Wishing you and yours a Healthy, Happy and Prosperous New Year!

I hope you are in the select few that achieve the resolutions they make for 2018. Recent studies have shown that it is more likely that you will achieve your goals if you keep them simple, involve metrics, and publicize them. At Garden State Trust Company, our resolution for 2018 is to provide our valued clients with such exemplary service that they would feel entirely comfortable making a referral to us. And, to those of you that have referred your clients and friends to us for trust services, we will continue to provide such outstanding service that you will continue to recommend Garden State Trust Company.

We fully understand that a referral is the greatest compliment we can receive, and if we receive a referral we cherish the trust extended.

As I mentioned in December, 2018 will mark the tenth year for Garden State Trust Company! In that time, we’ve grown to having four offices in New Jersey, Toms River, Cherry Hill, Lebanon and Linwood in order to efficiently serve the Garden State. We sincerely appreciate the trust we have earned from our clients and the opportunity to help them achieve their goals from generation to generation.

With best wishes,
Ira J. Brower, Founder
The tax reform legislation signed by President Trump on December 22 last year included an important change for many wealthier families. As of January 1, 2018, the amount exempt from the federal estate and gift tax has doubled, to $10 million plus inflation adjustments since 2011 (so $11.2 million in 2018, still higher in the years ahead). That’s per person, so a married couple has $22.4 million worth of transfer tax shelter so far. Here are a few points to keep in mind about the new law:

No estate tax repeal.  Earlier versions of this legislation included the complete repeal of federal estate and gift taxes in the future. That change was dropped along the way.

Temporary boost? The enlarged estate tax exemption expires in 2026, along with all of the individual tax changes, so as to meet projected budgetary targets. In the past, most such temporary tax breaks have been made permanent, and the amount exempt from federal estate tax never has been reduced. Still, the uncertainty casts a cloud over estate plans for the next several years. What’s more, some Democratic politicians are already on record as favoring a rollback of this provision, should the Republicans lose control of Congress. 

Full basis step-up at death.  For the vast majority of estates, planning for income and capital gains taxes will be more important than estate tax considerations. The new law preserves the adjustment of tax basis to fair market value for property received from a decedent’s estate.

Some state death taxes remain. There has been a trend since 2001of states abandoning their estate and/or inheritance taxes, when the federal credit for state death taxes was converted to a deduction. A majority of states have since dropped special taxes at death, but those that have kept them typically have exemptions well below what the federal government provides, some as low as $1 million. Anyone who lives in a state—or owns property in such a state—that still has any type of death tax will need to take that fact into account in estate planning.

Estate planners and their clients will be busy in 2018, as together they sort out the implications of this new law.

(January 2018)
© 2018 M.A. Co. All rights reserved.
Several tax reform ideas affecting retirement planning were bandied about as the recent legislation was being prepared, including limits on deductible 401(k) contributions, elimination of “stretch IRAs,” and requiring minimum distributions from Roth IRAs, similar to the treatment of traditional IRAs. In the end, only one significant change made it into the final legislation, together with a few minor ones.

The important change is that, beginning in 2018, conversions of traditional IRAs to Roth IRAs are irrevocable.

Until now, taxpayers could change their minds and undo a conversion to a Roth IRA through a “recharacterization” of the transaction. The reversal could be made until the due date for the taxpayer’s return, including extensions. That generally meant October 15 of the year following the conversion.

Conversion of a traditional IRA is a serious decision, not to be made lightly. Why might one have second thoughts, and regret the change? Perhaps the investments in the Roth IRA did very poorly, or perhaps the tax situation changed, making the conversion appear unwise.

Example 1 . George converted his $150,000 traditional IRA to a Roth in February of Year 1. The full amount must be included in George’s taxable income for that year. Unfortunately, George’s Roth IRA investments did very poorly, dropping the value of the account to only $100,000 a year later. What’s more, George otherwise had a very good year, earning a substantial bonus. That plus the inclusion of the income from the conversion will push George into a top tax bracket. In April of Year 2, George realizes his mistake, and so cancels the conversion.

Example 2. Janet has two IRAs, each $100,000. She converts each to a Roth IRA, and has very different investment strategies for each. After a year, one account has increased in value and the other decreased. Janet recharacterizes the account that went down in value, to avoid the loss, and keeps the tax-free gain in the other account.

How many taxpayers engaged in such strategies? Unknown, but that opportunity is now closed. However, the opportunity to fix contribution mistakes remains.

Example 3. Amy has a Roth 401(k) account. At her retirement, she directs the plan administrator to roll the money into her Roth IRA. Through a mistake by either the adminstrator or the Roth IRA custodian, the money is rolled into Amy’s traditional IRA. This is not a valid rollover, and if left uncorrected would be a distribution of the funds to Amy. Fortunately she is still allowed to recharacterize the rollover to save the Roth IRA.

Although the new tax law is very clear that 2018 conversions to Roth IRAs will be irrevocable, there is an ambiguity regarding conversions that happened in 2017, before the new law was signed. It would be harsh to, in effect, impose the new rule retroactively on taxpayers who did a conversion earlier in 2017, relying upon the old rules. But an argument can be made either way, given the new statutory language. It will be up to the IRS to resolve the issue.

Tax issues at retirement remain knotty, and are best addressed by an experienced professional.

(January 2018)
© 2018 M.A. Co. All rights reserved.
With the dramatic increase in the standard deduction in 2018, to $24,000 for married couples, many charities are worried that the tax incentive for donations will disappear, leading to lower gifts. Because the state and local tax deduction is now capped at $10,000, married taxpayers will need to have at least $14,001 in additional deductions before itemizing makes sense. A large majority of taxpayers are expected to rely upon the standard deduction instead.

Fears of declining charitable gifts may be unwarranted. Many, many Americans are motivated to make gifts to further their philanthropic goals, rather than to secure a tax deduction. Historically, aggregate charitable giving has fallen only during times of recession, and even then has remained remarkably strong. The booming stock market augers well for charitable giving, if it lasts well into the new year.

Still, it is true that some taxpayers augment their charitable giving by the amount of tax savings that they generate. For the tax-sensitive donors, one way to get maximum “bang for the buck” is to bunch charitable gifts into alternating years.

Example. Mr. and Mrs. Jones donate $15,000 to their church every year. They have more than $10,000 in SALT deductions. They still will itemize their deductions, as their total reaches $25,000. At a top tax rate of 37%, that deduction will save them $9,250 in taxes, $18,500 over two years.

Now let’s say that this couple doubles up on their gift in the first year, and make no charitable contribution in the second year, taking the standard deduction instead. They will save $14,800 in taxes in the first year, $8,880 the second year, or $23,680 over two years. Bunching their charitable gifts in this way saves them $5,180 in federal income taxes if they are in the 37% tax bracket. Those in lower brackets would have less dramatic savings.

If this strategy catches on, it could lead to an increase in the use of donor-advised funds dedicated to charitable giving. A donation to such a fund is irrevocable when made, but the distribution to a charity at the donor’s direction comes later. The tax deduction becomes available the year that the money is placed in the fund, and, therefore, there is no deduction when the charity receives the gift. Any increase in the value of the account from the time of the initial donation to the charitable distribution is tax free.

Going back to Mr. and Mrs. Jones, they might consider contributing their $30,000 to a donor-advised fund in 2018, securing the full tax deduction this year. They would direct the fund administrator to give their church $15,000 in 2018 and another $15,000 in 2019. In that way the church continues to get steady annual support, rather than the roller coaster ride of on-again, off-again donations.

For older retirees
Those who are older than 70 ½ and who have an IRA have another alternative available. They may arrange for a direct transfer of a gift from their IRA to a charity. The amount so transferred will not be included in taxable income, even though it does satisfy the minimum distribution requirements for those in this age group.

Because there is no addition to income, there will not be a corresponding charitable deduction. In effect, the retiree gets the benefit of a full charitable deduction on top of the standard deduction. This “new math” of charitable giving is expected to increase direct gifts from IRAs to charities significantly.

(January 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.