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IN THIS ISSUE
THE IRA TURNS 50
"YOU'VE COME A LONG WAY, BABY"
HAS TAX LAW ECLIPSED MOORE'S LAW?
ARTICLES OF INTEREST
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If you are reading this, then it is not too late to initiate your estate plan. Or for that matter, update your existing estate plan. Life is uncertain and delaying or ignoring this most important plan oftentimes does not have a good outcome; especially, if you have sizeable estate assets.
Thinking about mortality is hard. When it is yours, it is even harder. However, thoughtful planning can make a tremendous impact on what happens afterward. An ounce of prevention before one passes away will alleviate the need for pounds of cure in estate settlement afterward.
Here are two examples of famous celebrities who did not plan ahead:
Prince
Pop star Prince died without having made a will or taking any other estate planning steps. What is more, there were tricky questions about who his heirs would be, as he died without children or a surviving spouse. The estate's executor had to deal with those matters while an inventory of Prince's assets needed to be compiled and valued. Eventually six heirs were identified. Three of them sold substantially all their expected inheritance to music company Primary Wave. The executor reported a total value for Prince's estate of about $82 million. The IRS believed that his fortune was worth nearly double that, $163 million, which would have meant additional estate taxes of $32 million and a penalty of $6 million for the substantial understatement of the tax liability on the estate tax return. After a series of negotiations, the estate and the IRS reached a compromise, valuing Prince's estate at $156 million, six years after his death. Now that the tax issues are taken care of, the heirs can begin promotions of Prince's music and likeness. Reportedly there are plans for music exhibitions, films, even Broadway shows. Primary Wave's statement: "When we announced our acquisition of the additional expectancy interests in the estate last year bringing our ownership interest to 50%, our goal was to protect and grow Prince's incomparable legacy. With the distribution of estate assets, we look forward to a strong and productive working relationship."
Chadwick Boseman
The star of Black Panther, Chadwick Boseman, died at age 43 after a years-long struggle with colon cancer, something that he had kept completely private. He left an estate of $3.8 million before funeral and administration expenses, and he did not have a will despite his impending mortality. Boseman's wife, Simone Ledward-Boseman, oversaw the settlement of his estate. Expenses included about $51,000 in unpaid taxes and the purchase of two mausoleum crypts for Boseman's parents, as well as lawyer's fees. Simone asked that the remaining balance of the estate, $2.3 million, be divided equally between her and Chadwick's parents, about $1.15 million each. Boseman's two brothers did not share the estate. One reason that the settlement of the estate was so costly and took two years was the absence of a will.
We cannot be sure that the distribution of the estate was in accordance with Boseman's or Prince's wishes but needed to be guided by the laws of intestacy. Even if this was exactly the result Chadwick Boseman would have wanted, meeting with an estate planning attorney to get his estate plan in writing would have saved considerable time and money.
The assets were tied up for a considerable amount of time because of the thorny issue of valuation.
No matter how much we at Garden State Trust Company stress the merits of having an estate plan, we know there will be those who have not heard our message. There will be others who heard the message but did not pay enough attention. There will also be those that heard it, paid attention, and followed through with it but we never found out because they went to someone else (we are still happy they did).
As the Prince and Chadwick Boseman situations demonstrate, an estate plan can shorten the time period needed to transfer assets so they can be utilized by those that need them. Administration fees might be reduced, and addressing valuation issues could help prevent litigation with the IRS.
It is not just about increasing the underlying value of the estate though. Among other things, a good estate plan can help to avoid family arguments, provide a lasting legacy and can pass on merits that help increase the likelihood of good habits, wealth, and success in loved one's lives. It can achieve charitable goals and finance a positive change in a stranger's life.
If there is one message or take away from this please, please do not procrastinate with your estate plan. You owe it to yourself and your family to take this all important initiative.
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MONTHLY QUESTION & ANSWER | |
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Q. Do I really need to have a will? Do I have to see a lawyer to have a will?
A. We say YES!!
If you die without a valid will, you are "intestate." Every state has "laws of intestacy" which govern property distribution when a deceased owner did not take the trouble to have a will drawn up. This default rule will always reach a conclusion. Whether that conclusion is satisfactory is a different question.
Let me tell you about a lawyer friend who was well versed in trust and estate planning. He knew better than most why a will is important, yet he and his wife never did their wills. They were always too busy. After his wife died of breast cancer, after he had to settle her estate working within the law of intestacy, he finally did have his own will drafted. He recognized that the equalization regime provided by state law was not at all appropriate for his new circumstances.
August is "National Make-A-Will Month." For the two-thirds of Americans who do not yet have a will, it's a reminder that this chore should be undertaken by every responsible person who owns property or investment assets. We strongly recommend seeing an estate planning lawyer, to be confident that there won't be any oversights in the development and execution of your plan.
By the way, one of our more important services to families is the settlement of estates. You may nominate us to be the executor of your estate when you have your will drafted. To learn more, please make an appointment to see us at your earliest convenience.
© 2024 M.A. Co. All rights reserved.
HAVE A QUESTION ON TRUSTS, WILLS, OR INVESTMENT MANAGEMENT?
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For general informational purposes only. This information does not constitute legal advice. | |
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A new report from the Tax Foundation reveals that 1.9% of our GDP is eaten up by tax compliance costs. Read more about this and some amazing facts in our Informational Article, Has Tax Law Eclipsed Moore's Law?
Happy 50th Anniversary IRA (no not me). Once upon a time, there was no such thing as a tax break for individual retirement savings. That was before 1974, before passage of the Employee Retirement Income Security Act (ERISA). IRAs have now become the single largest financial asset for retirees. Read, The IRA Turns 50.
In keeping with the celebrity theme in our lead article this month please read in one of our Of Interest Articles, What We Can Learn From Tony Bennett's Estate Dispute. Bennett's daughters are suing their brother over the family trust, which could have been avoided had Bennett done some things differently.
Enjoy what remains of Summer.
Sincerely,
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Once upon a time, there was no such thing as a tax break for individual retirement savings. That was before 1974, before passage of the Employee Retirement Income Security Act (ERISA). The primary purpose of ERISA was to make certain that the retirement promises made by private companies to their employees would be kept, and that tax-preferred retirement savings programs would be made available in a nondiscriminatory fashion. But what about those who did not participate in an employer plan? For them, the Individual Retirement Account was created. At that time, up to $1,500 could be contributed by eligible taxpayers to an IRA, and a corresponding deduction taken. The eligibility rules were later loosened in 1981, but the tax deduction was later scaled back for higher-income taxpayers. In 1998, the Roth IRA was introduced, providing for an after-tax savings option with potentially tax-free distributions.
According to the Investment Company Institute's 2024 Fact Book:
- 56 million U.S. households owned an IRA at year-end 2023.
- Total IRA assets have reached $13.6 trillion, which is about 35% of all U.S. retirement assets.
- The next largest category, at $7.4 trillion, are 401(k) plans, followed by private-sector pension plans with $3.2 trillion.
- Mutual funds comprise 43% of IRA assets.
- The spectacular growth of IRAs has been fueled in part by rollovers from company retirement plans.
- Roth IRAs have $1.4 trillion in assets, while traditional IRAs have $11.4 trillion.
- New traditional IRAs mostly come from rollovers (74%), and new Roth IRAs mostly come from annual contributions (77%).
- IRAs are being used for their intended purpose, making retirement more financially secure. 60% of those making traditional IRA withdrawals are 70 years old or older, while just 6% are under age 59.
- Roth IRA owners generally avoid withdrawals, as only 6% of owners take them.
- Median ages are 51 for Roth IRA owners, 62 for Traditional IRAs. That may reflect the importance of IRA rollovers at retirement to preserve tax benefits.
(August 2024)
© 2024 M.A. Co. All rights reserved.
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"You've Come a Long Way, Baby" | |
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In 1967 the Phillip Morris tobacco company wanted to introduce a new, slimmer cigarette. They turned to their advertising agency, Leo Burnett Agency, for marketing ideas. The ad creatives kicked ideas around for a month, eventually coming up with the concept of a cigarette "designed" exclusively for women. The new product was Virginia Slims. The memorable tag line: "You've come a long way, baby." The product launch was a huge success.
Whether an increase in tobacco consumption by women is an achievement to celebrate is debatable. What is not up for argument is that women have more wealth in 2024 than they have ever had before in human history. Some data nuggets from a recent CNBC story:
- Women make up 11% of the world's millionaires, nearly double the share as recently as 2016.
- Women are projected to inherit some $9 trillion in horizontal wealth transfers in the coming years, as they survive their husbands by an average of four years.
- Women will control most of $30 trillion in baby boomer wealth by 2030, according to a McKinsey report.
- McKinsey also stated that, compared to five years ago, 30% more married women are making the financial and investment decisions for their families.
The shift in wealth ownership has important implications for philanthropy, as well as institutions in the business of wealth management. With great resources comes great responsibility, as seen with the efforts of notable female billionaires.
For an entertaining review of the ads for Virginia Slims, see https://flashbak.com/youve-come-a-long-way-baby-virginia-slims-advertising-year-by-year-365664/. The slogan was dropped in the 1990s, having worn out its appeal. For a look behind the creative curtain in the development of the ad campaign, see https://www.industrydocuments.ucsf.edu/tobacco/docs/#id=jmnb0122.
(August 2024)
© 2024 M.A. Co. All rights reserved.
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Has Tax Law Eclipsed Moore's Law? | |
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Two things are required to comply with the federal income tax: time and money. The money part is the roughly $4.9 trillion in federal tax collections, amounting to 17% of the U.S. gross domestic product. How about the time element?
The Tax Foundation has issued a new analysis, relying on figures developed from the White House Office of Information and Regulatory Affairs. Americans will spend more than 7.9 billion hours to comply with tax filing and reporting requirements in 2024. That is the same as 3.8 million full-time workers doing nothing but tax paperwork--which comes to 46 times the IRS workforce. This is why the U.S. tax system is characterized as a "voluntary" system, as most of the cost of compliance falls upon those trying to comply.
The report converts those hours spent on taxes to an estimated cost of $413 billion in lost productivity. There's an additional out-of-pocket expense, for computer software or accountant services and such, that adds $133 billion to the bill. Total compliance costs come to $546 billion, which is about 1.9% of GDP. For comparison, that is larger than the entirety of corporate income taxes collected, which is 1.8% of GDP.
New rules for cryptocurrency
The advent of virtual currencies such as bitcoin has created new and novel tax problems. The IRS treats virtual currency as property, with a tax basis, not as money. Thus, every use of cryptocurrency in a transaction represents a possible capital gain or loss. In 2022 keeping track of such transactions required 674,000 hours. However, the Infrastructure Investment and Jobs Act dramatically expanded the requirements, to a projected 2.2 billion hours, a cost of $123.7 billion.
The new rules were projected to raise $28 billion in new tax revenue over 10 years, not quite $3 billion per year. The costs and benefits of the new requirements seem unbalanced.
Moore's law posited that the number of transistors on a chip would double every two years at very little increase in cost, which in turn led to the explosive growth of many tech firms through continuously improved efficiency. One might think that because 94% of individual tax returns are prepared with computer software and 90% of returns are filed electronically, efficiency gains would cause compliance costs to fall. That has not been the case, according to the IRS' own estimates.
Why not? Because tax law has become ever more complicated faster than technology can keep up. Concluded the report: "Tax law has trumped Moore's Law."
(August 2024)
© 2024 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. ©2024. All rights reserved. | | | | |
