July 2015

At the end of the First Quarter, 2015 according to the FDIC, the 25 largest trust institutions had $16.989 trillion in assets under administration for a little over 4 million trust accounts.  And, that is ONLY for the largest 25 Largest Trust Institutions by Trust Assets.


Why do so many financially successful individuals and their families look to trust institutions to meet their financial management needs through a trustee relationship?  Several reasons come to mind and I can only speak on behalf of Garden State Trust Company:

We are a corporate fiduciary. A fiduciary is a person or institution given the power to act on behalf of another in situations that require great trust, honesty and loyalty. As a corporate fiduciary we are authorized by the banking authorities to act as a trustee for individuals and institutions in the management and distribution of their assets.

We provide a team approach. We are a fully staffed independent trust company with individuals who bring a diverse range of skills to the job. In addition, we also employ an open architecture approach to delivering our trust services. We employ “best of breed” partners to help deliver our trustee services from our investments to our tax services to our accounting system.

Our services are fee based. We are not compensated by generating transactions or through commissions for the sale of particular products.

Trusts are individually tailored to address many different personal and financial goals.  As a result, we tell our prospective trust clients that there is no such thing as a “typical trust.”

I hope you are enjoying the summer,

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You Can’t Do That With An IRA

 Terry Ellis decided that his next job would be selling used cars. To that end, he formed a limited liability company (LLC), which was to be 98% owned by his IRA. The other 2% would be owned by an unrelated third party working for the LLC.  Ellis was designated as the general manager of the LLC, with full authority to act on its behalf.

A month later Ellis’ IRA was established when $254,000 was rolled into it from his 401(k) plan.  He directed the IRA custodian to spend the entire amount purchasing shares of the LLC.  Two months later he received the balance of his 401(k) plan, $67,000, which he deposited into the IRA.  In turn, the IRA bought an additional $65,000 worth of LLC shares.

The plan did not work out as expected.  The law governing qualified retirement plans, including IRAs, has a number of safeguards intended to preserve these retirement assets specifically for retirement.  In particular, the law prohibits transactions between the retirement plan and “disqualified persons.”  Ellis was in that category because he was a fiduciary; he had discretionary authority over the IRA.  What’s more, Ellis was the beneficial owner of the IRA’s LLC holding, and that amounted to more than 50% of the voting power in the company.

So, what was the transaction that was prohibited?  Ellis had the LLC pay him a salary, $9,754 the first year and $29,263 the second year.  He reported the income and paid taxes on it.  The wages were paid from the funds that the company had received from the IRA.  That amounted to an attempt to transfer assets indirectly from the IRA to Ellis for his own benefit.

The tax consequences for Ellis were severe.  When a prohibited transaction occurs, an IRA loses its tax-qualified status.  The entire contents of the IRA are treated as distributed in that year. For Ellis there was a $135,936 tax deficiency, as both 401(k) distributions became taxable.  Adding insult to injury, an additional $27,187 penalty was assessed for the inaccuracy of the tax filing that didn’t timely report the distributions.

Self-directed IRAs are increasingly popular, but they cannot be treated as personal accounts, a way to “be your own banker.”

A real estate context

Barry Kellerman and his wife each owned 50% of Panther Mountain Land Development, LLC.  To facilitate a new development project, a new partnership was created, in which Panther Mountain was a 50% owner, and Kellerman’s IRA was the other 50% owner.  The IRA was to contribute certain real property and some $40,000 in cash to the partnership.  Panther Mountain was to contribute $160,000 to the partnership upon the completion of certain construction projects.

Kellerman then ordered his IRA custodian to liquidate $123,000 in assets and purchase the real property that was to be contributed to the partnership.  Additional funds were paid from the IRA to the partnership over the next two years in furtherance of the development.

Unfortunately, the project did not reach a successful conclusion.  Both Panther Mountain and the Kellermans ended up in bankruptcy court.  The Kellermans petitioned to have the IRA treated as an exempt asset.

The analysis by the court was much the same as in the Ellis case.  Kellerman was a fiduciary with respect to the IRA because of his discretionary control over it.  As such, he was a “disqualified person.”  The prohibited transaction was using the IRA as a lending source for the funds to acquire the real estate.  The consequence for the Kellermans is that the IRA is not shielded in the bankruptcy proceeding.

Their financial hardship may not be over, however.  The IRS is likely to come knocking at some point, claiming that they should have included the entire value of the IRA in their taxable income in the year of the prohibited transaction—plus penalties.

(July 2015) © 2015 M.A. Co. All rights reserved.

Transferring Your Assets: A Checklist

 Planning for the distribution of a lifetime of accumulated wealth can be complicated. The process involves drafting and regularly updating your will and making the necessary trust arrangements. It requires understanding exactly what you own and how to transfer what you own (and in what manner) to family members or other beneficiaries.

Meetings with professionals—your attorney, accountant and trust officer—will help shape the plan that’s best for your personal circumstances. Here are some points that you’ll want to consider as you do your planning:

1. How do you wish to divide your personal property among your loved ones? What items do you want to go to specific people? Are there any items that you wish to be sold?
2. What dispositions do you wish to make of real estate that you own (other than jointly held property)? Should the property be left outright or in trust? Should a spouse or other relative be given a lifetime use of the property, and then should the property be passed on to another beneficiary? Should any real estate be sold or any mortgages paid off?
3.  How much of your assets should be left to your spouse outright or in trust? If left in trust, what provisions do you want to make for your spouse’s use of trust principal to supplement the income that he or she receives from the trust? (If you own community property, ask your attorney how this fact affects your planning.)
4. What should happen to property left to your spouse in trust after he or she dies? Do you want to make the decisions or give your spouse the right to dispose of the property in his or her will?
5. What is the best way to leave assets to your children? Should they share equally or according to their needs? Are there circumstances (disability, lack of financial responsibility) that may suggest that you should make special arrangements for the transfer of your assets to your children?
6. What provisions do you want to make for any of your other relatives or dependents? To charities that you wish to favor?
7. If you own a business, either as a sole proprietor, partner or as a majority shareholder of a closely held company, what steps do you need to take to transfer your interest in a way that won’t disrupt the operation of the business? Or, if you plan to sell your business, what arrangements do you need to make now?
8. What special powers, if any, do you want to give your executor (or, as the position is sometimes referred to, personal representative) and trustee? You might want to give specific instructions to them in several areas, for instance:  the retention or sale of your investments; selling, mortgaging or leasing real estate; distributing bequests in kind; or the management of an ongoing business during the estate settlement period.
9. Do you want your estate and inheritance taxes to be charged proportionately to all of your beneficiaries or allocated in some other way? Your attorney can explain the impact of your choice.
10. Whom do you wish to name as your executor and trustee? Have you determined if they are willing to serve and have the requisite capabilities? Have you considered naming us to settle your estate and provide for the continuing management of assets that you place
in trust?

We would be glad to discuss your estate planning needs with you and your other advisors. Most especially, we would like to tell you more about our capabilities and qualifications and why we are a wise choice to serve as your executor and trustee.

(July 2015) © 2015 M.A. Co. All rights reserved.

Reasonable Excuses

Taxpayers are free to move money from one IRA to another, so long as they complete the transaction within 60 days.  If they hold on to the funds for 61 days, they have a taxable distribution on their hands, and possible penalty taxes as well.

However, the IRS is authorized to waive the requirement if there is a good reason. Here are two actual cases, taken from private letter ruling requests submitted to the IRS last year.

Situation 1. Taxpayer 1 withdrew funds from his IRA, intending to roll them over, but was hospitalized during the subsequent 60 days and couldn’t complete the transaction within the time frame.  In fact, he died soon after.  Taxpayer 1’s executor then asked the IRS to waive the 60-day requirement so that she could complete the rollover (avoiding significant income taxes on Taxpayer 1’s final income tax return).

Situation 2.  A certificate of deposit in Taxpayer 2’s IRA matured, and she put the funds into her checking account, intending to deposit them in another IRA that she owned.  However, Taxpayer 2 was the sole caregiver for her husband, who suffered from a heart attack, a hip replacement, a series of seizures and a stroke, and so she had trouble staying focused on financial issues.  What’s more, during the 60-day period Taxpayer 2’s daughter fell ill, was hospitalized and subsequently died. Taxpayer 2 asked the IRS to waive the 60-day rule.

In the private letter rulings, the IRS granted both requests. The elements that the IRS takes into consideration when waiving he 60-day rule are outlined in Revenue Procedure 2003-16.  Factors other than medical developments that may come into play include postal errors, errors by a financial institution, what was  done with the money, and how much time has elapsed since the IRA withdrawal.  Also, the IRS notes, the waiver does not apply to required minimum distribution amounts.

(July 2015) © 2015 M.A. Co. All rights reserved.

Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. Copyright 2015.

 

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