Elusive Treasures

St. Patrick’s day brings to mind the Irish legend of the pot of gold guarded by a leprechaun at the end of the rainbow. The pot of gold is simply unreachable because its location changes as soon as the treasure hunter’s location changes to investigate. The refracted light on water droplets that creates the rainbow effect is replaced with a different rainbow effect with even a single step towards it.

Perhaps there is some gold at the end of the proverbial rainbow, just waiting to be found. In the style of uncovering and cracking a code in Dan Brown’s novels, here are two interesting treasure hunts that Americans are undertaking to find gold:

  1. The Beale Cipher. There was a pamphlet sold in 1885 containing three ciphers, with one decoded that described the treasure, including gold coins buried in Virginia (estimated value of $43 million). The other two ciphers described the location and heirs for the treasure that was allegedly buried in 1820. Many attempts have been made to break the cipher, but none with recognized success to date. Several books and TV shows have mentioned the topic. Want to try to crack the code? It can be found on Wikipedia here.

Perhaps it’s real, or perhaps a ploy to sell pamphlets to eager treasure hunters.

  1. The Fenn Treasure. Noted millionaire author Forrest Fenn allegedly has hidden a treasure box of gold coins in the Rocky Mountains worth over $1 million, with the clues to find it buried in his book, The Thrill Of The Chase. The mountains can be dangerous, and Fenn has reportedly urged caution upon seekers. He suggested that the treasure is not hidden in a dangerous place, because it must be somewhere an 80-year-old man can access. Nevertheless, four hopefuls have lost their lives since the book was published, as they have been identified by authorities to be seekers of Fenn’s treasure.

Perhaps it’s real, or perhaps a ploy to sell books to eager treasure hunters.

At Garden State Trust Company, we’ll stick with focusing on a reasoned and conservative approach to building and preserving wealth for our clients rather than chasing rainbows or buried treasure.

Happy St. Patrick’s Day!

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.

Think Hard Before Tapping Your 401(k) Balance

One of the features that make 401(k) plans so attractive is that your money is not completely out of reach should an emergency need arise. Most plans allow for loans that are completely tax free if repaid as agreed. (Interest payments will be required, but they will be credited to the account.)  In a major emergency, a hardship withdrawal may be permitted, subject to income tax and, usually, a 10% penalty as well.

Borrow?

At first glance 401(k) loans may look particularly appealing. After all, you make those payments of principal and interest to yourself. However, if the interest that you pay is less than your borrowed dollars would have earned in the plan, you will slow the growth of your retirement nest egg. Moreover, you pay with after-tax dollars—replacing your original tax-deferred contributions.

Loans must be repaid in no more that five years. (Fifteen-year terms are allowed for loans to purchase a home.) If you leave your job before a loan is repaid, you’ll have to pay it off, or the open balance will be considered a premature withdrawal subject to income tax and penalty.

Potentially more serious yet, the burden of loan payments may make it impossible to continue your 401(k) contributions.

Withdraw?

It’s not easy to make a hardship withdrawal from your 401(k) account. You must show an “immediate and heavy financial need” for: medical expenses not covered by insurance; the purchase of a principal residence; postsecondary tuition; or to avoid eviction from or foreclosure on a principal residence. Many plans also include funeral and child support expenses. You also must show that you have no other resources reasonably available to meet these costs. This means that you first must fail to qualify for a plan loan. Once you take a hardship withdrawal, you will be barred from contributing to your plan for at least 12 months.

Pay now or pay later

To examine the effect of these options, let us compare the long-term results for Nancy Needful, a hypothetical 35-year old worker with a $30,000 balance in her 401(k) plan. Nancy contributes $150 monthly to her account. Faced with a sudden emergency need for $10,000, Nancy has three options.  Nancy can:

  1. Take a loan of $10,000 from her plan at an 8% interest rate and cease making contributions until the loan is repaid in five years, making monthly payments of $202.76, and resuming her $150 contribution after five years.
  2. Make a hardship withdrawal of $12,500 to provide the cash that she needs and cover her income tax and penalty, resuming her participation in the plan after one year.
  3. Obtain a $10,000 advance on an inheritance, continuing her participation in the plan.

Here’s how those choices will play out:

The long-range cost of raising $10,000
Reduced plan accumulations

 At age 55At age 60At age 65
Loan$199,384$310,352$470,186
Withdrawal$166,609$259,317$397,437
Advance$236,007$362,709$551,476

As we see, by taking the advance on her inheritance and continuing plan contributions, earning a moderate 8% return (high today, but average in the long term) on her investments, Nancy ends up at age 65 with 17.4% more than if she had taken the loan and fully 38.8% more than with the withdrawal.

The lesson: tapping into your retirement plan assets should be your very last resort.

© 2018 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2018, are not reflected in this article.

Lavish Gifts and Sudden Wealth

Some call Valentine’s Day an excuse to spend money, and with over 15 billion dollars spent each year for the last five years, it’s not very hard to see why.

According to the National Retail Federation, the top five gifts that were planned last year were: candy, greeting cards, an evening out, flowers, and jewelry. While jewelry ranks last on that list of five in percentage of givers (19%), it ranks #1 in terms of dollars spent ($4.4 billion). Click here to see more details from their survey.

What might the affluent or very wealthy be buying? We can’t know for sure, but here’s something in each of the categories that might fit the bill:

Candy: High-priced chocolate. At www.toakchocolate.com, one might be able to have a chocolate experience like no other since they trace the lineage of their cocoa trees back 5300 years to the first that were ever domesticated. Starting at $270 for a 50 gram bar.

Greeting Cards: Sending a card could be sending a piece of art: At www.GildedAgeGreetings.com, you can do just that and order a artisan’s hand-crafted Valentines day card for your loved one. The cards have limited editions, and start at $395.

An Evening out: Elton John announced last month that he’s retiring after his final 2018-19 tour. Unfortunately none of the venues are in NJ, but one could take a sweetheart to hear Sir Elton sing “can you feel the love tonight” at Madison Square Garden in October. Ticket price at this writing was starting at $343 per ticket.

Flowers: How about real roses that will last from one Valentine’s Day to the next? Called the “Eternity DE Venus™ – Square”, these real roses will last a whole year without watering or maintenance. A small square starts at $299, has 16 roses, and can be purchased online here: https://www.venusetfleur.com

Jewelry: Though not a Valentine’s Day gift, Edward McLean and his bride Evalyn bought “The Star of the East” as a wedding present. It is a 94.8-carat diamond, which cost $11.9 million.

Speaking of huge diamonds, last month the fifth largest diamond in the world was discovered in Lesotho. Analysts’ project it could be worth over $40 million.

Not surprisingly, finding a huge diamond isn’t the most common source of sudden or new wealth. Lump sum distribution of retirement benefits, insurance settlements, inheritance, or the sale of a business or investment real estate can create large sums of money for talented people who may not have experience with wealth management.

We can provide that experience and explain whether a trust could be useful.

Special Needs Planning 101: Why you should act NOW

“In 2015, U.S. health care costs were $3.2 trillion. That makes health care one of the country’s largest industries, equaling to 17.8% of gross domestic product (GDP). In comparison, health care costs were $27.2 billion in 1960, just 5% of GDP.” 1

“Advocacy group Autism Speaks reports that the cost of caring for a person with autism can run an estimated $1.4 million over the course of their lifetime.” 2

Unfortunately, caregivers of special needs children and adults know all too well the financial and emotional challenges they face now, and often dread the idea of trying to plan for when they’re no longer around. But taking the time to properly plan ahead for a child’s care in the future will help to alleviate some of the stress being felt currently.

First and foremost, visit with an estate planning attorney with extensive experience in the field of special needs planning. These are experts in a complex and dynamic field, in which the rules are frequently changing. For loved ones who may be eligible for governmental assistance programs such as Medicaid or SSI, that eligibility could be lost if the child receives a lump sum from a lawsuit or inheritance( For example, 2018 Medicaid eligibility requires that an applicant own no more than $2,000 in countable assets). Therefore, if one is planning to leave a relatively large sum of money  to a child who may currently be or may eventually be eligible for these types of “means-tested” benefits, it’s critical that the family speak with an attorney about creating a third party Special Needs Trust (also referred to as a Supplemental Benefits Trust). If anyone is planning on making smaller, periodic lifetime gifts to the disabled child, ask the attorney about the benefits of an ABLE account. Both of these vehicles are designed to receive assets on behalf of the beneficiary, allow those assets to be made available for supplemental needs or qualified disability expenses, and yet still allow the beneficiary to retain eligibility for certain governmental benefits. (More detailed articles to follow on both vehicles)

Next, speak with your financial advisor and/or insurance professional. If you will be creating a third party SNT during your lifetime or under your wills, it’s critical to ensure that beneficiary designations for any qualified plan (401(k), IRA, pension, annuity, insurance policy, etc) are made payable to the third party SNT and not to the disabled child outright. Failure to do so could result in disastrous consequences such as causing the child to become ineligible for valuable governmental benefit programs. For example, in the state of New Jersey, the loss of Medicaid eligibility can simultaneously result in the loss of housing and other services provided through the Division of Developmental Disabilities (DDD).

You will also want to speak to your tax advisor regarding any special needs planning you undertake. They will be able to provide necessary advice regarding the tax laws surrounding the gifting or bequeathing of various assets to a loved one. If you haven’t already done so, introduce all of your trusted advisors to one another to ensure that everyone is up to speed with the latest planning taking place. Failing to inform an advisor of a loved one’s special needs and any plans currently in place/in progress could not only unravel the plan, but cause devastating consequences like the one previously cited.

Lastly, if a third party SNT is created, it’s extremely important to consider the use of a professional trustee to manage the trust on behalf of a loved one. While many individuals’ first thought is to name a family member or friend as trustee, there are almost always significant drawbacks to that decision. SNTs are extremely complex, and the laws governing them are frequently changing. Individual family member/friend trustees almost never have the necessary time, experience, expertise, objectivity or energy to devote to the role of trustee, and they may not be able to serve when their role is called upon (death, disability, too busy, moved away). In nearly all circumstances, the use of a professional trustee is the better choice. (See previous article comparing family member trustees and professional trustees).

In this age of rising health care costs, it becomes even more critical to plan NOW for the care of loved ones with special needs. Assembling a team of professionals ahead of time will ensure peace of mind for the family, as they will know that there is a proper plan in place to care for their loved one when they are no longer able to do so.

For more information regarding Special Needs planning, and the role a professional trustee can serve in that planning, contact Sean Rice, CTFA, srice@gstrustco.com, (856)-281-1300

1 https://www.thebalance.com/causes-of-rising-healthcare-costs-4064878
2 https://blog.mint.com/planning/the-cost-of-raising-a-special-needs-child-0713

Timing Your Passing

It’s never a “good year” to die; however, if you live in New Jersey and made it to 2018 with a sizable estate, it’s possible your estate’s tax exposure just fell considerably.

The amount exempt from the federal estate and gift tax had been scheduled to rise to $5.6 million so as to take into account inflation since 2011. With the tax legislation signed on December 22nd 2017, the exemption doubles, to $11.2 million in 2018. Should both partners of a married couple die in 2018, the exemption potentially could shield $22.4 million. However, the higher exemption expires in 2026.

Additionally, New Jersey finished phasing out its state estate tax completely for deaths after January 1st 2018. We still have an inheritance tax, so that’s something to consider depending on the relationship the beneficiary or transferee has to the decedent.  For the most part, no tax will be due if the beneficiary will be a spouse, parent, grandparent, or child (relationship defined as Class A). However, brothers, sisters, and more distant transferees may face an inheritance tax.

Click here for a chart of what the tax rates will be for 2018.

Click here to see which class someone would belong to.

Consider gifting

A program of tax-free annual gifts (up to $15,000 per beneficiary in 2018, $30,000 per couple) can be an easy and effective method for reducing future estate taxes. For example, grandparents with three children and seven grandchildren can give up to $300,000 to their descendants every year, or $1.5 million in just five years.

If the transferees or beneficiary are not as closely related, so that they would fall into class C, or class D, a gifting strategy could help avoid the New Jersey inheritance tax, but only if the gifts are not “death-bed gifts”. Under New Jersey law, any gift made within three years of death is presumed made “in contemplation of death”, and would have the inheritance tax applied as a death-bed gift. So this strategy should be started early on.

Should you worry?

It’s been estimated that perhaps only 1,000 estates nationwide will pay the federal estate tax in 2018. However, the higher exemption expires in 2026, and some politicians already have announced an intention to reduce the exemption should they come into power.

Estate plans will need to remain flexible as tax laws change.

The greatest reason to have an estate plan is still to decrease hardship for the beneficiaries, reduce arguments and fights, and clarify your preferences for how your property should be distributed.

Our Professionals at Garden State Trust Company

We have experience dealing with the problems and pitfalls of families’ wealth management and transfer. Our staff is sensitive to the types of issues that could arise, and would be glad to speak with you about how to best achieve your goals.

Click here to schedule a meeting.

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.

End of Year Review

As we are nearing year-end it makes a lot of sense to review your current Will, especially if any of the following occurred during 2017 –

  • A named beneficiary died
  • A possible beneficiary was born
  • A named beneficiary divorced
  • A named beneficiary is very sick or has a drug dependency
  • You are moving or moved to a different state
  • The value of your assets changed significantly

These are just a few events that should prompt a review of your Will and your Estate Plan.

The professionals at Garden State Trust Company will be happy to meet to review your Will and Estate Plan at no obligation to you.

http://www.gstrustco.com/boomers—beyond.html

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.