March 2015

Congratulations, Siobhan!

I am proud announce that Siobhan Connolly has been promoted to Vice President and Trust Officer. Siobhan’s area of responsibility is managing and administering to Garden State Trust Company client relationships.

For those of you not familiar with the responsibilities of a trust officer, I would like to share this with you. Many years ago, and I mean many years ago, I read what Judge William Rhodes Hervey best described as the essence of a Trust. When you read the essence of a trust, all you have to do is substitute Trust Officer for the word It, and you will get  a feeling for what Siobhan does every day.

“It protects the living and serves the dead, befriends the widow and orphan, guides the aged, strengthens the weak, curbs the imprudent, represents the incompetent, advises the hesitant, plans for the inexperienced, encourages the timid, administers to charities, gratifies its claim to be an incorruptible friend.  It is the best friend of many households, the repository of many confidences, the instrument to motivate the cherished plans of those who cannot live to do so.”

On a personal note, I am really happy for Siobhan as she was our first hire after opening Garden State Trust Company in 2008. We all wish her continued success.

Over the past months we have experienced, sometimes on a daily basis, triple digit gains or losses in the stock market. What can an investor to do about rising volatility? For many investors, the answer is, not much.  Ideally, you want to be in the market on the up days and out on the down days. In reality, no one can call those days accurately in advance.  Academic studies have shown that most of the gains in the stock market occur on just a few trading days. The risk of being out of the market on good days outweighs the reward of avoiding the losers and the transaction costs of managing the process.

Wishing you and your family a Happy Easter and Happy Passover.

With best wishes,

IRA 2

 

NASDAQ 5,000

After 15 years the tech-heavy NASDAQ Composite index again crossed the threshold of 5,000 as March began. The last time that the index was at this level, in March 2000, the Internet bubble was about to burst.  In those heady days, many companies in the NASDAQ had not yet had a year with earnings, which made calculating a price/earnings ratio a challenge (division by zero is not allowed).

Both the S&P 500-stock index and the Dow Jones Industrial Average returned to and exceeded their highs of the Internet bubble long ago. What took the NASDAQ so long? It fell much farther.  In the 19 months following the 5,000 high-water mark, the index dropped a gut-wrenching 78%.  As recently as six years ago, it stood at 1,268.64.

Does the establishment of a new NASDAQ record suggest that the bull market is nearing its end?  Probably not.  Today’s NASDAQ is not showing the signs of speculative excess that we saw 15 years ago.  For example:

  •   The forward p/e is at 21, less than a third of what it was in 2000;
  •   In 2000 the dividend on the NASDAQ was one-tenth that of the S&P 500, while today it is about half;
  •   The valuation premium for the NASDAQ over the S&P 500 is 20% today, compared to 200% at the top of the Internet bubble.

Today the NASDAQ is being powered by companies that are making large profits making things, such as Apple, the most important recent contributor to the rise in the index.  What’s more, other firms in the NASDAQ are suppliers to Apple and also benefit from that firm’s success.  That’s not “irrational exuberance.”

Still, there are new firms coming on board all the time, and some almost certainly will fail. Venture capitalists reportedly have invested $52.1 billion in new companies in 2014, up 47% from a year earlier.  They are looking for a big payoff from the “next big thing.”  Perhaps that is simply “rational exuberance.”

 

Post Mortem Estate Plan Adjustment

Wife is the beneficiary of a substantial Qualified Terminable Interest Property Trust (or QTIP trust for short). Her six children were remainder beneficiaries, and she received all of the trust income. Perhaps motivated by the children’s impatience for their inheritance and low current interest rates, Wife proposed to divide the trust into three new trusts. Trust 1 will be identical in every way to the existing QTIP trust. Trust 2 will become a total return unitrust, in accordance with local law, which allows such transformation with the consent of the beneficiaries. Wife will receive from 3% to 5% of the value of the trust each year, valued annually. Trust 3 will be terminated immediately after creation, and the assets in that trust then will pass to the remaindermen. Wife will treat that termination as a taxable gift from her to the children, but the children will pay any gift taxes due. That fact will, in turn, reduce the value of the taxable gift and the final cost of the tax.

Wife turned to the IRS for confirmation that there aren’t any tax problems with this plan. There are not, the Service confirmed in private advice. The division of the trust into three trusts will not be considered a gift and will not impair the QTIP status. The termination of Trust 3 will be a taxable gift, and, therefore, those assets will not be included in Wife’s estate. The conversion of Trust 2 to a unitrust will not be a gift to anyone, and it will not require recognition of gain or loss.

QTIP trusts generally are considered unchangeable, but this case demonstrates that even irrevocable trusts may be modified to meet the changing needs of beneficiaries.

 

ABLE Accounts

A new, potentially simpler alternative to special needs trusts

 

A tax bill enacted in December also included the Achieving a Better Life Experience Act (ABLE), a permanent expansion of Sec. 529 savings accounts for the benefit of disabled young people.  The purpose is to encourage private savings to support disabled individuals in a manner that supplements, but does not supplant, other benefits that may be provided by private insurance, Medicaid, the supplemental security income program, or the beneficiary’s employment.

Qualified ABLE programs.  ABLE programs will need to be established in each of the states, as with Sec. 529 college savings plans.  ABLE accounts will be available only to residents of the state establishing the program.  A disabled person will be limited to a single ABLE account, except that creating a successor account for rollover purposes is permitted.

Contributions to an ABLE account generally must be made in cash; an exception allows for the rollover of funds to another ABLE account for the same beneficiary or an eligible individual who is a family member of the beneficiary.  As with 529 college savings plans, there is no deduction for making a contribution to an ABLE account.  Investment changes are limited to twice each year.

More than one donor may contribute to an individual’s ABLE account, but the aggregate of such contributions may not exceed the amount of the gift tax annual exclusion in any calendar year ($14,000 in 2015).

The beneficiary of an ABLE account must have become disabled or blind before reaching age 26.

Amounts accumulated in ABLE accounts generally will not be counted for purposes of means-testing eligibility for federal programs.  However, amounts distributed for housing expenses will not be disregarded for the Supplemental Security Income program.  In the event that the ABLE account balance exceeds $100,000, SSI benefits may be suspended, but Medicaid benefits will not be.

Tax treatment.  In contrast to a conventional special needs trust, which has the same broad goals as an ABLE account, these accounts offer the potential for freedom from income tax.  No taxes are imposed upon the investment earnings of ABLE accounts.  Similarly, there are no income taxes on distributions for qualified disability expenses.  Qualified disability expenses are defined quite broadly and include “education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative expenses, legal fees, expenses for oversight and monitoring, funeral and burial expenses,” and any other expenses as may be provided in future Regulations.

On the other hand, distributions not used for qualified disability expenses are taxable to the beneficiary, and a 10% penalty tax applies as well.  The distribution may not be treated as a taxable gift.

There is a price to pay for the tax favors accorded to the ABLE account.  At the death of the ABLE account beneficiary, the state may make a claim on the account up to the total medical assistance paid for the beneficiary after the establishment of the account.

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