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The RMD vacation is over

Last year seniors were given a reprieve from the requirement to take minimum distributions from their IRAs and qualified retirement plans.  The suspension of the rules, included in the CARES Act, was enacted at a time when the stock market had moved sharply lower, and so it was intended to prevent a forced emptying of retirement funds when values were low.  Prices have since risen and the market indices have been setting records.  There is no sign of Congress renewing a suspension of the rules.

Accordingly, taxpayers who turn 72 this year must begin taking their RMDs (required minimum distributions), and older taxpayers must resume their program of drawing down tax-favored retirement funds.  The amount of the RMD is calculated based upon the age of the account owner and the total retirement account values at the close of the prior taxable year.

Normally the RMD must be received during each tax year, with failure to distribute the full amount subject to a 50% tax penalty. However, there is a grace period for the first year of RMDs, as the senior gets used to the new distribution program.  For those who turn 72 in 2021, the first RMD is not due until April 1, 2022.  That gives them an extra year of tax-deferred growth.

Caveat: The grace period is not a panacea.  Someone who delays a first RMD to 2022 will have to take two such distributions for the 2022 tax year, which could lead to higher taxes on the distributions as well as higher taxes on Social Security benefits and perhaps higher Medicare premiums.

Timing distributions

An RMD may be taken at any time during the tax year.  In a rising market, maximum tax deferral may be obtained by delaying the distribution for as along as practical. Someone who will be using the distributed funds for ordinary expenses may want to withdraw 1/12 of the RMD on the first of each month. This “averaging out” approach may be preferred when stock prices are especially volatile.  

If you have several IRAs, the RMD is determined by adding all the accounts together.  However, you do not need to take an RMD from each account.  You could take the entire distribution from the smallest account for consolidation, or you could choose to liquidate the investments with the poorest prospects to rebalance your portfolio as you take the distribution. 

RMDs can be tricky, so getting professional advice is likely to be money well spent.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

A big risk in acting as trustee

Being the trustee of a trust is not an honorary position, it is a serious one with legal obligations.  Accepting such responsibility is what trustees are paid to do.  A corporate trustee, such as us, has made trusteeship a fully staffed and accountable business enterprise. Here’s an example of amateur trustees who were held to account for their failures.  

In 2004 David Hodges, Sr., established two irrevocable trusts, one exempt from the generation-skipping transfer tax and the other not exempt. His business associates served as private trustees. The beneficiaries of the trusts were his then wife, his three biological children, and his two stepsons. Five years later, David had second thoughts about his earlier generosity. His estate planning attorney explained that though his irrevocable trust could not be amended, it could be “decanted” into a new trust, and the new trust did not have to have identical beneficial interests. 

David liked that idea—he liked it perhaps too much.  In a 2010 trust decanting the interests of the stepsons were extinguished. A 2012 decanting removed one of the biological sons. The 2013 decanting removed the interest of the now ex-wife. At no time did the trustees raise any objections to the trust decantings. They did not even consult with independent counsel on the propriety of their actions to protect themselves.

In 2014 the beneficiaries who had been cut out of the trusts brought a lawsuit to have all the decantings declared void, and they won.  Interestingly, although the facts suggested that David may have retained effective control of the trusts, the courts declined to void the decantings on that basis, as it would have had major federal tax consequences.  Rather, they ruled that the trustees had failed to give proper weight to the interests of all of the beneficiaries or to the original purpose of the trust, and so they had failed in their fiduciary duties. 

New trustees were appointed for the trusts. The former trustees then filed a motion to recover the tens of thousands of dollars in costs they had incurred in defending the decantings in court. The new trustees not only resisted that request, they demanded that the former trustees personally pay the costs incurred by the trust itelf in getting the decantings set aside, as well as their own costs! Given the extent of their breach of fiduciary duty, the Supreme Court of New Hampshire ordered the former trustees to pay up.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

Ask a trust officer: The home office deduction

Dear Trust Officer: I’ve been working from home during the pandemic, and my employer has indicated that will probably continue for me at least part time this year as well.  Can I take a tax deduction for my home office?—Former commuter.

Dear Former: You are most likely not eligible to take a deduction for home office expenses.  One of the key changes included in the Tax Cuts and Jobs Act of 2017 was the elimination of the deduction for unreimbursed employee expenses.  Accordingly, employees will not get a deduction for home office expenses until that tax rule expires in 2026.  That loss of deduction was painless for most taxpayers because the standard deduction was roughly doubled by the same legislation.

Self-employed taxpayers may still be able to take the deduction, however.  Three tests must be passed:

(1) the home office must be used exclusively for business; 

(2) it must be used on a regular, ongoing basis; and 

(3) it must be the taxpayer’s principal place of business.

The simplified home office deduction is $5 per square foot, to a maximum of $1,500. The regular deduction is 100% of the direct expenses of the home office and a ratable amount of the indirect expenses, such as taxes, utilities, and rent.

See your tax advisor to learn more.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

The “Buffett indicator”

The stock markets had a strong first quarter in 2021.  Are you wondering how much higher stocks can go?  If so, you are not alone. The price/earnings ratios for many stocks are well above their historic averages, suggesting that shares have become relatively expensive.

How expensive? One frequently used metric is the ratio of the value of publicly traded stocks to Gross Domestic Product, sometimes called the “Buffett indicator” because Warren Buffett has mentioned that he favors it.  GDP is current economic output, and the capitalized value of stocks is what investors are willing to pay for future output.

Fortune reports that by this measure stocks have never been more expensive.  A few data points from their April 5 article using the S&P 500 as a proxy for stocks:

  • On average for the last 25 years stocks have been worth 85.65% of GDP.
  • The ratio bottomed at 54% in 2008 during the Great Recession.
  • Before the dot-com crash, the ratio peaked at 131%.
  • After the dot-com crash the ratio did not again break 100% until 2016.
  • The ratio reached 122% in 2019, 147% in 2020, and 156% in early April of this year.
  • Total GDP growth since 2016 has been a healthy 19%, and during that time the S&P 500 has doubled.

Several caveats are in order before leaping to the conclusion that a stock market bubble is about to burst. The measure of GDP used in the April calculation used a projection by the Congressional Budget Office, which may have been too conservative. Many observers expect an above-average wave of GDP growth as the vaccine becomes widely distributed and the economy returns to normal. That could boost corporate profits significantly, making today’s stock prices look more reasonable.  Finally, because of the current extremely low interest rates, the dividend yield of stocks remains realistic, acceptable to many investors, supporting current prices.  Buying bonds in an ultra-low interest rate environment runs the risk of large paper losses if interest rates rise in the future.  That’s not a matter of investor sentiment, it’s just how the bond math works out.

Before the dot-com crash, Fed Chairman Alan Greenspan spoke of “irrational exuberance” in the stock market, and Professor Robert Shiller wrote a book with that title. After the crash they looked pretty smart. When one sees millions of dollars being paid for intangible digital tokens as “collectibles,” one is tempted to say we are in another moment of irrationality, with a disconnect between price and value in some quarters. Still, few people have correctly called stock market tops, and even fewer have done so repeatedly.  Economic growth may continue for some time. Even so, caution is in order as stock prices cannot sustainably stay above GDP forever.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

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