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June 2020 - In This Issue:
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A GRAT IN ACTION
PRO AND CON ON CARES ACT WITHDRAWALS
TURNING ART INTO CASH WITHOUT SELLING
COVID-19 INFORMATION
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We Americans have been noted to be the most generous on the planet in terms of charitable giving, and that generous nature has inspired us many times over when we face and overcome crises as a community.
The Federal government is also trying to promote charitable giving, and has added incentives beyond what is generally provided for charitable donors. For individual donors, this should be considered in terms of whether you donate enough to justify itemizing on your tax returns.
Given the Pandemic we are living through, what if I want to give specifically for COVID-19 relief?
Many philanthropists are concerned with the ability of charities to continue to function during this crisis, and a recent study by Fidelity Charitable suggests that while 25% of donors planned to increase their charitable giving, one third of respondents felt they did not have the information needed to understand how to direct their efforts effectively. Because many older volunteers fall into an at-risk category, they can't participate the way they normally would to step up their efforts either.
Many programs and celebrities have helped bridge this gap by coming out with their favorite charities to their audiences or endorsing a particular charity through appearances on shows such as
The Tonight Show with Jimmy Fallon. However, if you are looking for charities that are more local with a focus on the New Jersey community, it may be worthwhile to check out this article:
How to volunteer and donate in New Jersey during the coronavirus outbreak. It has a county-by-county breakdown of over 75 charities with a short summary of each and links to additional information. An Ocean County charity, near and dear to my heart, not listed, is
21Plus serving special needs for adults.
When considering larger charitable gifts and how they will impact your families' financial security, a larger overview of family wealth can be helpful, and charitable trusts may also provide a way to maximize the benefits not only for your family, but the charity as well.
In this month's informational articles read about the
Pro and Con of CARES Act Withdrawals from your retirement account. The relief is welcome, but it is not without risks of its own.
At this time, all of us at Garden State Trust Company want to send thanks to all the frontline workers. Every second you are working is deeply appreciated.
Stay well,
Sincerely,
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The Grantor-Retained Annuity Trust (GRAT) has emerged as a popular strategy in the estate planner's toolkit. The idea is that a grantor places assets in a trust while retaining the right to receive payments from the trust. When the term of the trust expires, any assets remaining in the trust pass to a beneficiary, typically a family member.
Here's an example of a GRAT that, unfortunately, failed. On February 1, 1998, Patricia Yoder created a Grantor-Retained Annuity Trust, keeping for herself a fixed annuity for 15 years. The annuity was set at 12.5% of the trust's initial value. The trust was funded with investment real estate, and the annuity came to $302,259 per year. Although the value of the trust's income varied from year to year, the annuity payments to Patricia did not change, and they were timely paid.
Patricia died November 2, 2012, three months shy of the expiration of the GRAT's term. Her estate tax return reported a total taxable value of $36.8 million, including the value of the GRAT. Some $11.1 million in estate taxes were paid. Someone then had second thoughts, and believed that including the GRAT in the taxable estate was a mistake. A refund of $3.8 million was sought, and when the IRS did not respond, the matter went to District Court.
The estate argued that a fixed annuity is not a "right to income" within the meaning of the tax code section that covers this area. An annuity is the right to receive payments from transferred property, regardless of the income earned by the property. The Court acknowledged that there is no case directly on point, but using a substance-over-form reasoning held that the estate tax does apply in this situation. The U.S. Supreme Court has held that the grantor's reservation of any interest, however remote, was sufficient to bring the conveyance within the code's "possession or enjoyment" language of the tax code.
With that much money at stake, an appeal was filed with the Ninth Circuit Court of Appeals. That Court has now affirmed the District Court decision.
Had Patricia chosen a 14-year trust term, or if she had lived just three more months, the $3.8 million tax would have been avoided.
(June 2020)
© 2020 M.A. Co. All rights reserved.
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PRO AND CON ON CARES ACT WITHDRAWALS
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To help cope with the economic calamity resulting from the coronavirus pandemic, the CARES Act allows for the withdrawal of up to $100,000 from retirement accounts. One needs to have been infected or have a direct financial impact from the pandemic to be eligible. For example, being unable to work because daycare became unavailable is sufficient. Ordinary income taxes will have to be paid on the withdrawal, but the 10% penalty tax may be waived. Alternatively, the taxpayer may elect to repay the funds to the retirement account over three years.
The relief is welcome, but it is not without risks of its own. Quoted in the professional journal
Tax Notes, attorney Alan Gassman pointed out that in most states the money in retirement accounts is fully protected from the claims of creditors in a bankruptcy. Such protection is lost for any withdrawal. What's more, creditor claims could interfere with the possibility of repaying the money to the retirement account. The better course for many people, according to Gassman, will be to borrow against other assets, even at a higher interest rate.
On the other hand, for the wealthier taxpayer this could be a tax-saving opportunity. If asset prices are down when the withdrawal is made, the income tax liability will be reduced as well. What's more, the wealthy taxpayer could be in a lower tax bracket this year. The value at withdrawal becomes the tax basis for the holdings. When the assets are sold in the future, the taxpayer will owe tax on the capital gain, rather than an ordinary income tax. Presumably capital gains will continue to enjoy their preferential tax rate in the future.
Gassman concluded: "So while Joe Sixpack is probably going to make a mistake and this provision will cause more harm than good, the people he works for may want to take the [$100,000] out."
Your mileage may vary, as they say. The opportunity for penalty-free withdrawals is welcome, but the decision is not to made lightly. The advice of a financial professional is strongly recommended.
(June 2020)
© 2020 M.A. Co. All rights reserved.
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TURNING ART INTO CASH WITHOUT SELLING
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One major reason for such borrowing identified in the article is the need for funds to pay estate taxes, given the uncertainties of successfully liquidating a collection in such volatile times. At the other extreme are those who expect that there will be some relative bargains coming available in the art market, and who want to have ready access to cash to take advantage of them. The art market generally does not correlate precisely with the stock market, but it will lag. The art market dropped about 20% after the 2008-09 recession, for example, before coming back strongly.
Loans against fine art will have a loan-to-value ratio (or LTV) of 40% to 60%. Factors that go into determining the suitable ratio include the diversity of the collateral, the price points, the potential for blockage discounts if many items have to be sold at once, and the depth of the market demand for the pieces.
Borrowers need to be aware of how often the value of the collateral will be reappraised. A loan against art will work the same way as a loan against stocks. Should the value of the art fall, there will be a margin call. In that event, the borrower will have to provide a repayment or additional collateral to secure the loan.
(June 2020)
© 2020 M.A. Co. All rights reserved.
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HEALTH
Testing is available to all New Jerseyans.
Read More
Older adults and people who have severe underlying medical conditions like heart or lung disease or diabetes seem to be at higher risk for developing more serious complications from COVID-19 illness.
Read More
ECONOMIC
On March 9, Governor Murphy declared both a state of emergency and a public health emergency related to the COVID-19 pandemic. In addition, to stop the spread of COVID-19 and to save lives, Governor Murphy issued New Jersey’s stay-at-home Executive Order, which has been in effect since March 21.
Read More
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Cherry Hill, 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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