We continue to grow! This past month we added two new members to the Garden State Trust Company team. Kerri Jablonski, a recent graduate of Kean University with a Bachelor of Science in Accounting. Kerri will be providing support to our relationship managers and Barbara Kannheiser, our Chief Operating Officer, when tax season begins. Our other new hire has a familiar last name, Emily Brower. Yes, my daughter! Emily was a legal and compliance professional with extensive experience supporting Consumer Mortgage Lending activities from originations through servicing while at Santander Bank. Emily joins Garden State Trust as a Compliance Officer. Both Kerri and Emily will be working out of our Toms River office.
On a whim, Roland Reyes pitched $2 into an office pool, along with 10 colleagues at his Wells Fargo office in San Jose, trying to win the largest prize in California lotto history. The 11 financial workers, ranging in age from 21 to 60, won the $543 million Mega Millions jackpot with a quick pick ticket and claimed the prize at the Hayward lottery office the day after the July 24, 2018 draw. "If I could win, anybody could win. We're just normal people!" Reyes said in a press release.

All 11 winners have chosen to take the lump sum of $320.5 million, which for each member amounts to $29,140,281 before federal taxes (the state of California does not tax lottery winnings). The lotto earnings will be taxed at the highest bracket, 37 percent, which will come to a whopping tax-bill of roughly $10.7 million.

What would the estate tax consequences be if the 11 financial workers had opted for annuity payout rather than a lump sum? See the informational article Estate Tax On Lottery Winnings in this newsletter. We could only dream!!

Enjoy the rest of your summer,
Ira J. Brower, Founder
Thoughtful planning may create a lasting legacy.

Those who have built wealth during a lifetime of hard work are rightfully concerned about how best to use that wealth for family financial security. As has been noted often, the wealthy want their heirs to have enough to be able to do anything, but not so much that they don’t have to do something. Now more than ever, a family fortune is something to be protected and nurtured.

What is the answer? How can wealth be conserved and deployed on a long-term basis for the benefit of heirs? Trusts could be the answer, for many families.

Trust planning comes immediately to mind when planning for a surviving spouse or an heir who is a minor. With a trust one gets professional investment management guided by fiduciary principles. But what about when the children are fully grown, established in their careers and financially mature, in their 30s or even 40s? Even then, trust-based planning will be an excellent idea for many affluent families. 


Among the key benefits that can be built into a trust-based wealth management plan:

Professional investment management. A significant securities portfolio is a wonderful thing to have, but it requires serious care and attention, especially when economic growth is weak; interest rates are low; and taxes are uncertain. How can adequate income be provided to beneficiaries without putting capital at risk? What is the best balance between stocks and bonds?

Creditor protection. One of the most frequent questions that we hear is, "How can I keep my money and property out of the hands of my son-in-law (or, sometimes, my daughter-in-law)?" Answer: Use a trust to own and manage the property, and give your heir the beneficial interest in the trust instead of the property. A carefully designed trust plan can protect assets in divorce proceedings, as well as protect from improvident financial decisions by inexperienced beneficiaries.

Future flexibility. Parents typically have a fuzzy definition for treating their children "equally." As each child is unique, his or her needs may need financial support that is out of proportion to that of siblings. By utilizing a trust for wealth management, one may give a trustee a similar level of discretion, permitting "equal treatment" on something other than gross dollar terms. The trust document may identify the goals of the trust and provide standards for measuring how well the goals are being met for each of the beneficiaries.

We specialize in trusteeship and estate settlement. We are advocates for trust-based wealth management planning. If you would like a "second opinion" about your estate planning, if you have questions about how trusts work and whether a trust might be right for you, we're the ones you should turn to. We'll be happy to tell you more.


Support trust
For an adult child who needs a permanent source of financial support, with the trust principal protected from the claims of creditors, a support trust may provide a solution. The beneficiary's interest is limited to just so much of the income as is needed for his or her support, education and maintenance.

Discretionary trust
The trustee has sole discretion over what to do with the income and principal, just as the grantor does before the trust is created. The beneficiary has no interest in the trust that can be pledged or transferred. When there are multiple beneficiaries, the trustee may weigh the needs of each in deciding how much trust income to distribute or reinvest, when to make principal distributions, and who should receive them. The trust document often will include guidelines on such matters.

Gift-to-minors trust
For young children, contributions of up to $15,000 per year to this sort of trust will avoid gift taxes. Assets may be used for any purpose, including education funding, and will be counted as the child's assets for financial aid purposes. The assets of a gifts-to-minors trust must be made fully available to the child when he or she reaches age 21. However, the child may be given the option of leaving the assets in further trust.

Source: M.A. Co.

© 2018 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2018, are not reflected in this article.
If estates consisted only of cash and marketable securities, determining their values and death taxes due would be simple. But estates often have assets that are very hard to value, and much estate tax litigation with the IRS concerns getting that value right.

Take lottery winnings, for example. Three people shared a $20 million Ohio Super Lotto jackpot in 1991. Two of them, Mildred Lopatkovich and Mary Susteric, died in 2001, having collected only 11 of their 26 annual payments of $256,410.26. Carol Negron, executor for both estates, made an election for the estates to receive the balance of the lottery winnings as a lump sum. The reason for her election is not certain, but the estates could have been in a death tax cash crunch. The lottery annuity was not assignable and could not be used as collateral to borrow money to pay taxes. The lump sum election created substantial ready cash. Under the Ohio rules, the value of the lump was computed with a 9.0% discount rate, the interest rate in effect in 1991 when the prize was won. Each woman had collected $2.8 million of her $6.6 million share of the prize, and the election put $2.2 million into each estate. Negron reported that taxable value and paid federal estate taxes on it.

IRS has a very different formula for valuing lottery annuity winnings. The Service relies upon market interest rates at the time of death, which in this case were well below the 9.0% actually used to determine the lump sum. For the Lopatkovich estate the interest rate was 5.0%, boosting the taxable value of her annuity by some $500,000; the Susteric date of death yielded a 5.6% interest rate, so her increase was only about $390,000. The executor paid the additional estate tax and filed for a refund, arguing that the IRS tables do not value lottery annuities accurately. The District Court agreed with the estate’s position.

Considering the rarity of lottery winners, and the widespread choice by winners to opt for lump sums over annuities, there has been a remarkable amount of litigation over the proper valuation of lottery annuities for estate tax purposes when winners die before the annuity terminates. The issue has been whether the IRS tables create an accurate value when the tables don’t account for the fact that lottery annuities are restricted; they can't be used as collateral to borrow funds to pay death taxes. Taxpayers have won some and lost some.

In the case of the Ohio lottery winners, they lost when the IRS appealed their case to a higher court. "It is tempting," said the Court of Appeals, "to accept the argument that a person's estate should not be taxed on a lottery annuity amount that it did not receive." Indeed, ordinary people might find that fully persuasive. But in this case the different values arise because the federal discount rate didn't match the Ohio rate. "The two discount rates yielded different results because they served different purposes: one approximated the value of the unpaid annuity as if it had been a lump sum from the beginning; the other valued the annuities as an ongoing annuity or a continuing stream of periodic payments." It is just the estate's bad luck that the high rate operated to reduce the size of the lump sum, and the low rate served to increase the estate's taxes.

© 2018 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2018, are not reflected in this article.
Usually an IRA is invested in stocks, bonds, mutual funds, and perhaps certificates of deposit. Sometimes a retiree may see this nest egg as a resource for a more unconventional investment. In that case, one needs to beware of the rules against self-dealing. Some transactions are prohibited under the tax code, and may lead to a disqualification of the IRA’s tax-deferred status. Here are two examples.

A loan to the IRA owner

In December 1993, Ocean One North, Inc., was delinquent on its mortgage on certain improved real estate. Ernest Willis, a 50% owner of Ocean One, resolved the problem by purchasing the mortgage. To fund this transaction, Willis withdrew $700,000 from his IRA. The loan was for the short term, as Willis returned the money to the IRA 64 days later. If only he’d repaid the money in 60 days!

Then in 1997 Willis engaged in a check-swapping process between his brokerage account and his IRA. Eight times he simultaneously moved money between the two accounts, making total deposits of $2,022,000 into the brokerage account and $1,835,000 into the IRA. The net result of transactions was an increase of $186,500 in the brokerage account, done in such a way that the IRA appeared to make no taxable distributions, as all funds were restored to it within 60 days.

Fast forward to 2007, when Willis declares bankruptcy. Normally, an IRA is a protected asset in bankruptcy, but not in this case. The bankruptcy court found that Willis engaged in prohibited transactions with his IRA, and so at that moment it lost its status as a qualified retirement plan. From a tax perspective, that would mean the $700,000 loan in 1993 was a taxable distribution, and the repayment of it was an excess IRA contribution. That's an academic point, however. From a bankruptcy perspective, the IRA fully was subject to the claims of Willis' creditors, the Court held.

A loan to a parent

In 2005 Stacey arranged a $40,000 loan from her IRA to her father. Another IRA loan was made in 2012, this time $60,000 to Stacey's friend. In 2013, Stacey arranged for a rollover of her IRA to a new custodian. For some reason, the promissory notes for the loans were not rolled into the new account.

The IRS spotted the transaction, and charged that the failure to roll the notes into the new account created a taxable distribution to Stacey of $98,000. (Why the distribution was less than $100,000 was not explained; perhaps $2,000 of principal had been repaid?) Taxes on the distribution, coupled with the penalty for failing to report it plus a 10% penalty because Stacey was not yet 59½, brought the total assessment to some $42,000.

At trial, Stacey initially argued that the notes were rolled into the new account. The Court then ordered both sides to prepare additional memoranda on whether the loan to Stacey's father was a prohibited transaction under the tax code provisions of ERISA, and what the tax consequence of that would be.

Both parties concluded that the loan was a prohibited transaction, with the result that the IRA ceased being an IRA the year that the loan was made. Accordingly, the distribution of the notes, even if it occurred, would not result in additional taxable income to Stacey in 2013.

Because the IRA terminated so long ago, the statute of limitations for collecting additional taxes that should have been paid in 2005 has expired.

However, Stacey may not be entirely off the hook. Presumably she needs to refile her returns for all open years to report the investment income from the account that became an ordinary investment account in 2005. What's more, the attempted rollover in 2013 was not proper, and the entire amount may be an excess IRA contribution, subject to a 6% excise tax until it is withdrawn.

(August 2018)
© 2018 M.A. Co. All rights reserved.
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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. ©2017. All rights reserved.