QLACs

DEAR GARDEN STATE TRUST COMPANY:
WHAT THE HECK IS A QLAC?  IS THIS SOMETHING I NEED TO CONSIDER?
 —EXPECTING RETIREMENT

Dear “Expecting”,

A QLAC is a “Qualified Longevity Annuity Contract.”  The idea has been in the financial press because the IRS finalized regulations on these instruments in July.

A QLAC resolves two potential problems of retirement financial management.  The first is the worry about running out of money during a long life.  The second concern is taking required minimum distributions from IRAs and other qualified retirement accounts upon reaching age 70½, having that nest egg diminished by taxation.  For example, a retiree at age 65 may feel that she has enough retirement income and resources to last until age 80, when she would like to bump that income up.  Given the choice, she’d like to defer IRA distributions until then.

Under the IRS Regulations, if this retiree has a substantial IRA, she could spend up to $125,000 (or 25% of the IRA, if that is less) on a QLAC to begin making payments when she reaches 80.  The Regs. provide that payments must begin no later than age 85.  When this retiree turns 70½, the amounts spent on the QLAC will not be counted in determining the required minimum distributions from the balance of her IRA.

QLACs must be fixed annuities, not variable or equity-indexed annuities.  They may not provide for a cash surrender value or a similar feature. They are permitted to offer a return of premium, should the annuitant die before collecting an amount equal to the premium paid.

The QLAC is a brand new financial product, with which no one has much experience.  It may be appropriate in certain circumstances, depending upon the client’s wealth levels and life expectancy.  As with all annuities, the longer one lives the more financial benefit one derives.

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Advisor Fees

DEAR GARDEN STATE TRUST COMPANY:
WHAT’S THE DIFFERENCE BETWEEN A “FEE-ONLY” INVESTMENT ADVISOR AND A “FEE-BASED” ADVISOR?  THEY SOUND ABOUT THE SAME TO ME.  WHICH TERM APPLIES TO YOU?
 —GRAMMARIAN

Dear “Grammarian”,

An investment advisor has two potential sources of income.  The advisor can earn commissions from the sale of securities to his or her clients, and he or she can charge the clients a fee for the services provided.  A “fee-only” advisor does not accept commissions.  In theory, this removes any chance for a conflict of interest in the advice offered by the advisor. He or she has no financial incentive to recommend one product over another. A “fee-based” advisor, on the other hand, is free to accept commissions as well as fees paid directly by clients.  Given the dual sources of income, the initial cost of working with a fee-based advisor may be lower.

The trust industry always has charged only fees for services.  The fees are expressed as a percentage of the assets under management, with lower percentages applying to larger accounts. If you are interested, I would be pleased to provide you with our fee schedule.

Travel Trusts

DEAR GARDEN STATE TRUST COMPANY:
  I IMMIGRATED TO THIS COUNTRY FROM NORWAY AS A CHILD, AND I HAVE RELATIVES THERE WITH WHOM I REMAIN CLOSE.  ONE OF MY CHILDREN LIVES IN OSLO NOW AND MAY BE SETTLING THERE PERMANENTLY. FOR THE PAST SEVERAL YEARS, I’VE HELPED FUND SOME FAMILY REUNIONS.  THE GET-TOGETHERS ALTERNATE BETWEEN THE U.S. AND OSLO, AND I HELP PLAN THE TRIPS AND SIDE TOURS.  I ALSO COVER THE COST OF AIRFARE. IT’S BEEN A GREAT THING FOR CEMENTING THE BONDS OF THE EXTENDED FAMILY.  WHAT I’M WONDERING IS, CAN I ADD SOMETHING TO MY WILL TO KEEP THIS TRADITION GOING?
—FAMILY TRAVELER

Dear “Family Traveler”,

I suggest that you consider an irrevocable trust in your will, with the express purpose of providing financial support for travel for your heirs.  The trust will likely include other provisions related to the financial security of your heirs.  The trustee can be given some discretion in these matters, but only within the parameters that you and your attorney set out in the trust agreement.

If you choose a corporate fiduciary, such as us, your trust will have the additional benefit of professional investment management.  We are well-versed in all aspects of fulfilling fiduciary duties.

Social network investing?

DEAR GARDEN STATE TRUST COMPANY:
  I’VE HEARD THAT SOON WE’LL BE SEEING LEGITIMATE INVESTMENT OFFERINGS ON LINKEDIN AND FACEBOOK.  IS THAT TRUE?
—SOCIAL NETWORK SKEPTIC

Dear “Social”,

Maybe. The rules for advertising investment solicitations were overhauled in the Jumpstart Our Business Startups Act of 2012.  The goal was to make it easier for young companies to raise capital.  In theory, yes, companies now can use social media in their efforts to attract investment capital.

In practice, few companies have taken the plunge as yet.  The SEC remains concerned about fraud, and issued a 180-page memo last year proposing additional requirements to be met by such investor outreach. Perhaps most significantly, these investments are not open to everyone. Investors need to have $1 million in liquid assets or $200,000 in annual income, and the companies seeking funding need to take reasonable steps to learn these details about their investors.

Still, it is worth remembering, should you see an investment offering on social media, that it may not be just a scam after all.

Split-Interest Charitable Trusts

DEAR GARDEN STATE TRUST COMPANY,
 I’M GOING TO MAKE A MAJOR CHARITABLE GIFT TO MY ALMA MATER, BUT I ALSO NEED TO PROVIDE FOR MY HEIRS. HOW CAN I BALANCE THESE COMPETING INTERESTS?
—BUDDING PHILANTHROPIST

Dear “Budding”,

Explore a split-interest charitable trust.  Such a trust has both private and charitable beneficiaries (hence, the “split”). You contribute assets to an irrevocable trust, either for a set number of years, a beneficiary’s lifetime, or the lifetimes of more than one beneficiary.  The private beneficiaries receive trust distributions that are defined either as a specific dollar amount annually (an “annuity trust”) or a specified percentage of the trust’s value, determined annually (a “unitrust”).  In periods of inflation, growth in asset values will lead to growing distributions to beneficiaries. In periods of economic uncertainty, on the other hand, the annuity trust alternative gives beneficiaries the peace of mind of a set number of dollars coming in, regardless of what the markets do.

When the trust terminates, the assets pass to a designated charity, your alma mater.  This facet of the plan gives rise to income, gift and estate tax charitable deductions, stretching the financial protection of your resources.  A charitable remainder trust may be established during life or in your will.  It can be especially appropriate if you wish to diversify a portfolio with highly appreciated assets.

Be sure to consult with your tax advisors before making any irrevocable decisions.

Will Medicare cover the cost of a nursing home?

DEAR GARDEN STATE TRUST COMPANY,
 MY PARENT HAS BEEN RETIRED FOR MANY YEARS AND IS BEGINNING TO HAVE SOME TROUBLE WITH LIVING INDEPENDENTLY.  WILL MEDICARE COVER ALL OR PART OF THE COST OF A NURSING HOME? 
—WORRIED CHILD

Dear “Worried”,

No, neither Medicare nor supplemental medical insurance for retirees covers the cost of long-term care. Most nursing home care is custodial care, which appears to be what your parent needs. Medicare covers very limited and medically necessary skilled care or home health care if needed for an illness or injury and if certain conditions are met.  Long-term care is not one of those conditions.

To help take care of nursing home bills, your parent needs to buy long-term care insurance for that purpose. These policies can be quite expensive, because nursing homes are very expensive.  There can be policy terms that lower the cost, such as longer “elimination periods” before benefits become payable. Just as one can’t buy homeowner’s insurance once one’s house is on fire, your parent shouldn’t wait until the nursing home move is imminent to look into a long-term care policy.

Moving into a nursing home should be a last resort. There may be other, less expensive options that you can explore to help your parent with the chores of daily life.

Sincerely,

Garden State Trust Company

Controlling an Inheritance

DEAR GARDEN STATE TRUST COMPANY,
I EXPECT TO LEAVE GENEROUS INHERITANCES TO MY GRANDCHILDREN. ALL OF THEM EXCEPT “ALAN” HAVE FAMILIES AND CAREERS AND WILL, I BELIEVE, MAKE GOOD USE OF THE MONEY. ALAN, UNFORTUNATELY, LACKS MOTIVATION. LAST YEAR HE QUIT COLLEGE AND MOVED BACK IN WITH HIS PARENTS. HE DOESN’T EXPRESS ANY INTEREST IN A CAREER OR HIS FUTURE. OTHER THAN DISINHERITING ALAN (WHICH I SURELY DON’T WANT TO DO), IS THERE ANY WAY THAT TO MAKE SURE THAT AN INHERITANCE WON’T REINFORCE HIS LACK OF MOTIVATION?
—CONCERNED GRANDMA

Dear “Concerned”,

You might consider establishing an incentive trust for Alan in your will to allow you to attach conditions to his inheritance.

For example, you can specify that the trust distribute only a limited sum to Alan initially, requiring him to achieve certain goals that you believe are important (obtaining a degree, pursuing a professional career) in order to receive more. You can structure Alan’s inheritance so that he receives money from the trust only at certain ages, with the final payout coming at a time when he has reached financial maturity.

An incentive trust can’t guarantee that Alan will achieve the goals that you want him to pursue, if he doesn’t believe in those goals himself. But the trust can provide positive reinforcement, and it can protect the assets from being squandered.

Sincerely,

Garden State Trust Company