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IN THIS ISSUE
CHECK YOUR BENEFICIARY DESIGNATIONS
FAQs ABOUT TRUSTS
COMPANY-OWNED LIFE INSURANCE PROCEEDS ARE TAXABLE
ARTICLES OF INTEREST
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"Patience is a virtue" is a proverb, which is a short declaration that expresses a socially accepted truthfulness. One of the ideas that this phrase conveys is that being patient and waiting for something you desire can be a good thing. For one individual in particular, patience was a profitable decision. Please allow me to explain.
July is somewhat of a special month to those that believe in deferred gratification because it starts out with Bobby Bonilla Day. Bobby Bonilla was a famous baseball player who played for the New York Mets, and though he is retired now, he is still receiving almost $1.2 ($1.19 to be exact) million dollars every year through 2035 from his former employer. This may seem like a generous retirement package, but in fact it is a deferred compensation package dating back to the year 2000. More details can be found in this EPSN article, but the most unbelievable point is that the Mets bought out his $5.9 million contract with a deferred compensation package that incorporated an 8% interest rate. This meant they would start paying him 10 years later, nearly $1.2 million every year for 25 years, almost $30 million.
The speculation on the fantastic terms on this deal turn on the Mets needing more cashflow to hire other players that year, and that the owner could outperform the amount needed to pay Bonilla with the fantastic returns he was getting from Bernie Madoff (we know how that ended up).
This wasn't the only time that Bobby Bonilla chose deferred compensation though. He also has a deferred compensation package from the Baltimore Orioles that began in 2004 for $500,000 a year until 2029.
For those of us that are not sports stars and don't have multimillion dollar contracts, there are more conventional ways to defer gratification into retirement.
Early on in your career - If you have 35 years to save, the way Bobby did (until his final payout in 2035 when he turns 72), investing into an IRA is a way for a person to hold off on spending now to receive more in the future. Although it should be realized that inflation will erode purchasing power in that time as well, $7,000 invested today with a 7% average annual return 35 years later would turn into $74,736! Deferring that $7,000 (or more in a 401(K)) each year early in the workforce with a lot of time for compound returns can really make that delayed gratification an attractive resource in retirement.
Closer to retirement - Another delayed gratification possibility for average people when it comes to retirement is when to start taking social security benefits. If you start benefits early, then you lose 8% of what you would receive each year at normal retirement age. If you delay benefits until you are 70, you receive an additional 8% per year past full retirement age for the rest of your life. Actuarily, when you take the projected age of everyone into account it all balances out. This means that you will only receive more by delaying if you also beat the average life expectancy and are long-lived. Looking at health and family history is important here, but this is also one of the few times you can increase a payout that is automatically indexed to inflation.
More and more people are considering semi-retirement, or a work-optional lifestyle where they only work some of the time but aren't quite sure if they are financially well off enough to begin the gratification of retirement or need to keep delaying.
That's where we come in. Though many associate what we do with only trust and estate planning, we also handle investment management accounts and can do a holistic overview of your financial situation to help plan retirement spending and see if you are ready. We can provide portfolio management as well, so you can take the time you would like to focus on retirement or work as you choose, having your financial management running in the background.
So patience really can be a virtue when planning for retirement and delaying gratification may be one of those important strategies to incorporate into your life.
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MONTHLY QUESTION & ANSWER | |
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Q. How much can I save on my income taxes if I put my investments into a living trust?
A. Nothing. A revocable living trust that a grantor sets up to manage his or her wealth provides no income tax advantages. The trust's income and capital gains are taxable to the grantor.
The benefits of a living trust are elsewhere. When we are the trustees of your living trust, you get investment convenience and our professional expertise in investment supervision. You can leave the investment worries to us.
Living trusts also provide financial privacy at death. This can be very important to celebrities, and you may think that it won't be as important to your family if you are not famous. Still, do you really want the whole world to be able to know what your beneficiaries will receive after you die? Because that is what will happen when your will is probated.
We would be most pleased to discuss living trusts with you in more detail -- 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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In the Check Your Beneficiary Designations Informational Article find out what can go wrong when you do not check your beneficiary designations from time to time. In this article, a man's ex-girlfriend is likely to receive his retirement fund forty years later.
In another of this month's Informational Articles, FAQs About Trusts, learn the answers to several commonly asked questions about trusts.
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On a company note, The Estate and Financial Planning Council of Southern New Jersey (EFPCSNJ) held its Installation Dinner on June 19, swearing in its new President Sean Rice (above, left), who will serve as President for a term of one-year and will be responsible for coordinating and organizing educational seminars and networking events for EFPCSNJ.
Sean is our Senior Vice President & Trust Officer, Regional Manager South Jersey and Philadelphia and a Certified Trust and Fiduciary Advisor with Garden State Trust Company in Marlton. We are very proud of Sean's accomplishment.
Wishing you and yours a very safe and enjoyable summer.
Sincerely,
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Check Your Beneficiary Designations | |
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Jeffrey and Margaret were in their 20s when they met in a park and began dating. They moved to Sullivan County, Pennsylvania, living together while Margaret waitressed and Jeffrey got a job at Proctor and Gamble. In 1987, Jeffrey signed up for P&G's profit sharing and savings program. He listed Margaret as his beneficiary, stating that she was a "cohabitor."
Two years later, the couple broke up. According to Margaret, it was because she wanted marriage and children, he did not. Margaret soon did marry and have children.
Jeffrey remained unmarried and childless throughout his life. He lived with a new partner, Mary Lou, for several years, until 2014. During that time he designated his mother and Mary Lou as beneficiaries of his life insurance. After his mother died, Mary Lou was the sole beneficiary.
Jeffrey died in 2015, at age 59, a few months before he planned to retire. His largest asset was the P&G retirement fund, then worth some $750,000. He had never changed his beneficiary designation. And he never made a will.
Under ERISA, beneficiary designations control who receives retirement accumulations after the owner dies. Jeffrey's brothers, as executors of his estate, did not believe that he wanted all this money to go to an ex-girlfriend. P&G asked a federal court to decide who would get the money. The brothers alleged that P&G had violated its fiduciary duties by not getting Jeffrey to change his beneficiary designation, but the court noted that forms sent to Jeffrey over the years repeatedly admonished him to check this issue. The most recent court ruling was in favor of Margaret, but the brothers announced that they will appeal.
What if Jeffrey had made a will? A will does not normally overrule a beneficiary designation for insurance proceeds or retirement benefits, so it might not have prevented this litigation. However, it could have provided some insight into Jeffrey's intentions for the funds--perhaps he really did want Margaret to be the beneficiary of the retirement fund, which had grown to over $1 million by 2020. Had Jeffrey consulted an estate planning lawyer, the lawyer likely would have advised him to take steps to remove all ambiguity about his wishes, including a more forceful recommendation to check the beneficiary designations.
Nine years after Jeffrey's death, the retirement money is still being held in escrow.
(July 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.
© 2022 M.A. Co. All rights reserved.
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Company-Owned Life Insurance Proceeds Are Taxable | |
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Brothers Michael and Thomas Connelly were the sole shareholders of a corporation. The corporation obtained life insurance on each brother so that if one died, the corporation would have ready cash to redeem his shares without impairing the company operations. A buy-sell agreement was in place, giving each brother the right to buy the other's shares at death, and the corporation would redeem the shares if the survivor declined to purchase. Although the agreement included a mechanism for valuing the shares, it was never used.
Michael died first, and the company received $3.5 million of life insurance proceeds. The corporation redeemed the shares for $3 million in an amicable agreement, and Michael's interest in the business was valued at the same $3 million on the federal estate tax return. A $300,000 estate tax was timely paid, likely out of the remaining $500,000 of proceeds.
Upon audit, the IRS disagreed with the valuation of the company. The $3.5 million must be added to the value of the company, as it was a company asset. That brought the total value of the company to $6.86 million. Michael had owned 77.18% of the company, so the estate tax value of his interest came to about $5.3 million. That meant another $1 million in estate taxes were due. Where that money was to come from was not a concern of the IRS.
In Court, the estate argued that the value of the company was controlled by the shareholder's agreement, and although the insurance proceeds were a corporate asset they were offset by the obligation on the company to proceed with the redemption. The arguments were unavailing, first in the District Court, then in the Eighth Circuit Court of Appeals, and now, finally, in the U.S. Supreme Court. The Court held unanimously that life insurance proceeds must be included in valuing the company for estate tax purposes, and that a redemption agreement in this case did not reduce the value of the company, even though it drained the company of available cash.
Owners of small businesses need to schedule an early conference with their estate planning advisors to assess the impact of this decision on their planning. Cross purchase agreements, in which each shareholder owns life insurance on the other shareholders, should not be adversely affected, but that arrangement has its own drawbacks. Owners of very small businesses that are below the federal estate tax threshold have less to be concerned about, but even in that situation using life insurance to fund a redemption will raise issues regarding the value of the company and the basis of inherited interests.
(July 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. | | | | |
