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July 2019 - In This Issue:
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PHILANTHROPY AND YOUR IRA
"RETROACTIVE FILING"
SPOTLIGHT ON TRUST TAXES
ARTICLES OF INTEREST
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In our July 2015 Newsletter I shared that at the end of the first quarter in 2015, according to the FDIC, the 25 largest trust institutions had $16.989 trillion of fiduciary assets under administration. At the end of the first quarter 2019, the 25 largest trust institutions had $19.076 trillion of fiduciary assets under administration. And, that is
only for the 25 largest Trust institutions by fiduciary assets.
At Garden State Trust Company, we are very proud of our growth during those same years. As of month-end June 2015 our fiduciary assets under administration were $108.022 million and at month-end June 2019 $246.828 million. We would like to believe that much of that growth can be attributed to our being an independent trust company. Why would working with an independent trust company be important to an individual looking for a corporate fiduciary? Here are a few reasons:
- An independent trust company has autonomy in decision making and the inherent flexibility to exercise its fiduciary responsibilities without getting mired in the conflict of internal corporate interests and politics associated with larger multi-layered financial institutions.
- An independent trust company must undergo a high level of regulatory oversight, and must establish and maintain policies and safeguards to avoid the misappropriation of client funds and provide for the proper management of a client's account
- An independent trust company functions in an open architecture environment partnering with best of breed providers of investment and administrative services.
The emergence of the
Independent Trust Company has challenged the traditional sources of trust and estate administration and investment services. Learn more reasons why an Independent Trust Company may be right for your needs and those of your family.
Read more...
In this issue of our newsletter you can read an informational article on the
Seven Requirements for the Charitable IRA Rollover. Also, for those of you with a sweet tooth, please check out our Of Interest Article,
The Best Ice Cream Shop in Every State.
Wishing you a safe and enjoyable summer!
Sincerely,
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PHILANTHROPY AND YOUR IRA
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Making a direct transfer from an IRA to a charity, long a valuable planning strategy, has become even more valuable following the enactment of 2017's
Tax Cuts and Jobs Act. That's because the higher standard deduction coupled with the $10,000 cap on the deduction for state and local taxes effectively means that for many taxpayers there will no longer be a tax benefit for charitable giving. They won't have enough itemized deductions to get over the standard deduction threshold. A direct transfer from an IRA to a charity provides a tax benefit
in addition to the standard deduction. What's more, the transfer satisfies the required minimum distribution (RMD) rules that apply to those who are over age 70 1/2.
Seven requirements
- Only those over age 70 1/2 are permitted to use this strategy. Watch for this tax trap in the year that a donor reaches the magic age. All IRA distributions made during the year one turns 701/2 count toward the RMD, but only those made after the half birthday may be rolled tax free to a charity.
- IRAs only. Distributions from 401(k) plans, 403(b) plans, pension plans, or profit sharing plans are not eligible for charitable IRA rollover treatment. For those plans, the donor must first roll the assets into a new IRA.
- Direct transfers only. The check from the IRA must be made out to the charity. A check made out to the IRA owner that is endorsed over to the charity will not work.
- Public charities and private operating foundations must be the recipient. Ineligible recipients include private grant-making foundations (non-operating foundations), donor-advised funds, and supporting organizations.
- The payment would have qualified for a full charitable deduction. In other words, no quid pro quo; the donor must receive nothing in return. The qualified charitable distribution cannot be used to purchase a charitable gift annuity, for example, or even to pay for tickets to a fundraising dinner.
- Distributions are limited to $100,000 per year and must be otherwise fully taxable. Nondeductible IRA contributions are not taxable when distributed, and thus they are not eligible for treatment as qualified charitable distributions.
- Documentation required. The charity must supply a contemporaneous written acknowledgement of the gift and certify that the donor did not receive any financial benefit from making the gift.
Failure to meet any requirement results in the entire distribution being taxable to the donor.
Benefits
The biggest winners in using the charitable IRA rollover are those seniors who are using the standard deduction. They would otherwise get no tax benefit from their charitable gifts.
Those who pay more tax as their adjusted gross income rises also are better off with this strategy. This includes people subject to the 3.8% tax on net investment income, those whose income is high enough to cause their Social Security benefits to be taxed, and those who are paying higher Medicare part B premiums because of their high income. Donors who live in states that do not allow a charitable income tax deduction generally will achieve a tax benefit from the direct transfer to charity, as their adjusted gross income for state tax purposes won't be increased. The 60% of AGI limit on the charitable deduction does not apply to the charitable IRA rollover.
Finally, the heirs will be winners as well. They will prefer to receive assets that receive a basis step-up to getting income in respect of a decedent, which will be fully taxable as ordinary income.
Additional wrinkles
Spouses. Each spouse may roll up to $100,000 to charity if each meets the age requirement and if each has an IRA. Rolling $160,000 from one spouse and $40,000 from the other would not work to secure the full $200,000 tax-free transfer.
Inherited IRAs. Qualified charitable distributions may be made from inherited IRAs if the beneficiary meets the age requirement.
Pledges. A qualified charitable distribution may be used to satisfy a pledge to a charity without triggering income to the donor, and without being a prohibited transaction that would otherwise cost the IRA its tax deferred status.
It is up to the taxpayer to report qualified charitable distributions. The taxpayer reports all of the IRA distributions on line 15A of Form 1040, and reports only the taxable portion on Line 15B.
(July 2019)
© 2019 M.A. Co. All rights reserved.
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Jim will be 67 in July, but he has not yet claimed his Social Security benefits. If he starts his benefits then, they will be 8% higher than they would have been at age 66, his full retirement age.
Jim has the option of starting his benefits up to six months earlier, in January of 2019, so-called "retroactive filing." In that case, he would get a lump sum check for the six months during which he did not collect any benefits.
Although some retirees may find this attractive, it is not "free money" it comes with a cost. Jim's benefits will be computed as of the January start date, and some of his credits for delayed retirement will be lost. The reduction is permanent.
Consult with your tax and investment advisors about all your alternatives before making any such important decisions.
(July 2019)
© 2019 M.A. Co. All rights reserved.
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Nearly 30 years ago, Joseph Rice created a trust in New York for his three children. A New York trustee was appointed, and the trust was to be governed by New York law. The trustee was given complete discretion over distributions to the trust beneficiaries. At the time that the trust was created, no beneficiary lived in North Carolina. That changed in 1997, when a daughter, Kimberly Rice Kaestner, moved to North Carolina.
Soon after that relocation, the trust was divided into three subtrusts, one for each beneficiary and his or her descendants. The trust originally provided that it would terminate when Kaestner reached age 40, but in accordance with her wishes, the trustee rolled the assets over into a new trust.
North Carolina is one of three states that impose an income tax on the undistributed income of any trust that "is for the benefit of" one of its residents. This tax applies even if no distributions are made to in-state beneficiaries. For tax years 2005 through 2008, the state taxing authorities assessed income taxes of $1.3 million on the trust. During those years neither Kaestner nor her children received any trust distributions, nor did they have the legal right to demand distributions.
The trustees paid the tax and sued for a refund, arguing that the nexus between North Carolina and the trust was too tenuous to permit taxation, running afoul of the Due Process clause of the Fourteenth Amendment. The North Carolina Courts agreed, but the state took its case to the U.S. Supreme Court.
The Supremes speak
In a unanimous decision, the Court agreed with the taxpayer and the North Carolina Supreme Court. Justice Sotomayor outlined the two-step process for determining whether a trust has sufficient contact with a state to permit taxation within the parameters of the Due Process clause. There needs to be a definite link, "some minimum connection," between the state and the property it seeks to tax. Second, the income attributed to the State for tax purposes must be rationally related to "values connected with the taxing State."
In this case the trustee resided out of state. The administration of the trust was divided among two states, New York for the trust records and Massachusetts for the custody of the assets. The trustee made no investments in North Carolina during the relevant tax years.
Justice Sotomayor concluded: "When a tax is premised on the instate residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control or enjoyment of the trust property or a right to receive that property before the State can tax the asset." In this case the trust was entirely discretionary, and the beneficiary had no ownership or right to demand the property. In such a circumstance, the demands of the Due Process clause are not satisfied, and state taxation of the trust is not permitted.
The majority decision was premised explicitly upon the narrow facts presented, specifically the fact that the North Carolina resident was a contingent beneficiary. A concurring opinion suggested that the decision should not be read so narrowly.
Effects
Estate planners have been anxiously awaiting the Court's decision in this case, and they will be relieved by the outcome. However, there remains some ambiguity about how much connection there needs to be to permit taxation of undistributed trust income.
Justice Sotomayor noted that a tax based upon the trustee's residence has passed constitutional muster, and the location of trust administration has similarly been held sufficient. The unanswered questions are, what if the beneficiary had the right to demand some or all of the trust income? What if the demand right extended to trust principal?
(July 2019)
© 2019 M.A. Co. All rights reserved.
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Instead of scheduling every moment of retirement, learn how to relax.
read more...
Getting married is wonderful -- it's planning a wedding that can be stressful. And by stressful, we mean
expensive
.
read more...
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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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