Whether we are providing investment management services as Trustee of a Living Trust or as Agent under an Investment Management agreement one of the first things we do is to develop an Investment Policy Statement (IPS) with the client.  

The IPS brings organization and structure to investing by requiring the client to confirm our agreed upon plan for managing of the investments. The IPS is a dynamic document meaning that as time passes it allows the client and Garden State Trust Company to assess how the agreed upon investment strategy is working and what changes if any, may be necessary. 

This blueprint, our IPS, will begin with a profile of the client’s investment time horizon, tolerance for risk, tax bracket and family situation in order to narrow down a desired asset allocation. We discuss the client’s goals both for the short and long term and how the investments will meet specific needs. In order to meet the client’s needs, we talk about the selection of investments that will be used to develop the asset allocation which is diversifying the portfolio among different asset classes.  

Lastly, and most importantly, is agreeing upon our client’s expectation of communication to discuss the portfolio of investments. As I have mentioned so many times before Garden State Trust was founded on three very simple guiding principles – communication, objectivity and above all trust.

I just witnessed a great 2017 Masters golf tournament. What was more impressive than the level of golf Sergio Garcia and Justin Rose were playing was the level of sportsmanship displayed. It was so refreshing to watch two professional athletes locked in a dead heat trying to win such a prestigious tournament congratulating each other after a great shot. A lesson to be learned!

Sincerely,
 
  Ira J. Brower, Founder
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.
(April 2017)
© 2017 M.A. Co.  All rights reserved.
THE WRONG IRA BENEFICIARY?
Sometimes mistakes in an estate plan can be repaired after death. Sometimes not.

Charles Sukenik executed his will on November 4, 2004. His estate was to be divided between his surviving spouse, Vivian, and the couple’s private foundation. His revocable trust was restated at the same time, giving Vivian certain real property and the balance to the foundation.

Roughly five years later, in 2009, Charles designated Vivian as the beneficiary of his IRA, worth some $3.2 million. When Charles died in 2013, the heirs discovered that the estate plan was not very tax efficient. Vivian was looking at potential income taxes of $1.6 million on the IRA distributions. She proposed to reform the estate plan, giving the IRA to the private foundation in exchange for other estate assets of equal value. The charity was not opposed to the plan.  Being tax exempt, the new plan would make the income tax obligation that comes with an inherited IRA disappear. Certainly, this approach would more effectively implement Charles’ testamentary intentions.

The Court couldn’t swallow this one, because “the reformation requested here 
is prompted by neither a drafting error nor a subsequent change in law.
Several years  after executing his will and trust, decedent himself thwarted the tax efficiency of his own estate plan by making [Vivian] the beneficiary of the IRA. There is nothing in the record indicating why, after executing these estate planning instruments, [Charles] chose to leave additional assets to his wife in this manner or why, in the four years before his death, he did not take steps to cure the unfavorable tax consequences of his choice of IRA beneficiary.”

The Court concluded that if reformation were allowed in these circumstances, the decision “would expand the reformation doctrine beyond recognition and would open the flood gates to reformation proceedings aimed at curing any and all kinds of inefficient tax planning.” 

Did Charles have any understanding of the tax time bomb that he included in his estate plan? It appears probable that he did not consult his attorney before designating his wife as his IRA beneficiary, which is an ordinary, everyday occurrence. But he should have.
(April 2017)
© 2017 M.A. Co.  All rights reserved.
THE PROBLEM OF FAITHLESS TRUSTEES

There’s been quite a bit of press coverage of “fiduciary duties” when it comes to professionals giving financial advice. Bank trust departments and trust companies always have been held to the fiduciary standard, and are proud of it. Unfortunately, there are some documented cases when individuals with such duties simply ignored them.

SPECIAL NEEDS

Lawrence and Millicent Stream, a successful professional couple, had an autistic son, Larry. Although Larry’s condition was not severe, his parents saved for a trust to provide for him for the rest of his life after they had died. They accumulated about $2 million in that trust for Larry.

The trustee of the Larry’s trust was Layton Perry. We don’t know how the couple knew Mr. Perry, why they chose him as trustee, and why they did not choose a bank trust department or trust company for this important job. We do know that Perry was a disbarred lawyer.

Fortunately, Perry was not named Larry’s legal guardian. That job fell to Carolyn Crepps, who had worked as a legal assistant. She investigated Perry’s management of the trust, and she found that he and his wife had used the assets to buy new cars for themselves, had made mortgage payments on their own home, and had made many personal withdrawals from the trust with no documentation or explanation. The $2 million fund had been reduced to $200,000.

Crepps asked the probate court to remove Perry as trustee, and he was removed. The court ordered the sale of the Perrys’ cars and home, with the proceeds returned to the trust. However, that did not bring the trust fund back to its full $2 million balance.

Larry Streams was not stupid, but he was much too trusting of other people. As were his parents.

OLD MONEY

James Stillman, onetime Chairman of the National City Bank of New York (which years later would be renamed Citibank), was very rich. At his death in 1918, his fortune was estimated at $1.8 billion in today’s dollars. His son Chauncey used a portion of that fortune to create a family retreat, which he named “Wethersfield.” He purchased art, built a mansion suitable for displaying it, and installed gardens in the style of 17th-century Italy. A family foundation was created to manage the family’s money and implement their philanthropy. 

In 1998 the family foundation was worth $103 million. Unfortunately, there were no family members on the board of trustees to provide proper oversight. The trustees made grants to institutions that had nothing to do with the Wethersfield Estate, including their own alma maters, and the ex-president directed over $700,000 for his personal benefit. By April 2015 the value of the foundation had shrunk to $31 million, after 14 straight years in which grants made by the foundation exceeded its revenue.

The heirs finally woke up and brought suit against the trustees, and eventually they won a settlement of $4.4 million. The trustees were replaced, and the board now includes family representation. The legal settlement won’t be enough to save the Wethersfield Estate, so now the heirs have agreed to sell some of Chauncey’s art collection, including works by Degas and John Singer Sargent. They are hoping to raise $12 million.

There is a saying: Rags to rags in three generations. The saying is usually interpreted to mean that the first generation creates wealth; the second conserves it; and the third squanders it. In this case it was the untrustworthy managers who squandered the fortune, but the third generation did their part by failing to supervise their advisors properly.
(April 2017)
© 2017 M.A. Co.  All rights reserved.
ARTICLES OF INTEREST

11 Trips You Need to Take As Soon As You Retire – Travel & Leisure
You've got all the time in the world and all the world to see. Start planning.   read more...

Lump Sum Payments at Retirement Are Often Quickly Depleted – Money Magazine
A Scary Percentage of Retirees Blow Through Their Workplace Savings When They Take a Lump Sum   read more...

What to Do If You or Someone You Love Has Been Financially Exploited - US News
Though recovering money and assets is difficult, steps can be taken to get life back on track.  read more...

Toms River, NJ  
Lebanon, N
Cherry Hill, NJ
  732-255-5000
908-287-7188
856-251-1300
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. ©2016. All rights reserved.