Category: Media Clips

InvestmentNews Publishes Slideshow Based on McManus’s Year-End Tax Advice

6 tax strategies for year-end planning

New U.S. tax laws should inspire some Americans to pursue year-end tax strategies that will seek to maximize their wealth, according to John McManus, founding principal of McManus & Associates. He said these strategies make sense given the new tax framework, as well as estate planning recommendations. Click through the different strategies and listen to Mr. McManus discuss these strategies here.

Give it away sooner rather than later

Given that the increased estate tax exemption is temporary, high-net-worth clients worried about future estate taxes should make $15,000 (or $30,000 for a married couple) annual exclusion gifts to children and grandchildren into flexible irrevocable trusts before Dec. 31. Right after Jan. 1, give the gift again.

Offsetting gains due to growth

If a client sold appreciated investments or a business in 2018, that will spark capital gains taxes, so offset those by donating to a family-controlled charitable vehicle like a private foundation or charitable remainder trust before Dec. 31.

Think before you sell

Given the new limitation on the state and local tax (SALT) deduction for federal income taxes, clients should think before they sell appreciated investments or a business in the next few years because those sales will lead to unusually high capital gains taxes. But if they establish a non-grantor trust in Delaware or Nevada to store assets prior to a liquidity event, they can avoid state capital gains tax.

Investment diversification with insurance?

With the SALT deduction now constrained, think more about income tax exposure on investments. Consider whole life insurance, which continues to appreciate in value without resulting in income taxes due, and represents an efficient component of a diversified portfolio.

Tax benefits of insurance

High-net-worth families who will still have state and federal estate tax exposure should be thinking about how to utilize insurance. Permanent insurance coverage owned by an irrevocable life insurance trust should be a component of smart estate plans.

Creative solutions

Here’s a three-generation plan: A grandparent could loan significant funds to their child to acquire a life insurance policy for their grandchild. That loan can be structured to be dramatically discounted upon the grandparent’s death, thus cutting state and federal estate taxes. This arrangement allows the insurance policy to be free of taxes all the way down to the grandchild.

See the InvestmentNews slideshow with photos here.

Advice for Seniors from McManus Meets the Big Screen, Thanks to WealthManagement.com

WealthManagement.com/Trusts & Estates published the below byline by John O. McManus as a slideshow! Click here to read John’s advice, accompanied by entertaining movie stills.

John O. McManus | Oct 29, 2018

As clients age, there’s a significantly greater risk of incapacity. The failure to prepare a healthcare directive and living will, authorization for release of protected health information, and durable general power of attorney means that family members will be compelled to seek court intervention if your client becomes unconscious, has diminished capacity, or experiences some other emergency. This results in unnecessary delay and expense and will be completely inadequate if a client’s loved ones need to make a healthcare decision or act on their relative’s behalf with respect to financial, legal or personal matters. It’s essential to ensure basic protections are in place so that loved ones can act immediately in the event of these issues.

The need for the court to oversee the administration of an estate can be time-consuming, costly and frustrating. Proper planning will allow for the probate process to be completed with greater expediency. This includes the preparation of revocable living trusts, the assets of which will not be subject to court review (even if the property is owned in another state) and updates to the titling and beneficiary designation of your client’s assets to ensure a far more efficient estate administration.

Dramatically reduce a client’s future potential federal estate tax by utilizing the temporary increase to the lifetime gift exemption. The Tax Reform and Jobs Act enacted at the beginning of 2018 significantly raised the federal estate tax exemption, but the current law will expire no later than Dec. 31, 2025. Furthermore, Congress can take action sooner to reduce the increased exemption. Therefore, high-net worth individuals and families must strongly consider leveraging the exemption while it’s available in order to remove appreciating and/or discountable assets from the taxable estate.

Help a client understand the tax implications of the transfer of wealth across multiple generations to preserve their legacy for the descendants. The generation-skipping tax and the use of the GST exemption are among the most sophisticated planning concepts, but it’s essential to consider this issue as part of the larger estate plan. Bequests in trust to grandchildren, the design of a dynasty trust and the proper reporting of gifts are all connected to the deployment of the GST exemption and avoids the imposition of additional tax when an inheritance is received by more remote descendants.

Evaluate strategies to avoid a potential increase in federal income taxes due to limitations on state and local tax deductions. Different types of out-of-state trusts (particularly those based in Delaware and Nevada) provide planning opportunities before the liquidation of an appreciated investment or business. Furthermore, life insurance, Roth IRA conversions and contributions to charitable vehicles (including private foundations and charitable remainder trusts) afford clients opportunities to mitigate state income tax exposure.

Review the power of a step-up in basis upon death, reducing capital gains tax and delivering income tax savings your client’s loved ones can enjoy. Families must consider proper planning in advance of death. Asset transfers to an ailing spouse, community property trusts, asset swaps from existing irrevocable trusts and asset upstream gifting to parents are all options to put the surviving spouse, children and other heirs in the best position to sell an appreciated asset tax-free.

The cost of long-term health care could drastically deplete an estate, but strategies may be available to mitigate the attrition of assets. In addition to traditional long-term care policies, life insurance policies can be structured with an accelerated death benefit to cover the cost of nursing home care and/or provide wealth replacement if other resources are diminished. Medicaid trusts and supplemental needs trusts also afford the possibility that assets may be preserved for the use of a surviving spouse or provide a meaningful legacy for children without sacrificing the ability to qualify for governmental benefits.

Protect the inheritance of your client’s heirs and ensure wealth is not diverted, in case a child’s marriage fails or there’s some other attack by a plaintiff’s lawyer. A properly structured trust for the benefit of a child or grandchild under a will or revocable trust can serve to secure an inheritance from an estranged spouse. It’s also important to evaluate how these benefits can be enhanced through a prenuptial agreement or other prenuptial planning measures. Such a trust can insulate the assets from attacks resulting from personal or professional liability, creditors and other legal claims.

Ensure the inheritance of your client’s children and grandchildren will be used to enhance their standard of living, while preserving their ability to receive Social Security or Medicaid. If a client’s child or grandchild directly receives from the estate or benefits from a conventional trust, it will likely disqualify them for needs-based government benefits, forcing the funds to be used for basic living expenses and health care. Incorporating a supplemental needs trust into the estate plan will prevent the inheritance from being treated as a resource of that child or grandchild, which will allow for the continuation of payments from these programs. The assets of the trust can then be sheltered for uses not covered by the government, including social, cultural, entertainment activities, travel, visitation with family members, educational and vocational programs, and other quality of life considerations.

Aid your client’s loved ones in the effective deployment of the wealth they pass along by imparting their family mission and values, including the intrinsic benefits of philanthropy. As a first step, encourage adopting a family mission as part of the estate plan as a means of conveying these wishes and expectations. Recognize the importance of gradually integrating children and grandchildren into the estate plan through periodic family meetings with the family’s professional advisors, which will help them to understand the purpose of the estate plan and the various considerations that go into preserving wealth for the next generation. Finally, those families who adopt charitable giving as a core tenet of the estate plan should include children in the implementation of those activities, including the continued support of causes supported by the family, the identification of new causes that align with donative intent and the development of relationships in the philanthropic community to ensure charitable gifts will have the greatest impact.

Reuters Turns to McManus for Guidance on Giving

The article below, for which John O. McManus was interviewed as an expert source, was published by Thomson Reuters Regulatory Intelligence:



INSIGHT: New red flags for investment firms as charitable season meets donor fund boom

Oct 30 2018 Richard Satran, Regulatory Intelligence

The end of the year is high season for charitable donations — and with investment firms assuming a leading role in philanthropic giving, they face red flags and challenges. Compliance risk is rising for wealth managers trying to match the philanthropic clout of Fidelity, Vanguard, Goldman Sachs and others that have created charitable funds.

The vehicle of choice is the donor-advised funds that have boomed in recent years by offering investors a simplified one-step vehicle for tax-advantaged philanthropy. Some investment professionals have run into problems by assuming that a lack of rules hard rules for giving away money makes it easy: Specialists, however, warn that philanthropic giving is a complex venture that poses risks for investment professionals crafting their own tax-advantaged vehicles for clients.

Securities regulators have taken an increasing number of disciplinary actions against a more than a dozen investment professionals over the past year in an enforcement arena that had largely been the domain of state regulators and the Internal Revenue Service.

Hundreds of thousands of accounts

Enforcement cases have ranged from violations of marketing and sales practice rules of the Financial Industry Regulatory Authority to a Securities and Exchange Commission $9 million investment adviser’s fund diversion scheme last December using a charitable foundation as as vehicles for fraud.

Compliance teams at brokerage firms and investment advisories are seeing a flood of new clients seeking advice on philanthropies and private foundations. With 10,000 Americans reaching age 65 each day, new controls will be needed as clients shift gears from accumulating assets to managing and passing on wealth. Investment firms are looking for ways to remain relevant as trillions of dollars in assets hit the transition point.

“There is a large group of financial advisers who have begun to feel their business is a commodity, and to solve for the commoditization they feel a need to become more involved in ancillary issues,” said John O. McManus, attorney for the estate planning law firm, McManus & Associates. “We see a lot of mistakes and mismanagement and firms needing help fixing issues.”

“Mass affluent” become most philanthropic

Problems arise when investment professionals overstep their expertise in offering services that involve far more complex legal and accounting requirements than transactions and retirement planning. Some are misled by the fact philanthropic ventures are relatively free of regulatory oversight. But there is deceptive complexity in managing charitable activities for clients, and increasing scrutiny on investment and advisory professionals dealing with senior investors making difficult choices.

Setting up private foundations has been the routine for high net-worth individuals with the money to hire professionals in accounting, law and finance. The industry is being hit with a growing wave of middle-income or “mass affluent” who are increasing their giving while wealthier, tax-conscious individuals have slowed their charitable contributions, which have been made less attractive by tax cuts and revisions.

“Fuse is lit” at end of year

The end of the year brings the scramble for clients and firms to decide contributions. The “fuse is lit at the end of the year,” as they race against a deadline to put funds to work to take advantage of tax breaks for the next year’s taxes. The initial setup work for a private foundation may be relatively simple and quick, but follow-up reporting can place an continuing burden that can be onerous for firms and perilous for clients. Privately-funded charities, for example, must report every transaction separately, unlike retirement accounts. Private foundations require board meetings and minutes carefully documented.

“There are ever-changing laws and operations need to be updated to meet them,” said Tamara Surratt, president and chief executive officer of Legacy Family Office. “People think that there are all kinds of rules on who you can give to. It’s true, you have to be careful about giving to a apolitical organization or campaign, or for anything that gives you a personal benefit. But that is not the biggest concern.”

The boom in donor-advised funds offered by most large brokers and fund companies has provided a way for individuals to avoid the complication and cost of a private foundation, and hundreds of thousands have used the alternative. Fidelity’s donor fund has become the largest charitable foundation, surpassing United Way two years ago. The assets of the donor advised funds are expected to top $100 million this year after quadrupling over the past five years.

Funds get “gift that keeps on giving”

The funds themselves have found a comfortable niche, although the philanthropic community has viewed them anxiously and criticized the fund sponsors for being lured by “the gift that keeps on giving” — since firms collect fees on funds they can hold and manage for years without any requirement to give them to away. They are not bound, as non-profit foundations are, to put 5 percent of their assets into the hands of beneficiaries. They have on average paid out about 20 percent, but there is no legal obligation to do so.

“The donor advised funds are really offering a service to their clients. The fees are low, and it’s not a big profit center for them. It’s a perfect choice for smaller charitable contributions, ” said McManus, although individuals with over $500,000 to contribute to tax-advantaged charities can justify the accounting and legal professionals costs required of a private foundation.

“I would hope the UBSs and Merrill Lynchs of the world would educate their advisers on the pitfalls that could befall managing a foundation,” said Surratt. “It should be flagged and there should be resources allocated to that individual. There are a whole host of things to be considered. The average investment professional is schooled in managing investments, or gathering assets. Not running a private foundation.”

Single missed payment

Wealth managers often look for ways to partner with accountants and law firms to manage the wealthy client who sets up private funds. The agreements are ripe for problems if the reporting responsibilities are not made clear from the start, said McManus. A single missed disclosure or missed payment can jeopardize the foundation’s status, he added. But the private fund route allows the wealth manager and client more control over the process and allows for “an enduring charity, with a family ethos, with participation that keeps families together.”

The donor advised funds give control to the firm managing the account and take care of compliance issues on the fund level, providing a practical way for small investors to do tax-advantaged contributions. Charitable gift annuities are another way that small investors can make donations directly to a qualified charity. Tax law changes have made possible qualified charitable distributions from individual retirement accounts, which are a simple way to covert required minimum distributions into a tax-advantaged contribution without itemizing deductions.

The increasing popularity of such investments will place demands on compliance to make certain clients interests are being served at a time when retail protection of seniors is a top priority for securities regulators.

Firms need conversation with clients

“It is one of the biggest issues facing the industry and it is important to understand the implications of the huge wealth transfer coming over the next 10 to 20 years,” said Surratt. ”It’s incumbent on advisers to be thoughtful and think of what is the best interest of clients and to think long term about what legacy they wish to leave.”

Firms need to make certain that brokers are having conversations with clients to make certain the right choices are being made and that they understand the complex transactions involved.

“These are really important conversations to have,” said Surratt “It will be difficult at firms where brokers are managing large books of clients, but it is absolutely those are really important conversations on a regular basis and for firms’ leadership to set the culture to make it possible.”

(By Richard Satran of Thomson Reuters Regulatory Intelligence.)

Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.

Real Daily Relays Insight from McManus on Self-Directed IRAs

 

Real Daily, which seeks to enrich, enlighten and empower readers to make informed choices that will positively impact their financial lives, recently published the article, “5 Reasons You Need a Self-Directed IRA.” The piece, which cites insight from McManus & Associates Founding Principal John O. McManus, begins with an overview:

·           Self-directed retirement accounts, known as a self-directed individual retirement arrangement (IRA), were created in 1999 by an act of Congress after intensive lobbying of small business owners and associations.

·           The beauty of a self-directed IRA is it allows you to invest up to $6,500 into a tax-deferred account where you control the investments. Many of those investments include alternative vehicles not available in a traditional IRA.

·           These alternative investments include real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property.

The first reason why one should consider opening a self-directed IRA is higher returns. Per the article, “The number one reason investors use self-directed IRA accounts is the ability to pursue much higher returns compared to stocks and bonds. If you make a 25% return on a real estate investment and are able to build on that profit cumulatively for 10, 30, or 30 years it can be life-changing.” The story goes on to quote McManus:

“If you understand investments, particularly in certain segments, you can take advantage of higher yields and maybe less volatility,” John O. McManus of the estate-planning firm McManus & Associates in New York and New Providence, New Jersey told NerdWallet.

McManus has invested in real estate and other assets through a self-directed IRA for about 15 years, he says.

A self-directed IRA also lets McManus invest in companies that aren’t publicly traded, which “a mutual fund will not allow you to do,” he says. But, he warns, “this is not a game for the unsophisticated.”

The following four reasons to consider a self-directed IRA include:

·       Better diversification

·       Investing in private equity

·       Putting assets to work

·       Investing in cryptocurrencies

Click here to read the full article, including more information about the five arguments in favor of a self-directed IRA, as well as the risks of self-directed IRAs.

To discuss your investment strategy as it relates to your wealth management plan, call McManus & Associates at 908-898-0100.

The New York Times Highlights John O. McManus as Trusted Philanthropic Advisor

This week, The New York Times published the story, “Want to Help? Do Your Research Before You Donate,” which highlights John O. McManus as a trusted philanthropic advisor. As noted by the article, John recently challenged the firm’s foundation clients to think beyond the borders of their typical charitable intent and to consider a new initiative: the needs of those suffering in the most recent natural disasters. From the article:

Dr. Granowitz was on a business trip when the hurricane struck. He watched on television the images of devastation. The day he returned home, he got a call from John O. McManus, a lawyer who advises Dr. Granowitz on philanthropic giving through his family foundation.

“He said, ‘What are you doing about charity relief in Puerto Rico?’” said Dr. Granowitz, who is chief medical officer for a major pharmaceutical corporation. “I said, ‘Frankly, John, nothing yet.’ He said, ‘Well, get off the stick and do something!’”

This client worked with McManus & Associates to combine his own philanthropic mission with the immediate need of the people of Puerto Rico. In the story, The Times follows the charitable gift from its source to the distribution warehouse in San Juan.

Two key pieces:

  • In times of need, please think beyond your typical charitable beneficiaries. From The New York Times article:

Mr. McManus said the focus of his clients’ charitable giving includes organizations affiliated with the nursing profession and those that serve older people.

  • Take time to research these gift initiatives to ensure that your new charitable investments provide the “hoped for” yield. Also from the story:

Communicating directly with donors, showing the effect their dollars have had, is more than just a way to verify that the recipients have used the money. “We’ve found that people want to meet someone with the organization, and they want to hear the stories, the so-called ‘mission moments’ which give examples of their work,” Mr. McManus said.

McManus & Associates would love to help you think through your family foundation’s strategy, or if you are now ready to establish a family foundation, we are here to guide you through its creation.

Most importantly, if we can assist you to refine your own relief effort in the recently devastated areas of Houston, Puerto Rico, Northern California, Mexico City, or the tragedies in Las Vegas, New York City, or the First Baptist Church in Texas, please contact McManus & Associates at 908-898-0100; we’re happy to make the process easier.

McManus Weighs in on Self-Directed IRAs for NerdWallet

Andrea Coombes, whose stories on retirement, investing, taxes and other topics have appeared in the Wall Street Journal, MarketWatch, San Francisco Chronicle and other outlets, recently wrote an article on an investing strategy for the bold-hearted. Her piece, “Self-Directed IRAs: An Option for Expert Investors,” sheds light on the benefits and risks of self-directed IRAs.

Coombes spoke with McManus & Associated Founding Principal John O. McManus for his take. From the story:

The two main reasons investors take on the risks of self-directed IRAs are higher expected returns and the opportunity for diversification.

“If you understand investments, particularly in certain segments, you can take advantage of higher yields and maybe less volatility,” says John O. McManus, who has invested in real estate and other assets through a self-directed IRA for about 15 years. McManus founded the estate-planning firm McManus & Associates in New York and New Providence, New Jersey.

His self-directed IRA also lets McManus invest in companies that aren’t publicly traded, which “a mutual fund will not allow you to do,” he says. But, he warns, “This is not a game for the unsophisticated.”

Head over to NerdWallet to learn more about the advantages and drawbacks of self-directed IRAs. For guidance on your overall wealth management strategy, contact McManus & Associates at 908-898-0100.

McManus Helps Uncover HSA Pitfalls for MarketWatch Column

Andrea Coombes, Ways & Means columnist for MarketWatch, recently took on the task of identifying “hidden pitfalls” of Health Savings Accounts, which are medical savings accounts with tax advantages. For her piece, she spoke with John O. McManus to learn what happens to HSAs when the accountholder passes away.

The fourth item on Coombes’ list of 10 pitfalls:

Your entire HSA account becomes taxable when you die, unless you’ve named your spouse as beneficiary, in which case your account becomes your spouse’s HSA. So, from an estate planning perspective, what’s the best way to handle these accounts, assuming you’re older and have a hefty sum stashed? “Our view is postpone withdrawals from accounts that are compounding tax-free,” John O. McManus, founder of McManus & Associates, a trusts and estates law firm in New York and New Providence, N.J. Once you’re over 65, you can withdraw money without the 20% penalty faced by those under 65. (If you spend on non-medical costs, you’ll owe income tax, which is the same as withdrawing from a traditional IRA, but health accounts don’t have required minimum distributions, so you have more control.) Letting the money grow is valuable, McManus says, given that people are living into their 90s and nursing-home costs can run “$100,000 just for living quarters and medical assistance.” If you bequeath the account to a non-spouse beneficiary, he or she will owe income tax on its fair market value.

To read Coombes’ full column, “10 hidden pitfalls of health savings accounts,” click here. For guidance on utilization of investment and savings vehicles as part of your estate plan, give McManus & Associates a call at 908-898-0100.