When it comes to financial and estate planning, it can be especially difficult to know what to do with a beneficiary who has previously demonstrated poor behavioral patterns. Questions emerge about whether a financial windfall might actually create more problems than it solves and about how to know who to trust with their care.

Love being blind often causes us to not realize problems are problems until it's too late (or much more difficult) to solve them, which is why an outside perspective can be important.

An incentive trust is a trust that includes provisions requiring beneficiaries to meet certain conditions before the trustee can distribute funds. This means that the funds can only be accessed in specific situations or for specific needs. Some incentive trusts give the trustee the authority to spread distributions out so the beneficiary doesn't receive them all at once, but the incentives can be much more varied.

Incentives don't only need to target negative behavior, such as drug abuse, either. For example, a provision encouraging positive behavior might be to encourage charitable work or giving, offering to provide extra funds for a beneficiary as a reward for volunteer work or to match their charitable gifts.

However, for families wanting to create provisions to provide financial incentives to prevent drug abuse, it can become a little more complicated. Martin J. Hagan, J.D. wrote a three part guide for Kiplinger "Designing Trusts for Beneficiaries with Substance Abuse Problems" that goes over some of the basics. Part one identifies how the trust can view the problem differently. Part two is really for the trust officer and estate planning attorney as it goes over the language the trust should include to protect other government benefits. Part three is about who the best party would be to select as the trustee.

The most important take-away is that the trust is not a magical lamp that will necessarily solve the problem. It can provide additional structure for a beneficiary by using incentives, so as goals are accomplished within a treatment plan that includes caregivers, physicians, therapists, and others, the beneficiary will receive funds. The structure could be cash incentives, but a trust can also ensure that the money is spent in a particular way, avoiding the potential that the money itself is abused. For example, instead of making a cash distribution, the trustee could be in charge of paying for particular expenses such as a car, vacation, or club membership every year should the beneficiary remain sober. 

Being a caregiver is a difficult job and being impartial toward those we care about can be nearly impossible. Care needs to be ongoing and responsive to changing circumstances. Being a trustee for a beneficiary with substance abuse issues isn't easy either. One needs to be careful about distributions so as not to jeopardize other government benefits, one may face difficulties in verifying whether goals are met that would trigger distributions, and additional coordination may be needed to set up a treatment team beyond the standard team a trust department may work with.

Mr. Hagen notes that "Sometimes individual trustees end up resigning from the trust due to emotional fatigue." The best trustee might end up being someone that is most familiar with the situation, but it may also be appropriate to have a co-trustee that deals with many cases of this nature. Mr. Hagen also notes that the best institutional trustee choice would likely be one that has familiarity with special needs trusts, such as Garden State Trust Company, since we are already familiar with social workers and case managers that have experience with the medical and health needs of disabled beneficiaries.
With the Major League Baseball postseason right around the corner, I thought I would share with you the Will of the "Yankee Clipper". 
FAMOUS WILL FOR THE MONTH JOE DIMAGGIO
CLICK THE NAME TO READ
CLICK THE NAME TO READ
Read in one of our Informational Articles, The Limits of the Taxing Power, how a tax refund lawsuit over the 2017 Tax Cuts and Jobs Act could have implications for the future of federal wealth taxes.

While most of us are looking forward to beautiful fall weather and the colorful foliage it brings, we want to acknowledge with thanks our healthcare workers battling Delta Covid Variant at the risk of their own safety. It is appreciated more than you know.

Lastly, for those celebrating the Jewish New Year this month, Happy New Year!

Stay well,
Ira J. Brower, Founder
Inflation Watch Continues
Investors remain nervous about where inflation is headed, and just how "transitory" it may prove to be. In June, the Case-Shiller national home price index posted its largest year-over-year increase since the index was created, 19.1%. The previous record was 14.4% in September 2005. The big jump in the cost of shelter does not get immediately factored in to the consumer price index (CPI), because only a relatively small number of people are buying houses in any one month, but over time the cost of housing will affect about one-third of the CPI. Higher housing prices also drive higher rents.

Gasoline prices have generally stopped rising, even falling a few pennies in some areas, but remain about 41% higher than one year ago. According to the Conference Board survey, consumers now expect overall prices to be 6.8% higher in 12 months. These inflationary expectations have a way of becoming self-fulfilling prophecies at times.

Retirees living on a fixed income tend to be acutely aware of rising prices, as they have less flexibility to adjust their spending. Inflation is the retiree's constant enemy. 

Investors have different concerns. They worry that the Federal Reserve will have to raise interest rates to combat inflation, and the increases could be more abrupt than anticipated. Higher interest rates may damage investment portfolios in two ways:

  • The value of existing bonds must fall as interest rates rise, as investors seek market rates of return. This leads to losses on paper for bond holdings, which become real losses if the bonds must be sold before maturity. 
  • The value of stocks may fall, as new bonds become somewhat more attractive when they pay higher interest rates. This effect is less certain, and not all stocks will experience the same negative fallout from an interest rate increase. But with the unusually high price/earnings ratios seen in today's market, some stocks may be more vulnerable to an interest rate hike than expected.

This is a good time to keep a watchful eye on one's investments.

(September 2021)
© 2021 M.A. Co. All rights reserved.
The Limits of Taxing Power
Under the U.S. Constitution, direct taxes must be apportioned among the states. An income tax is a direct tax, and the early attempts to create a federal income tax were declared unconstitutional as they were not apportioned. That's why a constitutional amendment was needed to create today's income tax regime. Indirect taxes, such as tariffs, which are passed along to consumers, do not need to be apportioned.

A new case is going to address the limits of the federal taxing power. According to The Wall Street Journal, Charles and Kathleen Moore invested $40,000 in start-up company that provided better tools to subsistence farmers in India. The company was a huge success, but it reinvested all of its profits in expanding its market. The firm grew to hundreds of employees, thousands of dealers, and millions of customers. The Moores never received a financial return from their investment, but were more than pleased with the success of the company that they helped to fund. The growing success of the Indian farmers was their reward.

In the 2017 Tax Cuts and Jobs Act the taxation of multinational firms was reformed. One element of that change was the imposition of a one-time tax on accumulated foreign earnings. The Moores received a tax bill for $15,000 on the accumulated but undistributed earnings from their investment.

The couple paid the bill and is suing for a refund. They argue that they have received no financial reward from their investment, no "income" as that term is used in the tax law, and therefore that $15,000 was effectively a property tax, not an income tax. As such, it would have to be apportioned, and as it was not, the tax itself is unconstitutional.

This may seem like a minor transitory tax problem, as the 2017 imposition was a one-time event. However, should the Moores succeed it could be the death knell for such proposals as Senator Elizabeth Warren's "wealth tax." A tax on wealth is very different from a tax on income, and many observers have questioned the constitutionality of it. The Moore litigation may resolve that larger question.

(September 2021)
© 2021 M.A. Co. All rights reserved.
Five Basic Benefits of Working With a Financial Planner
Thanks to the internet and YouTube, doing-it-yourself has taken on a new life. For example, a young person we know was able to diagnose a problem with his clothes dryer, then order the key part and install it, thus saving the cost of an in-home repair. Information that once might have been hard to find outside of specialized publications has become accessible to everyone.

But there are limits to self-empowerment. One area in which some people may be overconfident is financial management. There is more to financial planning than setting some goals and pinching some pennies. Here are five basic benefits that may come from working with a financial planner on an organized financial plan.

1. Test whether goals are realistic in the stated time frame
Legendary Green Bay Packers coach Vince Lombardi reportedly once said, "We didn't lose, we just ran out of time." That's how it can be with savings plans. How long will it take to accumulate enough for the down payment on the house, or reach the target for college savings? The variables are the savings rate, the rate of return on savings, and time. A financial plan provides perspective on integrating savings strategies.

2. Identify overlooked risks
What are the chances of dying before meeting one's financial goals? What are the odds on becoming disabled during a career? What would happen to meeting the mortgage payments if a spouse dies prematurely? A financial plan will quantify these hazards and provide mitigation strategies, often with insurance plans.

3.Measure progress
A financial plan includes benchmarks along the path toward the financial goals. If the targets are not being met, a mid-course correction may be required. 

4. Fix mistakes
There are a number of routine money management mistakes made by a surprisingly large number of people. Failure to take full advantage of a company retirement plan is one; paying high interest charges on credit card balances is another. A financial plan will identify opportunities to bring greater efficiencies to money management and flag the pitfalls that could undermine the plan. 

5. Build wealth
A household financial survey conducted by the Certified Financial Planner Board of Standards found that families with financial plans generally have more money saved and are more likely to have paid their credit cards in full. This was true even for families in the lowest income bracket. For those with a plan, 41% of those earning less than $25,000 were paying off their credit cards every month. Only 26% of those in the $25,000 to $49,999 income bracket without a financial plan were paying off their cards, even though they had more resources to do so.

Get started
Having a financial plan and following through on it takes some of the uncertainty out of life. It gives people a feeling of greater control over their financial destiny. Financial plans are not just for the wealthy--they offer a path for becoming wealthy. They are not just for the young, or for the old, because financial plans address needs throughout one's lifetime. 

(September 2021)
© 2021 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. ©2021. All rights reserved.