As I write the lead in to this month’s newsletter, I am happy to share that we are in the process of making application to the New Jersey Department of Banking and Insurance for our 4th Office!  Garden State Trust Company is adding Linwood, NJ located between Ocean City and Atlantic City to our other locations, Cherry Hill, Lebanon and Toms River extending our presence within the Garden State. I will announce in a future newsletter when our Linwood Office will be operational.

An article in this month’s newsletter explores the options available to provide for someone with special needs who is receiving government assistance including Special Needs Trusts and the recent addition of the ABLE account.  There are two types of SNTs, a first party SNT funded with the assets of the disabled person and a third party SNT that has been created and funded by someone other than the disabled person. The most recent option, ABLE Accounts, are tax-advantaged savings accounts for individuals with disabilities and their families, created as a result of the passage of the Stephen Beck Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act).

Each has the ability to provide for a special needs individual while not jeopardizing their access to government benefits.  These are not exclusively either/or options; but rather, in certain circumstances, can work together to provide the best solutions.  Whether you have a first party or third party special needs trust, the ABLE account can work in tandem to distribute funds directly to the beneficiary providing them with more freedom and access to cash for qualified expenses.

Hoping you enjoy your Summer days,
  Ira J. Brower, Founder

Individuals with special needs and their families have three choices when it comes to providing long-term financial support.  First, there is a “first-party” special needs trust (SNT), funded with the assets of the person with the disabilities.  For example, if a person became disabled as the result of a car accident and won damages in a court case, that money could go into a first-party special needs trust.  It would be preserved to provide for a lifetime of medical care and support.

A “third-party” special needs trust is one that has been set up by someone other than the disabled person.  Parents or grandparents might fund such a trust for a child born with disabilities, for example.  The child may become eligible for Supplemental Security Income or Medicaid, and the existence of the SNT will not impair those benefits.

Finally, there is the ABLE account (Achieving a Better Life Experience).  These accounts are of more recent vintage.  These accounts are offered in 19 states so far, and more are expected to be launched this year.  They are administered by the states.  When ABLE accounts were first authorized by Congress, they were limited to in-state residents, but that restriction was removed in 2015.

The upside of the ABLE account is that investment earnings are tax free, and it is easier to establish than an SNT, which needs a lawyer’s supervision.  But that freedom comes with several downsides.  The onset of the disability must have occurred before the beneficiary reached age 26.  Each individual may have only one such account, and annual contributions are limited to $14,000.  (This amount is the federal gift tax exclusion, so it will rise in tandem to account for future inflation).  Should the value of the ABLE account exceed $100,000, the SSI benefits will be reduced.

With both the ABLE account and a first-party SNT, at the death of the beneficiary there is a “payback” to the state for the costs of Medicaid services. For the ABLE account, the payback dates to the creation of the trust, and for the SNT it covers the entire lifetime Medicaid expenses of the special needs person.  A third-party SNT does not have the payback requirement, and it may include other beneficiaries for funds left in the account.

This is an important area in which the services of your lawyer will be required.

Compare and contrast
  (July 2017)
© 2017 M.A. Co.  All rights reserved.
Under current law, when an heir inherits a Roth IRA or an IRA from someone who has not yet begun receiving minimum distributions, he or she must make a choice.  The money must be distributed either within five years or over the heir’s lifetime.  For lifelong distributions, the heir will need to withdraw a minimum amount each year based upon IRS life expectancy tables.  This strategy is referred to by estate planners as a “stretch IRA.”

For a young heir, such as a child or grandchild, stretching payments over a lifetime, maximizing the period of tax deferral or tax freedom, can make an enormous difference in the total value of this financial resource.  That’s because in the early years the required minimum distributions are likely to be less than the growth in the value of the account, which allows for additional tax-free or tax-deferred accumulations.

Writing in Trust & Estates magazine (June 2017), James Lange explores the alternatives for a 46-year-old heir who inherits a $1 million traditional IRA. Assuming a 7% rate of return, if the child takes only the minimum distributions for life the account will peak at about $2.7 million at age 76, and it will be worth $2.5 million at age 82.  On the other hand, if the account is fully distributed within five years and subjected to ordinary income taxes, and the proceeds are placed in a taxable portfolio, the same pattern of withdrawals will exhaust the account at age 82.


Lange’s article is titled “The Latest Developments in the Death of the Stretch IRA.”  There hasn’t been much press attention to the issue, but last year the Senate Finance Committee voted unanimously for the Retirement Enhancement and Savings Act of 2016.  One critical “enhancement” was the elimination of the vast majority of stretch IRAs in the future.

Under the bill, nearly everyone will have to abide by the five-year rule for inherited IRAs and lump sum death benefits from qualified retirement plans. There are exceptions for surviving spouses and disabled dependents, for whom lifelong distributions would be permitted.  If a beneficiary is a minor, the five-year distribution rule would not kick in until he or she reaches the age of majority.  There are also exceptions for charities, charitable remainder trusts, and beneficiaries who were born within 10 years of the account owner.


The bill also carves out the first $450,000 in IRA assets from the application of the five-year rule.  Therefore, a new wrinkle will be added to estate planning.

In estates in which combined IRA balances are less than $450,000, no change of plans will be needed (assuming that the exclusion isn’t changed in final legislation).  Estates with larger IRAs may need to be reviewed and new plans devised, if the new rules are adopted.


Lange makes much of the fact that, given the unanimous vote, the elimination of the stretch IRA has bipartisan support.  On the other hand, the bill died last year, and it has not be reintroduced as of this writing. Will there be tax reform this year? One of the difficulties of developing a consensus for a tax reform bill is the need to “pay for” tax cuts with other tax increases, so as to stem the revenue loss.  The stretch IRA is a low-hanging fruit that looks ripe for harvest by eliminating it.  The Joint Committee on Taxation scored the provision as raising $3.8 billion over the next ten years.  But if tax reform bogs down, and gets pushed into 2018 (at this moment, the most likely outcome), the stretch IRA remains safe for another year or so.

(July 2017)
© 2017 M.A. Co.  All rights reserved.
The last recession took a toll on the value of vacation homes. The National Association of Realtors reports that, from the end of 2007 through 2012, when primary homes were dropping in value by 14.8%, the value of vacation properties fell by 23%. The good news is that prices have come back strongly.  The median price of a vacation home rose 28% in 2015 and another 4.2% in 2016, reaching $200,000.

The main reason for owning a vacation home is—or should be—for rest and relaxation.  The vacation home also may serve as a “tryout” for a destination for retirement living.  In some cases, it may become the home one retires to.

But vacation homes have investment and tax angles to consider as well.

Rental income from the property may help cover some of the expenses of maintenance and improvement.  If the property is rented for 14 or fewer days, the income is tax free.  Rentals for longer periods may be offset with income tax deductions for mortgage interest, property taxes, insurance premiums, utilities, and other expenses, but the biggest tax benefits are available only to owners who use the property for 14 or fewer days during the year.


The $250,000 exclusion from capital gains ($500,000 for married couples filing jointly) for the sale of a principal residence does not apply to the sale of a vacation home.  At one time, it was possible to get around this rule by selling one’s principal residence and moving into the vacation home, living in it as the principal residence for at least two years.  At that point a new exclusion would become available.  This strategy was curtailed, beginning in 2009.  Now the exclusion is not available for the portion of your ownership attributable to vacation home use.

Example.  You bought a $1 million vacation property in 2010.  In 2017 you sold your primary residence to begin living in the vacation home.  Now assume that you decide to sell that home in 2020, after living in it for three years, when it is worth $1.5 million.  That period is 30% of your total ownership, so only 30% of your gain of $500,000 ($150,000) is excludable from income. The same dollar limit of $250,000 also applies.

Query: Did the adoption of this tax rule in 2009 contribute to the decline in the value of vacation homes around that time?  No one can say with certainty.


The issue of capital gains taxes evaporates if ownership of the vacation home continues until the death of the owner.  At that moment the tax basis of the property steps up to fair market value, so there would be no capital gain on a sale soon after.

If there is an intention to keep the vacation home in the family, a Qualified Personal Residence Trust (QPRT) should be considered. One can think of this as a major gift scheduled for a future date. The home is placed in a special trust that lasts for a specific number of years.  The homeowner retains the right to live in the home for the full duration of the trust, and the children (or other beneficiaries) receive the home when the trust terminates.

The home transferred to a QPRT must be a personal residence, but it does not have to be a primary residence. Vacation homes and associated property, for example, are eligible for this estate planning strategy.  And the trust may include other structures on the property if they are suitable for a personal residence, taking into account the neighborhood and the size of the house.

A gift tax return will be required when the home is placed in the QPRT.

However, the value of the gift will be discounted to reflect the delay until the gift takes effect. The discount can be very substantial, and it is a function of the current market interest rates as well as how many years will elapse before the gift takes effect.

For the strategy to succeed, the owner must survive to the end of the trust term.  But if the owner dies during the trust term, the estate is in no worse position than if the QPRT had not been undertaken.

(July 2017)
© 2017 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. ©2016. All rights reserved.