A Good Time to Review
For better or worse, most of us are finished with our income tax returns for at least another year. Before you file away all of your supporting tax papers, now would be a good time to review your assets and your estate planning documents to see that they do not conflict with each other. What do I mean by conflict with each other? Look at how your assets are registered and how your estate planning documents distribute your estate upon death.
If for example, your Will leaves everything outright to your children equally and your brokerage accounts have a TOD (transfer on death) registration to one of your two children, there is a conflict. The TOD registration on your brokerage account will override your Will, since your Will can only distribute what is in your name alone (without any beneficiary designations). It cannot direct the distribution of the TOD account. Therefore, you basically have a disproportionate distribution to your children, maybe by design or maybe by error due to the registration you chose for the account.
Also, ask yourself if there have been significant changes in your personal life over the past year. Are your primary and alternate beneficiaries in good health? Have there been deaths, births, or divorce? Are these events covered in your estate planning documents? Has the value of your estate dramatically changed? Do you now require tax planning?
Lastly, look at the beneficiary designation on your retirement accounts. If you have the beneficiary your estate, your heirs may be faced with a large income tax bill when you die. There are ways to minimize the income tax consequences.
Now that you have gone through this exercise, you can put your tax papers away for another year and enjoy the warmer weather just around the corner.
With best wishes,
Controversy Spoils Charitable Deduction
A recent Tax Court decision shows how estates of well under $1 million can run into significant tax trouble.
Eileen Belmont’s 1994 will left all of her property to her mother, Wilma. It further provided that should Wilma die first, Eileen’s brother David was to receive $50,000, and the balance of the estate would pass to the Columbus Jewish Foundation. Wilma died in 2001, and Eileen died in 2007, so the contingent disposition applied.
Eileen’s estate consisted of $243,463 in the State Teacher’s Retirement Pension Fund, a home in Ohio that was sold by the executor for $217,900, and a condo in Santa Monica, California. The condo had been owned by Wilma, and brother David had moved in with Wilma to help care for her. Both of them returned to Ohio about a year before Wilma died. David moved back into the condo in 2006, living there rent free for about nine months until Eileen died.
David wanted to exchange his $50,000 bequest for a life tenancy in the condo. The Foundation countered with a “$10,000 stipend” if David would vacate the premises immediately.
He did not vacate the premises and, instead, filed a creditor’s claim in Los Angeles County Probate Court, alleging breach of an oral contract between himself, Eileen and Wilma. He claimed that he had been promised lifetime use of the condo in exchange for his services in caring for Wilma.
In its fiduciary income tax filing of July 17, 2008, the estate claimed a charitable deduction of $219,850 for the amounts passing to the Foundation. However, that amount had not been paid, nor had it been segregated from other funds used to pay administrative expenses.
The probate court accepted David’s claim to the condo in October 2011. The estate lost its appeal of the verdict in February 2013. David was awarded use of the condo for the rest of his life.
The IRS denied the estate’s charitable deduction because nothing had been permanently set aside for the Foundation as of the date of the tax filing. The estate argued in the Tax Court that as of that date, the chance that it would not have sufficient funds to pay the charitable bequest was so remote as to be negligible. The Court disagreed, noting that the estate was on notice of the pending litigation. Because there was a real possibility that the estate would be depleted before payment to the charity was made, no charitable deduction was permitted. That will increase the income tax due, and further reduce the amount going to the charity.
Waiting for the Fed
April 3—Many market observers expected interest rates to begin rising in 2014, but it did not happen. This sustained period of low interest rates almost certainly will end in 2015, but the question of timing remains open. Key factors that the Fed must consider:
Employment. Payroll employment has increased by an average of 239,000 per month for the past six months, a rate consistent with a healthy, growing economy. That number fell to a disappointing 126,000 in March. Whether that drop was an anomaly attributable to the cold, snowy winter in much of the U.S. or a signal that the economy is losing steam remains to be seen.
Unemployment. In March Fed officials suggested that when the unemployment rate reaches the range of 5.0% to 5.2%, the economy will be at “full” employment, with stable inflation and plentiful jobs. We are very close to that level already. However, that formulation does not take into account the long-term joblessness that has marked this particular downturn. The labor force participation rate edged still lower in March, to 62.7%, a level not seen since the Reagan administration.
Average hourly earnings. Wages have not gained, even as unemployment has fallen. In March earnings rose just 0.3%, only a bit above February’s 0.1%. One school of thought posits that higher-paid baby boomers are leaving the work force, bringing down the average. A sign of a possible earnings pickup: Both Wal-Mart Stores and McDonald’s (for its company-owned restaurants) recently announced wage increases well above the rate of inflation.
Inflation. The Fed has announced a target inflation rate of 2.0%. Core inflation in February was 1.6%, approaching the Fed’s target. On the other hand, low gasoline prices have tamped down inflation, and that effect may ripple through the economy. Gas prices traditionally rise as the summer driving season approaches, but oil inventories are very high at present, with little unused storage available for the surpluses being produced around the world.
The Fed may act on raising interest rates as early as June, provided economic growth looks stable.
Housing prices still are rising, though more slowly than before. In the 12 months ending with January 2015, home prices rose 4.5%, according to the Standard & Poor’s/Case-Shiller Home Price report. In January 2014, that figure was 10.5%. Home prices are still rising about twice as fast as wages.
The rate of increase is made possible by low mortgage interest rates, which have declined to about 3.7% from 4.4% a year ago. The Wall Street Journal noted that if home prices rise an additional 5% and mortgage interest rates go up one percentage point, the average monthly mortgage payment would rise 18%. That would put home ownership out of reach for many.
Home ownership levels already have fallen among recent college graduates. A number of factors are involved, including a possible increased preference for rental housing, avoiding the major commitments that come with home ownership. Federal Reserve governor Lael Brainard voiced additional concerns at a recent conference. Those who graduated during the Great Recession faced a poor job market at the same time as they had large amounts of student debt. Many were forced to take jobs for which they were overqualified, and many found no work at all. Even though the employment situation has improved, it may take a decade or more for this cohort to get back “on track” in their career earnings.
“If the decline in homeownership among young people proves persistent, the implications for asset building for the future could be of concern, since homeownership remains an important avenue for accumulating wealth, particularly for those with limited means,” she concluded.
Trustworthy Advice: Look No Farther
As a corporate fiduciary, we are dedicated to providing our clients with trustworthy asset management. Of course, we also provide traditional trust services, such as administering estates and managing trust funds for young or inexperienced beneficiaries. Our primary function, however, is helping people turn financial success into financial security. We would like to take this opportunity to introduce you to what we do and how we do it.
Technically, we serve our asset-management clients as investment agent or as trustee under a revocable trust agreement. In practice, however, each of our clients is “special.” We fit our services to the needs of the client. For example, you might need little more than a reliable source of investment bookkeeping today, but you might wish a much broader array of asset-management services when you retire and have new money to invest.
Essentially, the varied tasks that we perform for clients fall into four categories:
• Asset management. Clients look to us for help in developing investment strategies that fit their current income needs, their goals for the future and their tolerance for market risks. We’re also equipped to implement these strategies for them. Some ask us to submit specific investment recommendations for their approval. Others—including those who travel a lot or have especially demanding careers—authorize us to make investment decisions on their behalf.
Granting one’s investment advisor full discretion is not something one does lightly these days. Because we charge moderate annual fees for our work, rather than relying on sales commissions, our clients know that they can count on us to act in their best interests.
When we talk about “trustworthy asset management,” we mean that each and every member of our staff observes two rules: 1. The client’s interests always come first. 2. In case of exceptions, see Rule 1.
• Good financial housekeeping. We handle all details related to purchases and sales of securities. We provide safekeeping. We disburse or reinvest investment income promptly. We keep accurate, comprehensive investment records and submit periodic statements to our clients. We watch for bond calls and handle redemptions promptly. We . . . but you get the idea. Our tradition of trusteeship makes us near-fanatics when it comes to attending to the detail work of investing. Some clients who first came to us merely to receive these relatively routine services now draw upon our asset-management capabilities as well.
• Special services. Many of our clients look to us for a variety of special services when and as they need them: Payment of household bills. Payment of quarterly estimated taxes. Arranging for preparation of annual tax returns. Older clients often authorize us to step in and provide full personal financial management in the event that they should become mentally or physically incapacitated. Even when this alternative to a court-ordered conservatorship is not needed, it contributes to the client’s financial peace of mind.
• Traditional trust and estate services. Finally, our clients can draw upon our traditional trust and estate services. No other type of asset-management firm can offer this kind of continuity from generation to generation. Only a trust institution such as ours can help you preserve personal financial security for life, then administer your estate and look after funds that you leave in trust for others in the family, or for charitable purposes.
When billionaires become billionaires, often they create and staff their own family financial offices. That’s fine, but only if you possess the megawealth to justify the high cost. Perhaps the best way to visualize our approach to personalized asset management is to picture us as a similar office—one that serves many individuals and families and so can provide its services at quite moderate cost.
May we provide you and your family with more information about how we can help you create and maintain a long-term strategy for financial security? We would be glad to schedule an appointment at your earliest convenience.