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IN THIS ISSUE
RETIREMENT READINESS
TAXES ON HOME SALES
TO BE VALID, A TRUST
MUST HAVE A PURPOSE
OTHER THAN TAX AVOIDANCE
ARTICLES OF INTEREST
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The Department of Labor released a final version of its fiduciary rule for retirement advisors last month. This would affect the roughly $1 trillion in assets that's rolled over from 401(k) and other retirement plans to IRAs every year, and would take effect in September, unless it is delayed by court action.
Financial advisors generally have a client's best interest at heart, because just as with any other business their client's success leads to greater success for them. This ruling has to do with whether or not retirement advisors would be able to continue to provide recommendations that are "suitable" for the client, or need to provide recommendations that are in the client's best interest and put the client's interest ahead of their own.
This seemingly minor difference between "suitable" and "best interest" is significant to regulators.
Investment doesn't come without risk, and to provide suitable recommendations brokers or advisors need to fulfill three criteria. They need to have a reasonable basis to believe the investment will be suitable for at least some investors. They need to have a reasonable basis that suits the customer it's being recommended to, based on their age, risk tolerance, and investment time horizon. They even need to have a reasonable basis that the recommended transactions are not excessive.
The "suitability" standard helps prevent churning of accounts and recommendations that make no sense for the client but falls short of the higher requirement that the client's interest be placed first. Nobody is trying to gamble with the nest egg that is America's retirement savings, but it isn't surprising that the Department of Labor may want to make sure that those giving recommendations about it are held to the highest fiduciary standard. That way the recommendations must take the fees paid to the advisor into account as well and have a higher standard regarding potential conflicts of interest and ensuring the client's interest is put first.
Garden State Trust Company acts not only as a fiduciary, but also as a trustee, which means that to fulfill our duty of loyalty to our clients, we have many other specific duties we are legally obligated to perform on behalf of our clients.
Here are some of the more common duties a trustee owes its beneficiaries:
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Duty to administer a trust by its terms. Every trust agreement should make plain the purposes of the trust, as they provide the critical benchmarks for evaluating the trustee's actions.
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Duty of skill and care. A high standard of performance is required, even if an amateur is named who has no prior experience as a trustee.
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Duty to give notices. Notices may concern the legal rights of the trust beneficiaries, such as a power to make withdrawals, or they may cover such ministerial matters as designating a successor trustee or an agent to assist in trust administration.
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Duty to account. A written accounting of the assets, liabilities, receipts, and disbursements of the trust must be provided to the beneficiaries regularly.
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Duty of impartiality. The trustee must not favor one beneficiary over another, unless the trust document directs that providing for a particular beneficiary is a principal purpose of the trust.
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Duty to invest. Trust assets must not be left idle. In addition to making the trust investments, the trustee has a duty to diversify the investments and develop an asset allocation plan. This is a job for professional investors or corporate fiduciaries.
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Duty of confidentiality. Normally, the terms of a trust, the identity of its beneficiaries and their respective interests, and the nature of the trust assets cannot be disclosed to anyone except the beneficiaries and those who need such information to be able to administer the trust.
The word "fiduciary" may be legal jargon; however, we take pride as a trustee in our duty of loyalty to our clients and being legally bound by it. We've heard it said that once you've heard of the fiduciary standard, you would never settle for anything less.
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MONTHLY QUESTION & ANSWER | |
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Q. In estate planning what does "incorporation by reference" mean when it comes to giving my personal effects to various people?
A. In estate planning, incorporating a list of personal property by reference means that instead of listing out each item of personal property in a will or trust, the document (the will or trust agreement) refers to a separate list that contains details of the personal property and who should inherit each item. This separate list can be updated more easily without needing to amend the entire will or trust document. This is certainly more efficient and less costly when you change your mind about who receives a certain item.
Don't confuse a list of personal property incorporated by reference with a Letter of Wishes. Read more in this month's Of Interest Articles, A Letter Of Wishes: No Legal Power but Powerful Nonetheless. One is legally enforceable, the other not.
© 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 one of this month's Informational Articles, Taxes on Home Sales, read about how with the increase in home values of recent years, more and more home sellers will have gains larger than the exclusion allowed for selling a personal residence. In the informational article, Retirement Readiness, learn about a recent survey from the Nationwide Retirement Institute that suggests growing anxiety about retirement among those in the last decades of their careers.
Monday, May 27, 2024, is Memorial Day and all of us at Garden State Trust Company would like to remember and honor the men and women who have made the ultimate sacrifice to protect our country. Thank you to all who have served and are serving in our Armed Forces.
Sincerely,
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A recent survey from the Nationwide Retirement Institute suggests growing anxiety about retirement among those in the last decades of their careers. Some 69% of those aged 55-65 agreed that retiring at age 65 "doesn't apply to them." 22% reported that in the last 12 months they've decided to retire later than planned. More than 40% believe that they will have to keep working during retirement to make ends meet.
Inflation is one culprit behind the pessimism. 42% said the rising cost of living has affected their spending habits, with 27% saving less for retirement as everyday spending consumes more of their income. More than half of respondents expect that inflation will hurt their retirement portfolios.
Over the years, many observers have worried about the transition away from employer-provided pensions, toward enabling employees to save for their retirement in 401(k) or 403(b) plans. With a pension, the transition to retirement is somewhat seamless, as the regular payments take the place of the earlier salary in the household budget. Not so with a lump sum accumulated in a tax-deferred plan. How much in savings will be enough for retirement? How much can be withdrawn each year? How should it be invested? The questions are daunting, there are no easy answers. Will retirement turn into another kind of work?
On optimistic side, writing for Morningstar, John Rekenthaler asserts that "There's No Retirement Crisis" [April 29, 2024]. He reached that conclusion by examining the changes in relative incomes for each population cohort since 1994. The data is from the U.S. Census Bureau. Over the last 30 years, real, after-inflation income has grown by 42% for those age 65 -74, and by 33% for those 75 and older. For comparison, the average income of those 45 - 54 has grown only 17% above the inflation rate. What's more, these figures do not include the 2023 8.7% increase in Social Security benefits.
So there is no retirement crisis yet, according to Mr. Rekenthaler. But he does conclude with a different caution about global demographics. "The world is becoming older rather than younger. That shift will have profound implications, including with retirement funding."
(May 2024)
© 2024 M.A. Co. All rights reserved.
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The tax blow for the sale of a principal residence may be softened, even eliminated, by the $250,000 exclusion from income ($500,000 for marrieds filing jointly) for the gain from the sale of a principal residence. However, these boundaries were set in 1997 and never adjusted for inflation. As the prices of houses has soared in the past few years, more and more taxpayers find themselves in taxable territory. Had there been an inflation adjustment, the exclusion for couples would now be $981,558, according to the Bureau of Labor Statistics online calculator.
A recent Wall Street Journal article ["Capital-Gains Tax Hits More Home Sellers," May 4, 2024] reported that roughly 8% of recent home sales have generated likely taxable gains. However, there is considerable variation around the country. California is the leader, with an estimated 28.8% of home sales in the fourth quarter of 2023 resulting in taxation. Hawaii, Washington, D.C., Massachusetts, and Washington state each were over 15% in the proportion of gains exceeding the exclusion amount.
Long-Term Owners
To be eligible for the full exclusion for a home sale, one must have owned and used the property as a personal residence for at least two of the preceding five years. Short absences (such as vacations) are not a problem, but a prolonged absence could be.
The doubled exclusion of $500,000 for married couples is available if: (1) either spouse meets the two-year ownership test; (2) both spouses meet the two-year use test and (3) neither spouse has claimed the exclusion within the prior two years. If one spouse is ineligible, the other may still claim up to $250,000.
Relief For Short-Term Owners
If the two-year test can't be met, a partial exclusion may be salvaged if the home sale came about due to a change in the place of employment, a change in health or for "unforeseen circumstances." IRS has provided examples that meet these vague requirements. For example, the exclusion would be available for a sale due to:
- multiple births from a single pregnancy;
- a lost job;
- a change in circumstances that leads to an inability to meet mortgage payments;
- development of a disease, illness or injury (selling to improve one's general health would not qualify).
For some taxpayers, a partial exclusion will be as good as full one if it covers the full amount of their gain.
Good Records Are Essential
These rules make good recordkeeping more important than ever. Good records for current home owners will also be important when:
- the owners intend to stay in the home for a long period of time;
- they have invested heavily in renovations;
- there is a possibility that the owners will claim a depreciation deduction for a home office or rental use of the residence. Gain will have to be recognized to the extent of any depreciation deduction claimed.
The tax on the sale of a home applies to the net after the tax basis is subtracted from the sales proceeds. Basis includes what the taxpayer paid for the house plus major remodeling, such as a kitchen upgrade or a new roof. Routine repairs don't count. Details on allowable expenses are provided in IRS Publication 523.
(May 2024)
© 2024 M.A. Co. All rights reserved.
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To Be Valid, a Trust Must Have a Purpose Other Than Tax Avoidance | |
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Lawrence Saccato was in the storage business. Over the years, he created a variety of legal entities, and he managed them with his long-term girlfriend. What he failed to do was file a tax return, a failure that recurred for 14 straight years.
When the IRS attempted to audit Mr. Saccato, he was not cooperative. He claimed that he was neither the trustee nor the beneficiary of the various trusts he had set up in connection with his business. The IRS therefore used his bank account records to reconstruct Saccato's income.
Before the Tax Court, Saccato continued to maintain that he did not own the business property, that he was not the trustee of the trusts (although he had so described himself to a bank and the state authorities). Saccato also made a number of assertions similar to those made by tax protesters, which the Tax Court characterized as "gibberish."
The Court held that "We find that these 'trusts' do not exist and that, if they did exist, they would be shams. The sole purpose of these fictitious entities was to obscure petitioner's true ownership of the assets they purportedly held." The IRS determinations recreating Saccato's income from bank records were sustained. What's more, Saccato persisted in making nonsense arguments after he was warned to desist. The Court added a $10,000 penalty to the overdue taxes for wasting its time.
(May 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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908-287-7188
LINWOOD / SOUTH JERSEY 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. | | | | |
