14,000 to each of as many people as you wish, and you need not even file a gift tax return. Married couples can “split” their gifts, so that as a couple their annual exclusion is $28,000.

Second, the direct payment of qualified tuition or medical expenses is not considered a taxable gift at all.

Third, the exemption from federal estate taxes is $5.25 million in 2013, $5.34 million in 2014. Married couples can double this number as well.

Fourth, that same exemption is available for gifts that exceed the $14,000 annual exclusion.  Although gifts up to $5.34 million are taxable, no tax will be payable until that threshold is crossed.

Finally, the available estate tax exemption is reduced to the extent that the lifetime gift tax exemption was used.  If a donor made lifetime taxable gifts of, say, $2 million, his or her 2014 federal estate tax exemption is just $3.34 million. This figure is adjusted every year for inflation.

Don’t overlook state death taxes (inheritance tax, estate tax, or both). Although most states have abandoned their death taxes, those that retain them generally impose them at much lower wealth levels.  Even if you live in a state without a death tax, you could be affected if you own real property in a state that continues to impose one.

 

Sincerely,

Garden State Trust Company

What is a Corporate Fiduciary?

DEAR GARDEN STATE TRUST COMPANY,
I UNDERSTAND THAT YOU ARE A “CORPORATE FIDUCIARY.”  WHAT IS THAT EXACTLY?  AREN’T YOU JUST A DIFFERENT FLAVOR OF STOCKBROKER OR FINANCIAL PLANNER?
—SHOPPING FOR ADVICE 

Dear “Shopping”,

“Fiduciary” is a legal term that describes the duties that one party owes to another in a business relationship.  A fiduciary duty is the highest duty of care in the law and has been a standard element of trust practice for decades.  There are many elements to fiduciary duties, but perhaps the most important is the duty of loyalty, to put the interests of the client ahead of one’s own interests.

A “corporate fiduciary” is a business entity, such as ours, that has been granted permission by the state to act in a fiduciary capacity.  We can serve as trustee, and we can settle estates.  In this capacity, we are subject to a wide range of audit controls and government regulatory supervision.

Most stockbrokers are not fiduciaries, and many financial planners have resisted moves to upgrade their client relationships to fiduciary status.  Thus, we are different from these sorts of advisors in a way that can have legal consequences.

One example of this difference: We are compensated for our services with a fee that varies with the size of the account under management.  We do not earn more based upon the transactions that we generate or the type of service that we recommend.  Our interests are, therefore, always aligned with the interests of our clients.  We prosper when they do.

When we act as trustee, our investment decisions must be responsive to the needs of both current and future beneficiaries.  This is not an ordinary perspective to have for portfolio management.  Our approach cannot be risk free, but it does tend to be risk averse.

Sincerely,

Garden State Trust Company

Is there anything I can do to avoid an RMD?

DEAR GARDEN STATE TRUST COMPANY,
I TURNED 70 ½ THIS YEAR, SO I HAVE TO START TAKING REQUIRED MINIMUM DISTRIBUTIONS (RMDS) FROM MY IRAS.  I DON’T WANT OR NEED THESE DISTRIBUTIONS, AND I’M CONCERNED THAT THEY MIGHT PUSH ME INTO A HIGHER TAX BRACKET, OR EVEN AFFECT THE TAXES ON MY SOCIAL SECURITY.  IS THERE ANYTHING I CAN DO TO AVOID AN RMD?
—AFFLUEN T RETIREE

Dear “Affluen T”,

You can’t duck RMDs, but you can give them away, within limits.  Those who are 70 ½ and older are permitted to transfer up to $100,000 from their IRAs to the charity of their choice each year. You can transfer less, of course—for example, you can arrange for your RMD to be paid directly to a charity instead of to you.

You don’t get a tax deduction for doing this, you get something better—the amount transferred is not included in your income at all, even though the RMD rule has been satisfied. Thus, the RMD won’t interact with your tax return in any way.

This popular tax strategy is slated to expire at the end of this year.  Although it’s been renewed with regularity, it remains something of a political football.

Speak your tax advisor before making any final decisions.

Sincerely,

Garden State Trust Company

How much income can I expect from a trust?

DEAR GARDEN STATE TRUST COMPANY,
HOW MUCH INCOME CAN I EXPECT FROM A LIVING TRUST?  WHAT ABOUT A TESTAMENTARY TRUST, WOULD THAT BE DIFFERENT?
—PROSPECTIVE BENEFICIARY

Dear “Prospective”,

The very low interest rates in 2013 have meant that many investors have not been satisfied with their portfolio income.  Everyone would like more income, but without more risk, which leads to the question about trust income.

Using a trust doesn’t necessarily change the amount of income that a portfolio generates.  Should you place a securities portfolio into a revocable living trust, there would be essentially no immediate change in your investment income.

In a traditional testamentary trust, “income” means collected interest and dividend payments.  With that approach, as interest rates and dividend yields rise and fall, income changes with them.  Changes in asset values—growth in stock prices, for example—accrue to the remainder beneficiaries when the trust terminates.

Some testamentary trusts today take alternative approaches, defining income as a percentage of trust assets, or as a fixed dollar amount every year, or as a dollar amount adjusted for inflation—there are many alternatives to consider.   However, if a fixed percentage is used to determine distributions, and the income falls short, the trustee will have to invade the principal to make up the difference.

Sincerely,

Garden State Trust Company