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February 2020 - In This Issue:
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TIME FOR AN IRA REVIEW
ENFORCING A CHARITABLE GIFT
WHAT KIND OF INVESTOR ARE YOU?
ARTICLES OF INTEREST
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Trust. Hard to build, easy to break.
Trust is the key ingredient for creating brand loyalty. Trust is created by consistently providing a quality product or service, on-time delivery and truth in advertising. All are part of building the trust necessary to keep clients buying your products or in our case staying with us for their lifetime and beyond.
Unfortunately, with the chaotic digital marketplace this trust can be tested in many ways. One of those ways is from fake reviews. Vendors can take advantage of the idea of independent reviews to try to build that trust on a false foundation.
A story by CBS recently reported the findings from
Fakespot, a website designed to check the integrity of reviews. Their research found:
- 52 percent of reviews posted on Walmart.com are "inauthentic and unreliable," Fakespot estimates
- 30 percent of Amazon reviews are fake or unreliable
- About a third of reviews on makeup retailer Sephora and video-game service Steam are also unreliable or fake, the analysis discovered
The piece also provided red flags for spotting unreliable reviews:
- A one-day surge in five-star reviews
- Broken grammar
- Reviews from reviewers who post hundreds of reviews in one day
Amazon and Walmart.com have responded that they are creating new ways to spot fake reviews and remove them, but given the size of their marketplace and number of vendors, it may be a difficult challenge.
Trust is hard to build, and easy to break. In the end, even with fake reviews, companies that do not deliver quality products and service will not survive. Businesses need to grow their customers and keep them if they are to thrive.
As an independent trust company, our success is built on trust. Garden State Trust consistently delivers on our promise of superior personal service to our clients. It is evident in the long relationships we have grown that last for generations. We recognize the trust that our clients place in us and hold ourselves to the highest standard, the fiduciary standard. This means always putting the best interest of the client first with the sincere hope that when they are asked about our company, they can honestly recommend our services to family, friends and yes, the internet too.
On February 2nd, groundhog, Punxsutawney Phil, didn’t see his shadow and let us know we will have an early spring! Here’s hoping Phil is right!!
Sincerely,
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The IRA was born in 1974, in the Employee Retirement Income Security Act (ERISA). Employers already received tax deductions for setting aside money for the retirement of their employees. The idea was to extend that privilege to workers themselves, if they weren't covered already by an employer plan. IRA eligibility was expanded to all Americans with earned income in 1981, but the IRA deduction was later taken away from higher-income taxpayers. In 1997 the Roth IRA variation was introduced. There's no upfront tax deduction, but if conditions are met, all of the distributions from the Roth IRA are tax free. Finally, a number of simpler employer retirement plans have been built upon the IRA foundation.
Tax diversification
The tax deduction for the traditional IRA contribution is welcome. It makes funding the IRA easier, especially when times are tight. But eventually the music has to be faced, and taxes must be paid.
The alternative is to have some money in Roth IRAs, with the possibility of tax-free payouts. This can create greater flexibility and control of the tax effects of a retirement income stream. Also, Roth IRAs are exempt from required minimum distributions during the owner's life.
Multiple minor accounts
Have you set up several IRAs over the years at different financial institutions? Are you swamped by statements for the many accounts?
Consolidation of your IRAs in a single account will simplify your financial life. You'll have just one statement to contend with, and one account to review for investment decisions. Maintenance fees may be reduced as well.
The consolidation process need not be complicated. We'll be happy to help if you wish to take this step.
Investment incoherence
Your IRA investments should be reviewed in the context of all your investments, including 401(k) accounts and taxable savings. You want to have one asset allocation plan for all of your holdings, not a separate plan for every account. Having multiple accounts does not provide you with investment diversification if all the accounts are invested in the same way.
If you are unsure of the best investments for your IRA, seek professional guidance. Doing nothing, taking the IRA investments for granted, is not a good solution.
Check your beneficiary designations
Have circumstances changed since you specified a surviving beneficiary for your IRAs? Has there been a death, a birth, a marriage, or a divorce? You might be surprised at how often IRA designations are overlooked during a divorce.
A substantial increase in wealth also may be an occasion for changing an IRA designation. For example, if a surviving spouse no longer will need the IRA for retirement security, it may make sense to tap the IRA for charitable bequests. Such a move may save on estate taxes, inheritance taxes, and income taxes after death.
The IRA designation needs to be reviewed in the context of the overall estate plan. IRAs may be subjected to estate and inheritance taxes, and distributions from inherited IRAs (but not inherited Roth IRAs) may be subject to income taxes as well. All these taxes can eat up this asset pretty quickly, so thoughtful planning is a must.
One strategy that was popular in the past was the "stretch IRA," in which an IRA beneficiary could take required minimum distributions from the account, geared to his or her lifetime. That option was largely eliminated by the SECURE Act, enacted as part of the budget deal in December 2019. In general, an inherited IRA must be distributed to beneficiaries within ten years of the owner's death. Exceptions are allowed only for:
- surviving spouses;
- minor children of the owner (their ten-year period is deferred until they reach majority);
- beneficiaries who are less than ten years younger than the account owner;
- disabled beneficiaries; and
- chronically ill beneficiaries.
If you believe that one of the exceptions may be available in your estate plan, see your legal advisors promptly for optimal tax planning.
(February 2020)
© 2020 M.A. Co. All rights reserved.
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ENFORCING A CHARITABLE GIFT
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Sherlock Hibbs, a 1926 graduate of the University of Missouri, served in World War II and then went on to a successful career in finance. During his career he observed the fundamental importance of free markets, private property, and limited government. Hibbs' will provided $5 million to the University of Missouri, with the stipulation that the money would be used to endow three chairs and three distinguished professorships limited to "dedicated and articulate" disciples of free market economist Ludwig von Mises and his Austrian School of Economics. Hibbs died in 2002.
The will included an unusual enforcement clause, to see that the donor's directive would be implemented. If the University of Missouri should fail to honor his wishes completely, the bequest passes to a contingent beneficiary, Hillsdale College. The TaxProfBlog reported that Hillsdale is taking the responsibility very seriously, and it has filed suit against the University of Missouri for its failure to comply. The University allegedly found the directives "distasteful" and was concerned that its Business School could be "held hostage by a particular ideology." Hillsdale hired former Missouri Governor Jay Nixon to represent it in the lawsuit. He said, "Hillsdale College looks forward to thorough discovery into why the University of Missouri changed the terms of Mr. Hibbs' gift."
(February 2020)
© 2020 M.A. Co. All rights reserved.
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WHAT KIND OF INVESTOR ARE YOU?
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An
active investor is one who seeks to outperform the market, to invest in winners while avoiding losers, and who responds to market dynamics with portfolio repositioning from time to time. The
passive investor, on the other hand, is satisfied to just get market returns. The loss of upside potential is balanced by the fact that returns will be no worse than the market. Passive investors may choose index funds, while active investors prefer to own individual securities or actively managed mutual funds.
One advantage of passive investing is the low cost. Active management tends to incur transaction costs and tax costs, and the advice of an experienced investment manager is not free. Some investment managers will beat their benchmarks, others will not, and costs figure into that performance. A 2016 study by S&P Dow Jones Indices suggested that some 90% of active managers missed their targets over various time frames. That may be part of the reason for more and more money moving into passive funds over the last decade. Passive investing also is growing more popular in Europe, but there it accounts for only 15% of funds.
Active managers have the flexibility to increase exposure to promising sectors of the economy and to avoid those showing weakness. They may be able to use short sales or put options as hedges against downturns, and they can sell a stock that seems clearly headed for a fall. The index investor necessarily owns all the stocks in an index until a stock is removed from it.
An investment manager may be able to tailor a strategy for tax efficiency, for example by selling stocks that have lost value to offset other realized gains on sales. Interestingly, even hedge fund managers, who are among the most highly compensated of the active investment managers, have a portion of their holding in passive funds, according to Investopedia.
In a rising market, with a strongly growing economy, many investment strategies will look good, including passive ones. But when a bear market emerges, most investors will favor taking steps to preserve capital, and not simply accept a portfolio meltdown.
Preparing for a bear market
Bull markets do not last forever, much as we may wish that they did. One defensive measure to take is to allocate more of the investment portfolio to fixed income investments, such as bonds. However, we are still in an era of abnormally low interest rates, in which generating significant income from a bond portfolio is difficult.
When a bear market does emerge, history suggests that the safest stocks are likely to be utilities and consumer staples, followed by health care and telecommunications.
At the moment, few if any are predicting a bear market in the foreseeable future. But bear markets don't often announce their arrival with great fanfare, so the prudent investor needs to stay alert.
A tale of two recessions
This table compares the performance of ten sectors during the bear markets that accompanied the last two recessions. The numbers show the percentage return of each sector compared to the overall market (which was down), not the absolute return of the sector. Numbers in parenthesis are negative.
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Source: Singer,"Positioning Portfolios for the Eventual Bear Market," Trusts & Estates (September 2018).
If you have questions about your portfolio management strategies or tactics, please call on us.
(February 2020)
© 2020 M.A. Co. All rights reserved.
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Cherry Hill, NJ
Lebanon, NJ
Linwood, NJ
Toms River, NJ
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856-251-1300
908-287-7188
888-323-5535
732-255-5000
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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.
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