because wealth management is
more than managing money
T H E C O M PA S S
FA L L 2 0 1 6
THIS ISSUE
IRA Charitable Rollover
Made Permanent
2
Consider Using a Corporate Trustee
A New Money Market
3
Behind the Scenes
4
b y We s t r a y Ve a s e y, J. D .
hen clients are establishing trusts for their spouse or children, they often select individuals to serve as the
trustee. Sometimes this proves to be the best result, but in many cases, it might be more appropriate to select a
corporate trustee.
Selecting a trustee is a tough decision. You must determine who is best qualified to manage the trust assets, to
perform the administrative functions of the trustee such as: filing returns, allocating income and expenses, providing
accountings, and making decisions about distributions to the trust beneficiaries. Often, a family member is selected to
serve as trustee based on the perception that they will charge little to no fees and they will have a better understanding
of the beneficiary’s needs. In instances where the
trust is smaller and of a relatively short duration,
lower fees and a close association with the
beneficiary can certainly justify selecting a family
member as trustee. But in situations where the
trust assets are more significant and complex, and
the trust may last for a generation or more, a
corporate trustee could be the best option.
Corporate trustees are experts on trust
compliance and legalities as well as tax matters.
They are professionals at managing assets and
often can achieve better returns than nonprofessionals. They are objective in their decisionmaking; they are built to serve as a fiduciary and,
therefore, must act impartially in the best interests of the trust’s beneficiaries. And they are perpetual. Family members
frequently do not have expertise in these areas and may (and should) end up hiring professionals to assist them, and, of
course, they could predecease your beneficiary.
Certainly in situations such as blended families, or where the beneficiary is a spendthrift or has special needs,
substance abuse issues or a rocky marriage, an objective corporate trustee will be better suited to navigate difficult and
W
Continued on back page
NOTABLE QUOTE: “WE DON’T HAVE TO BE SMARTER THAN THE REST. WE HAVE TO BE MORE DISCIPLINED THAN THE REST.” WARREN BUFFETT
because wealth management is more than managing money
IRA Charitable Rollover Made Permanent
b y J o n a t h a n H e n r y, C PA , C FA ®
he IRA charitable rollover, first introduced as a temporary measure when it was included in the Pension
Protection Act of 2006, was passed by Congress and signed into permanent law on December 18, 2015. This
provision allows taxpayers age 70½ or older to transfer up to $100,000 annually from their IRA accounts directly
to charity without first having to recognize the distribution as income. The IRA charitable rollover can also be used
to satisfy required minimum distributions (RMDs) from your IRA. Note that while the amount of gift transferred
directly from an IRA to a charity is excluded from income, it is also excluded as a charitable deduction so that
taxpayers cannot gain a double benefit for the gift.
Prior to 2006 taxpayers who sought to transfer IRA assets to charity first had to recognize the distribution
amount as ordinary income and then claim a charitable deduction for the amount of the gift. For higher income
taxpayers, the charitable deduction taken on their
tax return may not totally offset the tax liability
incurred from their IRA distribution. One of the
reasons this occurs is that the distribution
included as income increases adjusted gross
income (AGI) and many deductions are phased
out or eliminated as AGI reaches higher levels.
For example, the deduction of medical
expenses is subject to a 10% AGI floor (7.5% for
ages 65 or older through 2016) – if AGI were to
increase by $100,000, potentially $10,000 of
medical expenses would be nondeductible. In
such cases, taxpayers that prefer to use IRA assets
for charitable gifts would benefit by utilizing an IRA charitable rollover to fulfill their charitable giving goals. A
lower AGI could also result in decreased taxes on social security income and lower Medicare insurance premiums, as
well as numerous other tax benefits.
The IRS uses the term “qualified charitable distribution” (QCD) to describe an IRA charitable rollover. The
requirements for a QCD are as follows:
• The distribution must be made from an IRA (other retirement accounts are not eligible).
• The recipient must be an eligible charitable organization (note: Donor Advised Funds and Private Foundations
are not eligible).
• The IRA’s owner must be at least age 70½.
• The distribution must be made directly to the charity by December 31st.
T
If you are currently receiving an RMD from your traditional IRA, are charitably inclined and don’t necessarily
have a need for the funds, consider an IRA charitable rollover for your next gift.
2
THE COMPASS Fall 2016
The information contained in the Compass is not intended as investment, legal, or tax advice. Please consult with your professional advisor to determine the appropriateness of any
strategies to your specific circumstance. Copying this publication without permission of Trust Company of the South is prohibited. © Copyright 2016 Trust Company of the South.
A New Money Market
b y D a n To l o m a y, C FA
ctober 2016 is here and so is the scheduled implementation of money market fund reform. Changes to the
$2.7 trillion market will impact individual and institutional investors as well as the fund companies that
manage such funds.
Eight years ago, during the financial crisis, the Reserve Primary Fund was forced to “break the buck” and mark
down the price of its money market fund below $1.00. The reason for the decline was enormous losses stemming
from bad short-term loans to Lehman Brothers. As a major money market fund had never broken its one-dollar
value before, panic swept the institutional market and major redemptions occurred. In the case of Reserve Primary,
two-thirds of assets were gone within a day. After that, operations were suspended and liquidation began.
To provide steadiness to money market funds, the Securities and Exchange Commission (SEC) introduced new
rules in 2014. Fund holdings are to be of higher quality and an increased emphasis is to be placed on liquidity. The
fixed price of $1.00 will be replaced with a floating value, which introduces capital fluctuations. Additionally, a fund
provider is required to use liquidity fees and suspension gates to prevent a “run on the fund.” The former assesses a
1% fee if weekly liquid assets fall below 10% of total assets and a 2% fee if weekly liquid assets decline past 30% of
total assets. The latter allows funds to suspend redemptions for up to 10 business days in a 90-day period.
Retail (non-institutional) money market funds are spared the floating price requirement and will continue to trade
at a fixed $1.00 price. They are, however, subject
to the triggers that lead to liquidity fee
assessments and redemption suspensions. As a
result, many fund companies are seeking to avoid
these restrictions by converting their fund(s) into
government money market funds, which are not
impacted by the new regulations.
As they are the intended target of the reforms,
institutional funds will feel more effects. The
choice the funds must make is to: a) convert to
government funds to avoid the new rules and
accept a lower yield or b) remain prime funds,
which may invest in short-term securities from
non-government issuers, and capture a higher
return but be subject to the new rules.
Trust Company of the South will be consolidating its money market holdings into the Blackrock FedFund
(TFDXX), which is an institutional vehicle. The fund invests at least 99.5% of its total assets in cash, U.S. Treasury
bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements secured by such obligations or cash. With its government
focus, the fund is not subject to a floating net asset value (NAV) or liquidity fees or suspension gates. The result is
that it will be business as usual with the cash portion of our portfolios – stable values and accessible funds.
O
THE COMPASS Fall 2016
3
C o r p o r a t e Tr u s t e e C o n t i n u e d f r o m p a g e 1
stressful decisions. Serving as trustee can put a lot of strain and
burden on the appointed family member who might not have the
time or the sophistication to handle complicated trust matters.
Consideration should be given to the trust agreement
provisions governing the trustee role. If a corporate trustee is
appointed, the beneficiaries or a third party should be given the
ability to remove and replace the trustee if the corporation selected
is unresponsive or has unacceptable personnel changes. It may be
advisable to pair a corporate trustee with a third party advisor who
can provide either mandatory or permissive direction to the
professional corporate trustee on certain trust matters. In that case,
the relative rights and responsibilities of the corporate trustee and
the trust advisor should be made clear in the trust agreement.
Consult with your advisors and planners about whether a
corporate trustee might be the right choice for you.
Valuation Discounts Under IRS Attack
On September 6, 2016, the IRS issued proposed regulations to Code Section 2704, which addresses the valuation of interests in
family-controlled entities for transfer tax purposes. These regulations will not be operative until made final, which is expected to
be some time after January 1, 2017. If final regulations approximate the proposed ones, most restrictions on liquidation in
determining the fair market value of a transferred interest in a family entity will be disregarded. In other words, lack of
marketability and minority interest discounts currently available in valuing interests in family entities for transfer tax purposes
will likely be limited or eliminated after the effective date of the final regulations. We recommend you consult with your advisors
on how this development may affect your gift and estate tax planning.
BEHIND THE SCENES
• Trust Company is pleased to announce Mrs. Kim Johnson
has joined our team as a client services officer and office
manager of our Raleigh office. Kim works with our entire
team of professionals. Before joining us, Kim served as a
paralegal for many years, working in the area of trusts and
estates. Welcome, Kim!
GREENSBORO OFFICE
RALEIGH OFFICE
®
44
THE COMPASS Fall 2016
• Trust Company would like to offer congratulations to our
client and friend, The Hon. James C. Gardner, on
receiving the North Carolina Award for Public Service.
Presented annually since 1964, the award recognizes
significant contributions to the state and nation in the
fields of fine art, literature, public service and science. This
is the highest civilian honor the Governor and the state of
North Carolina can bestow. Congratulations, Jim!
CHARLOTTE OFFICE
®
®
William H. Smith, CFP
CEO, President
336.538.1000
[email protected]
William H. Noble, AIF
Principal
919.781.8287
[email protected]
Jay D. Eich, CFP , CPA
Principal
704.936.4302
[email protected]
Mitchell H. Paul, CPA
Principal
336.538.1000
[email protected]
Jonathan S. Henry, CPA, CFP
Director of Financial Planning
919.781.8287
[email protected]
Matthew E. Hornaday, CPA
Wealth Advisor
336.538.1000
[email protected]
Westray B. Veasey, J.D.
Fiduciary Counsel
919.781.8287
[email protected]
®
Christopher N. Sutherland, CPA
Principal
704.936.4303
[email protected]
TRUST COMPANY OF THE SOU TH
800.800.9440
www.tcts.com