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IN THIS ISSUE
WHO PAYS INCOME TAXES?
FAQs ABOUT TRUSTS
ENFORCING A LIVING WILL
ARTICLES OF INTEREST
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This month I want to share with you a recent Blog we posted on our social media outlets.
Traditional IRAs and 401(k) and similar retirement plans have the wonderful feature of using pre-tax income to maximize the retirement nest egg. Eventually those deferrals--and their earnings--must face the tax man. For those turning 73, or those that are older than 73, Required Minimum Distributions (RMDs) must occur every year.
The minimum amount that must be withdrawn every year increases with age and is a percentage of the account rather than a dollar amount. Here are some example percentages:
73 years old - 3.77%
83 years old - 5.65%
93 years old - 9.9%
103 years old - 19.23%
These RMDs are important to take, as the penalty for not doing so is quite severe, 25% excise tax for the amount not withdrawn (10% if it's corrected in two years).
Those who are philanthropically minded might want to consider a QCD, or qualified charitable distribution from their retirement accounts. By arranging for a direct transfer of funds from an IRA to a favorite charity, up to $100,000 per taxpayer per year, one can accomplish the move sometimes referred to as a "charitable IRA rollover." The amount transferred will not be included in taxable income, but it will satisfy the RMD for the year. Because there is no income inclusion, there is no corresponding charitable deduction.
Avoiding more taxable income by making a gift to charity may have other rewards, in addition to the satisfaction that comes from charitable giving. For example, those who do not itemize get no benefit from the charitable deduction. At some income levels, an increase in taxable income can boost the income tax due on Social Security benefits. Dodging the income inclusion avoids this tax boost.
Those who are making substantial gifts to family members may want to consider using the annual gift tax exclusion for all its worth every year. For 2024 the annual exclusion amount is $18,000 per recipient, and that's going up to $19,000 for next year. Major gifts of property are subject to a federal gift tax, much as estate transfers are. However, the annual gift tax exclusion shields modest gifts from tax and filing requirements.
Generally speaking, every taxpayer is allowed to give an annual exclusion amount to each of as many individuals as he or she desires. What's more, a married taxpayer, with the help of his or her spouse, can double the tax exclusion. (This "gift-splitting" must be reported by filing a gift tax return.)
Now, $18,000 or $19,000 may not sound like much in a multi-million-dollar estate. However, consider the possibilities for married grandparents with four children and four grandchildren. As much as $288,000 can be gifted to the eight in 2024, more in subsequent years. In four years, the total would reach over $1 million. What's more, each of the recipients (or the trustee for each grandchild) presumably will invest the amounts transferred each year so it would grow in their hands outside of the estate.
These are just a couple of year-end tax moves that have to do with giving gifts. Year-end tax planning often concerns deferring income, accelerating deductions, and harvesting capital losses to offset realized capital gains. It can be complex and different for every family based on their priorities and wealth management goals, with projections of how things might play out in future years regarding taxation. We recommend both consulting a tax advisor and an annual review with your trust or wealth management officer. If you're interested in a consultation, please don't hesitate to let us know.
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MONTHLY QUESTION & ANSWER | |
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Q. I'm retired, and I'm having a hard time keeping up with inflation. I've recently learned about a great sounding investment that could be the answer I'm looking for. The guaranteed yield is 15%, and the principal is insured, so there is no downside. I'm considering rolling most of my IRA money into this investment, it would set me up for life. What do you think?
A. We think that investments that sound too good to be true are not, in fact, true. The cleverest investment con men no longer promise quick riches, they instead promote steady, safe, above-market returns.
The investment you've described sounds very much like the one that Richard Whitacre invested his entire 401(k) money in, as detailed in The Wall Street Journal [" 'I Don't Know Where to Turn or What to Do,' His $763,094 Retirement Fund is in Limbo," November 22, 2024]. He thought he was buying a 15.25% guaranteed return. Instead, he is getting no payments, and the company that sold the investment has been dissolved. The insurance company denied providing any coverage, saying "the paperwork and signatures of our officials were used fraudulently." It is unclear how much of his investment Mr. Whitacre will recover, and it is possible that whatever he receives will be a taxable distribution from the terminated IRA. The SEC and some state authorities are now looking into the matter.
We recommend that you investigate further before you invest. Be confident that you understand how that 15% return will be generated, and the bona fides of any guarantee of your principal.
(December 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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Did you know that the bottom 50% of taxpayers, nearly 77 million taxpayers with income less than $50,339, together paid only 3% of the income taxes collected by the IRS. What about the top 10% and the top 1%. How much did they pay? Read our Informational Article, Who Pays Income Taxes? to learn more.
For golf dreamers, read our Of interest article, Top 100 Courses in the U.S. for 2024-25: America's Finest Designs, Ranked From 1 to 100.
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A recent report by the Tax Foundation sheds some interesting light on the distribution of the tax burden in the United States. Among their findings, based upon IRS data for 2022:
- The top 1% of taxpayers, those with income above $663,164, paid 40% of the total income tax. Of course, those with the most income will pay the most tax, but in the case of the 1% their share of the income tax burden is almost double their share of the national income, 22%.
- The top 10% of taxpayers provide 72% of income tax revenue, while they earn 49% of the national income. These are taxpayers with incomes above $178,611.
- The bottom 50% of taxpayers, nearly 77 million taxpayers with income less than $50,339, together paid only 3% of the income taxes collected by the IRS. The report notes that arguably they paid even less than this percentage, because refundable tax credits are treated as spending rather than lost tax collections.
- The bottom 50% had an average tax rate of 3.7%, while the average tax rate for the top 1% was 26.1%. The table below show average tax rates for other groups.
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Caveats
The Tax Foundation study does not take Social Security taxes into account, which the bottom 50% must pay on their wages. That would bring their average federal tax burden much closer to 20%, if the employer share of FICA is attributed to the employee.
Having a high income in a particular year and being wealthy are two very different things. A retiree might have several million dollars in assets yet take only a modest amount of income each year to meet living requirements.
The question of a "fair share" in taxation is a political one. When the debate turns to whether billionaires are paying their "fair share," the focus is often on the increase in the value of their stockholdings. Such increases are not taxable until the asset is sold, the gain "realized."
(December 2024)
© 2024 M.A. Co. All rights reserved.
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What do you think of when you hear the words "trust fund"? Many people will associate those words with the Astors, the Rockefellers or the financial titans of the 19th century. Those families did indeed employ trusts for the long-term care of family wealth. But you don't need to have billions to benefit from a trust-based wealth management plan, thanks in part to advances in technology. More and more affluent families these days are exploring the unique financial management and financial protection advantages of trusts. Here are questions that we hear frequently, and our answers.
What is a trust?
A trust is a formal, legal arrangement for the continuing care and management of property. Typically a trust is created when someone transfers money or property to a trustee, either an individual or a trust institution or bank trust department. The trustee holds title to the trust assets and manages the trust fund solely for the benefit of one or more beneficiaries.
Can the person who creates a trust also be the beneficiary of the trust?
Yes, that is very a common approach. In a typical revocable living trust, a husband and wife might transfer their investment assets to the trustee with the expectation that the trustee will handle their investments for the rest of their lives. The trustee may remit trust income to the couple as needed, or may be authorized to pay their bills directly from the trust.
Can I be my own trustee?
Yes, you can be the trustee of your trust, or you can have a trusted family member be the trustee. But that's not a course we would recommend. Some very important reasons to let us be trustee of your trust are:
- To gain access to professional management of your assets.
- To have someone available to stand in your financial shoes should illness or incapacity strike.
- To provide financial support for your loved ones during your lifetime and beyond.
- To put all the chores of trust administration into experienced hands.
What's the best age for setting up a trust?
As a practical matter, a great many people first give serious consideration to establishing a trust as they approach retirement, or when they do their estate planning. However, many young entrepreneurs have used trusts for their wealth management once they achieve early success. There really is no "best age."
How is a trust different from other investment accounts?
A trust has an independent legal existence that makes it durable. It can survive the incapacity or death of its creator. The trustee continues to manage the trust according to its stated purposes, stepping into the shoes of the person who created the trust.
If a trust has an independent legal existence, does that mean it must pay income taxes?
In the more usual case, trust income is distributed to the beneficiaries and they pay the taxes. However, if the trust accumulates its income, yes, the trust does pay income taxes, and the tax brackets for trusts are very compressed.
Can I change my mind after I create a trust?
That depends upon what sort of trust we're talking about. A charitable trust is normally irrevocable and can't be modified. A trust in a will can be changed simply by amending the will.
Usually, this question arises about revocable living trusts, and in that case the answer is yes; you remain in full command. You can change the beneficiaries, add assets, withdraw the assets, even terminate the trust should you decide that it is not right for you and your family.
(February 2022)
© 2024 M.A. Co. All rights reserved.
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Lynne Chesley signed a living will (sometimes called an advance medical directive) in 2013 that stated she did not want to have her life extended by artificial means. Among other things, that would mean no feeding tubes. Lynne designated her sister, Amy, as her proxy for making medical decisions should Lynne become incapacitated.
In 2021 Lynne was hospitalized with pneumonia, and a feeding tube was inserted. Her children asked that the tube be removed, consistent with the directive that Lynne had executed. Amy disagreed. Amy said, in a related case, "I don't believe in killing someone before they are ready to die." She claimed that when Lynne was told the removal of the tube would be painful, Lynne made movements, and that these movements amounted to a revocation of the living will and a request to keep the feeding tube in place.
A three-year court fight followed. Ultimately, the Oklahoma Supreme Court sided with the children, held that the living will must be honored, and Lynne was allowed to die.
Did Lynne ever discuss her living will with Amy? Did Amy candidly share her beliefs? What was Lynne's quality of life during the litigation? This case suggests that there was a real failure of communication.
Having a living will and designating someone for making medical decisions has become a normal element of estate planning. Some people will want to take all possible steps to extend their lives, others prefer to keep medical intervention at the end of life to a minimum. A living will is essential for providing guidance. Equally important, a serious conversation is necessary with the person who will be designated to make medical decisions. Does the person understand and agree with the wishes? Will the person be able to carry them out?
(December 2024)
© 2024 M.A. Co. All rights reserved.
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WALL - MAIN OFFICE
732-255-5000
SOUTH JERSEY / PHILADELPHIA REGION
856-281-1300
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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. | | | | |
