More Trouble for Long-Term Care Insurers

More than 400,000 long-term-care insurance policies were sold in 1992, according to figures published by The Wall Street Journal.  These are the policies that help seniors cover the costs of nursing home stays at the end of life.  At least 400,000 additional policies were purchased each year in the subsequent ten years, peaking at about 750,000 in 2002.

Then sales collapsed, and never again reached the 400,000 level. Last year, reportedly only 105,000 such policies were sold.  What’s more, two Pennsylvania providers of long-term care insurance were on the verge of being liquidated in December.

The need for long-term-care insurance never has been greater.  What happened to the market?

Actuarial errors

A series of actuarial errors were made when long-term-care insurance was first introduced.  The most important of these was the “lapse rate,” the number of policies that will be terminated without ever paying a benefit. This occurs either because the insured stops paying premiums or the insured dies without making a claim.  The actuaries chose a fairly conservative lapse rate of 5%.  At that rate, if 1,000 policies were sold in year one, only 400 would be in force 20 years later.  As it turned out, the buyers of long-term-care insurance thought of their purchase primarily as an investment, not as insurance, and so the lapse experience was closer to 1%, which implies that 800 of every 1,000 policies still will be in force after 20 years.  That led to far higher payouts than projected.

When the unanticipated expenses started to pour in, insurance companies had to raise their rates.  However, in many cases, state insurance regulators would not approve the full amounts requested for existing policyholders.

Two more errors compounded the damage.  The first is that medical advances have lengthened life expectancies, which, in turn, increases the likelihood of making a claim on a long-term-care insurance policy. The second is that the actuaries generally assumed a 7% rate of return on the invested premiums on these policies.  That assumption was fine in the 1990s, but interest rates have been at historic lows since 2008.  When long-term-care policies are priced today, the projected rate of return on premiums is likely to be 2% to 3%, which drives premium costs still higher.

Getting coverage

If you already have a long-term-care policy, you probably want to hang on to it.  For the most part, those who have purchased these policies have profited from them.

New long-term-care policies still are available, although they are more expensive than in the past, and the terms may be less favorable than older policies.  Insurance companies are now using much more conservative actuarial assumptions.

Hybrid policies that combine life insurance with long-term-care coverage have emerged, and they have proved popular as well.

The poorest seniors may have the costs of their long-term care picked up by the government through Medicaid.  The wealthiest may be able to cover the costs without insurance—even though a year’s stay in a nursing home can easily run to $100,000 or more.

For everyone in the middle, planning is necessary. Despite the price increases, long-term-care insurance will prove an important part of that plan for many affluent families.

© 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

(March 2017)

© 2017 M.A. Co.  All rights reserved.

Strategic Asset Management With a Revocable Living Trust

Developing a sound investment management strategy is more than allocating assets and diversifying among the various asset classes. It is also about attaining your financial goals in life. The long-term security of your family is likely to be a key goal. To reach it, you want to ensure that your assets will continue to grow—providing the income that your loved ones will need to live comfortably, should you not be able to provide for them. And one of the most valuable resources available to help you achieve that goal of long-term financial security is a revocable living trust.

Living trusts: the facts

A revocable living trust allows you to arrange for the management of your assets both while you are alive and after you are gone. By establishing your trust now, you may be able to reduce the stresses and strains that your family may experience when they are forced to make difficult financial and investment decisions after you’re gone.

Think of a trust as a container, a place where you can transfer your securities, real estate or other property. This transfer is accomplished by making the trust the new owner of your assets. However, you retain control while you live, and you can direct what happens to the assets after you are gone, or are unable to make the necessary decisions about their management. These instructions are contained in a trust agreement that will be implemented and administered by the trustee that you name to oversee the trust.

Neither the instructions in the trust agreement nor the trust itself need have a permanent life. The directions that you give today may be altered in any way, at any time. The trust itself, if necessary, can be revoked, and your assets transferred back to you.

A strategy designed to your specifications

Your trustee will serve as the manager of the trust’s investments. When you name a corporate trustee, such as our institution, we can assist you in developing the strategy that will best serve you and your family, based upon your personal circumstances. For example, we will review your long- and short-term objectives, your risk tolerance, liquidity needs, tax considerations and a host of other variables in order to make certain that the investment choices made match your needs and expectations.

When we assist you in formulating and developing an investment management strategy, you may delegate to us in the trust agreement the authority to execute all of the investment decisions. Alternatively, you can require us to submit recommendations for your approval. In all cases, as trustee, we will be responsible for all the paperwork and chores associated with the management of your assets.

Here’s an added benefit, and it’s an important one: By setting up a living trust now and naming us to serve as your investment manager, you can “preview” our performance. By observing our actions now, you will have the peace of mind of knowing that you will be leaving a capable, knowledgeable investment advisor to serve your family later.

Just in case

If you haven’t yet made the decision to integrate an “active” living trust into your current financial plans, you may want to look at an alternative—a standby trust.

A standby living trust offers you the opportunity to achieve a high degree of protection for yourself and your family should you become ill or incapacitated. Yet you maintain total control of your investments. The trust is activated only when you are unable to manage your investments, and only for as long as necessary.

In addition, the trustee can be directed to use the trust’s assets to pay household bills and taxes, for example. At a time when your loved ones are apt to be burdened by concerns other than financial ones, they will have the confidence of knowing that professionals are managing the family’s finances in your absence.

Additional protection: an estate planning strategy

When you establish a living trust, you designate two types of beneficiaries. There are the income beneficiaries (typically, yourself and your spouse), who receive regular payments of the trust’s income or principal as outlined in the trust agreement. At the termination of the trust—at your death or some other specified time—those whom you name as your remainder beneficiaries will receive the assets in the trust. But the trust may continue beyond your lifetime, and become an integral part of your estate plan. There are good reasons for coordinating a will and a living trust.

A living trust can operate as a highly efficient organizational tool, providing a unified approach to the management of your assets. For instance, assets such as the proceeds from a life insurance policy or a retirement plan may be paid to a living trust that you have established and which, at your death, becomes irrevocable.

As a result, you can ensure that your family will have a continuous, uninterrupted flow of income. In addition, you can set up an orderly distribution plan for your assets, either over a certain number of years or keyed to certain circumstances.

Finally, having all of your assets “under one roof” will make it easier for your spouse and other beneficiaries to keep track of how the family’s assets are being managed and to know where to turn with questions or concerns.

Additional benefits

At your death the assets in your living trust will not be subject to the potential delays and costs associated with the probate process. In addition, although the terms of your will can be made public, a trust is a private document and, generally, escapes public scrutiny.

This latter point can be especially important in the event that you become disabled and cannot manage your financial affairs. Contrast the privacy of a standby living trust, which springs into action immediately and without fanfare, with the potential for publicity, time and expense when formal conservatorship proceedings must be commenced in a probate court setting.


In sum, then, a revocable living trust offers a wide range of features and benefits that can help you reach the goal of securing your family’s financial future. If you would like more information about how a revocable living trust can be shaped to your financial goals and needs, call upon us at any time.

© 2015 M.A. Co. All rights reserved.

John M. Bonk Joins Garden State Trust Company

John joined the Lebanon, New Jersey Office of Garden State Trust Company as a Senior Vice President and Trust Officer in January 2017 where his knowledge and expertise, drawn from a career of over 40 years in the Trust and Investment Management Business, focused on Estate and Trust Planning and Administration, Retirement Planning as well as Philanthropic Planned Giving strategies and administration.  John will help Garden State Trust Company to expand our Investment and Fiduciary Service business in the New Jersey Marketplace. 

Prior to joining Garden State, John was with Peapack-Gladstone Bank for 18 years asSenior Managing Director of Wealth Management supervising the Wealth Advisory Trust and Business Development Group.  Under his direction, the Trust Division saw the assets under administration swell from $600 million to over $3 billion.  He was also instrumental in the establishment of the PGB Trust & Investments – Delaware trust subsidiary.

He started his career in Plainfield, New Jersey at United National Bank, later known as United Trust in Bridgewater, NJ.  A Senior Vice President and Trust Division Head, John had managerial responsibility over the investment, administration, tax and new business aspects of the $1.7 billion Trust Department including Chairman of the Officer’s Trust Committee and a member of the Plainfield Foundation.  John graduated with BS in Business Administration from Concord College and received the Professional Designation of Certified Trust and Financial Advisor (CTFA) from the American Bankers Association.

John serves as Trustee of the Lowell F. Johnson Foundation, Trustee of Hillside Cemetery Association and previously on the Boards of The DuCret School of Art, American Federation for Aging Research (AFAR) and on the Planned Giving Advisor Boards of Muhlenberg Hospital  Foundation, The Hunterdon Healthcare Foundation and Hunterdon Museum of Art.

John’s experience and approach to providing fiduciary, administrative, trust, investment and tax services in a coordinated manner will enhance the delivery of optimum results for existing and new trust relationships going forward.

2016 IRA Deadline Approaches

If you haven’t yet made an IRA contribution for 2016, there’s still time to make one, until the tax filing deadline. Taxpayers have until Tuesday, April 18, 2017, to file their 2016 returns and pay any taxes due. The deadline is later this year due to several factors. The usual April 15 deadline falls on Saturday this year, which normally would give taxpayers until at least the following Monday. However, Emancipation Day, a D.C. holiday, is observed on Monday, April 17, giving taxpayers nationwide an additional day to file. By law, D.C. holidays impact tax deadlines for everyone in the same way that federal holidays do.

If you already have made your 2016 contribution, it would be financially wise to go ahead and make one for 2017.  That will give your account an extra year of investment returns.  The contribution limit for each year is $5,500.  Those who are 50 and over may make an additional “catch-up” contribution of $1,000.

The deduction for IRA contributions phases out for those higher-income taxpayers who also are covered by an employer’s retirement plan.  The phase-out range was bumped up slightly for 2017 contributions, as shown in the table below.

IRA deduction thresholds

Taxpayers below the threshold may take a full deduction for their contributions to traditional IRAs.

IRA deduction thresholds

Source: IRS Notice 2016-141

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000 in 2017, up from $184,000 and $194,000 in 2016.

(March 2017)

© 2017 M.A. Co.  All rights reserved.

UPDATE: Michael Jackson’s Estate

More than seven years after his death in 2009, controversy continues to plague Michael Jackson’s estate.  The remaining problem, and it’s a big one, is the federal estate tax.

Jackson’s reputation was at a low point when he died, and his debts totaled half a billion dollars. His executors valued his name and likeness at just $2,105, and they tallied the total net estate at $7 million.  We don’t know what their reasoning was, but given the enormous size of Jackson’s debts, some observers at the time expected the estate to be bankrupt.

The IRS disagreed on the valuations.  Most importantly, the IRS figured that Jackson’s celebrity value was an astounding $434 million, which contributed to a total estate value of $1.3 billion!  Taxes and penalties could have run to $700 million.  Negotiations between the estate and the IRS have been ongoing since 2013, and the Service reportedly has backed off on the celebrity value, down to $161 million.

Even that figure is completely unrealistic, according to the lawyer for Jackson’s estate.  That is a far higher value than any other celebrity identity ever has commanded, and it is far more than Jackson himself earned from his celebrity (as opposed to his music) during his entire life!

The evidence that the estate low-balled the value of Jackson’s assets comes from the fact that the executors have netted about $1 billion for the estate during the period of administration.  This includes music sales, the documentary “This Is It,” a Cirque du Soleil tribute show and the sale of Jackson’s 50% stake in Sony/ATV Music Publishing.  They have paid off all of the debts owed at Jackson’s death and now have roughly $500 million for his heirs.

But there is still that estate tax to be paid, and a trial on the valuation began in February. The tricky question presented is, how much were Jackson’s assets worth at the moment of his death?  Without the skilled work of his chosen executors, they most likely would have been worth nothing at all.  How much of the success of those executors was foreseeable at Jackson’s death?  Certainly, he left them a lot to work with.  But was the surge in popularity of Jackson’s music and image foreseeable when he died?

This is a case for the record books.

(March 2017)

© 2017 M.A. Co.  All rights reserved.

Sean Rice Promoted To Vice President and Trust Officer

Sean Rice, having achieved the status of Certified Trust and Financial Advisor (CTFA) has been promoted to Vice President and Trust Officer of Garden State Trust Company.

CTFA is a distinguished professional credential offered by the American Bankers Association. It is the recognized standard of excellence for trust and wealth management professionals. Mr. Rice attended the Cannon Financial Institute and successfully completed the comprehensive three-year program.

Including Sean, the company currently has 5 CTFAs on staff. The other individuals include: Kurt Talke and John M. Bonk, Lebanon Office and Siobhan Connolly and Adam Brower, Toms River Office.

Garden State Trust Company is a premier New Jersey independent trust company providing investment management, trust and estate services, and elder care solutions for retired and soon-to-be retired individuals.

Adam Brower Promoted To Vice President and Trust Officer

Adam Brower, having achieved the status of Certified Trust and Financial Advisor (CTFA) has been promoted to Vice President and Trust Officer of Garden State Trust Company.

CTFA is a distinguished professional credential offered by the American Bankers Association. It is the recognized standard of excellence for trust and wealth management professionals. Mr. Brower attended the Cannon Financial Institute and successfully completed the comprehensive three-year program.

Including Adam, the company currently has 5 CTFAs on staff. The other individuals include: Kurt Talke and John M. Bonk, Lebanon Office; Siobhan Connolly, Toms River Office and Sean Rice, Cherry Hill Office.

Garden State Trust Company is a premier New Jersey independent trust company providing investment management, trust and estate services, and elder care solutions for retired and soon-to-be retired individuals.

IRA Errors

James Theissen and his wife worked for Kroger or its subsidiaries for 30 years. They lived in Colorado, and in 2002 Kroger informed Mr. Theissen that his job would be moved to Ohio.  As the Theissens did not wish to move, they retired and rolled their 401(k) money into “his and hers” IRAs, totaling some $432,076.41.

 Because Mr. Theissen was interested in metal fabrication, he began shopping for a company to buy.  He planned to use the IRA money to fund the purchase and let the IRA own the new company.  A corporation was formed, Elsara, and the couple’s IRAs purchased all the Elsara stock.  A suitable metal-fabricating firm was found.  The price was $601,000.  The couple contributed $60,000 from their savings; Elsara paid $341,000; and Elsara also provided a promissory note for $200,000, to be paid over five years at 7% interest.

Unfortunately, the Theissens also personally guaranteed repayment of the note.

 Apparently, the note was properly repaid according to its terms.  However, in 2010, six years after the transaction, the IRS challenged the financial structure used for the acquisition of the business.  According to the IRS, the personal guarantee of the note was a prohibited transaction. It amounted to an extension of credit to the IRAs by the beneficiaries of the accounts.

Federal law has some very strict rules concerning transactions between qualified retirement plans, which includes IRAs, and those who are the beneficiaries of such plans. The public policy being served is the preservation of the money in the plan for retirement.  

 Before adopting this structure for their business purchase, the Theissens consulted with a CPA firm and an attorney. They didn’t come up with this idea on their own.  Nevertheless, the Tax Court ruled that they had, in fact, committed a prohibited transaction when they personally guaranteed the loan.  That caused two unfortunate consequences.  First, the IRAs stopped being tax qualified in 2003.  That meant the entire amount in them was deemed distributed to the Theissens in that year and subject to ordinary income tax, which came to nearly $190,000.  Second, because neither was yet 59½ at the time of the distribution, they owed an additional 10% penalty tax!  Plus interest since 2003.

 It’s not entirely clear how this will enhance the Theissens’ retirement income security, but perhaps that was not the point.

Another Problem

Dr. Mark Vandenbosch decided to loan $125,000 to a radiology technician whom he had befriended, John Carver. Carver needed the money for an investment opportunity.  The source of funds was Dr. Vandenbosch’s Simplified Employee Pension (SEP).  However, the SEP did not distribute funds to Carver, nor did it execute a promissory note for the loan.  Rather, the money went into Vandenbosch’s personal checking account, and the loan document showed the doctor and his wife as the lenders.

 The couple argued that they were acting as conduit, and that the loan to Carver was essentially a tax-free IRA rollover.  The Tax Court held that it was not.  The $125,000 was a taxable early distribution to the doctor, subject to income taxes and the 10% penalty for early distribution.  Fortunately, the balance in the doctor’s SEP was not tainted by the transaction, so it continued to be tax deferred.  

Jeopardy for Family Limited Partnerships

Valuing a publicly traded company is a fairly easy proposition. Every day, shares trade hands between willing buyers and willing sellers. The price of that trade, times the number of shares outstanding, provides the capitalized value of the company. For any shareholder’s stake, the value of that interest is the number of shares held multiplied by the price.

Valuing privately held companies is far more difficult. The standard is, fundamentally, the same: What would a willing buyer pay, and what would a willing seller accept, if neither were under any requirement to buy or sell? Putting that standard into practice is very different, because there is no public market for the shares. In particular, with closely held firms the issue of control becomes paramount. If one stakeholder controls the enterprise, his or her share may command a premium, while the minority shareholders’ interest will be discounted. The minority interest may get an additional discount if there are restrictions on selling it, as is usually the case. 

These principles of tax law are nothing new. The new twist came in utilizing them in the context of a family limited partnership or, alternatively, a family-run limited liability company. These are legal entities used to manage family wealth, and also to move wealth to younger generations in a planned, controlled fashion. By employing discounts for illiquidity and lack of control, the transfer tax costs (gift taxes or estate taxes) could be significantly reduced. The IRS gets particularly unhappy when the new legal entity is essentially a repository for a portfolio of marketable securities. There are many sound non-tax reasons for employing a family limited partnership to manage any kind of wealth, but the IRS believes that no one would go to the trouble for a portfolio of securities except to secure additional tax benefits. 

Accordingly, the IRS has effectively declared war on family limited partnerships, by proposing a new set of regulations under Internal Revenue Code 2704 last year, which deals with intra-family transfers. The proposal is detailed and abstruse, and it is not limited to securities portfolios. There has been much resistance to the proposal from business owners.

Speaking to estate planners at the Heckerling Institute on Estate Planning, Catherine Hughes from the Treasury Office of Tax Legislative Counsel reported that the IRS will be moving ahead on finalizing the controversial proposed Regs. She reported that more than 10,000 comments were received, and no doubt the vast majority were in opposition. The December hearing on the proposal lasted more than six hours, which Ms. Hughes thought to be a record for recent times.

Contrary to the reactions of many commentators, the proposed Regs. were not intended to eliminate all minority discounts, Ms. Hughes asserted. The final Regs. will make that point very clear, as well as addressing other misunderstandings identified during the comments period.

Elimination of the federal estate tax might not render the §2704 Regs. moot. They could come into play if the federal gift tax is retained, or if there will be a capital gains tax imposed at death.