The gap between what the wealthy want and what financial advisors are delivering

Interesting, if somewhat predictable, information in this survey by SEI Investments. Another boost for "holistic" planning.

Estate tax reform delayed

Earlier this year a compromise on the future of the federal estate tax looked possible. Senators Kyl and Baucus were negotiating a middle ground that might attract enough democratic votes to avoid a filibuster. However this item from Tax Notes (paid subscription required) indicates that nothing will happen before the August recess. Senate Majority Leader Frist was threatening to call for a vote on full estate tax repeal, but Finance Committee Chairman warned against the move.

"I've observed very intense efforts on the part of Sen. Baucus to work on a compromise and I think that he's sincerely trying to get Democrats on board," Grassley said. "I think that anything that would go for complete repeal, even though I support complete repeal, might blow the whole thing up."

So, maybe in September?

He gave up peddling trusts and annuities.

Yes, this Californian had a better idea. Instead of a slimey life selling living-trust packages and annuities to unsuspecting seniors, he opted for good old, straightforward fraud.

Why estate tax repeal doesn't much matter

William J. Bernstein, the Oregon neurologist who turned his hobby, portfolio theory, into a second career, doubts that estate tax repeal would create a new class of perpetually wealthy Americans.

Even with the widening acceptance of dynasty trusts, says Bernstein, vast familial wealth will shrink "faster than the prawn plate at a Cajun wedding."

Read his reasons here.

"Hi! I'm from the Government, and I'm here to cut your taxes"

Did you notice? President Bush asked Congress to map out income-tax hikes totaling as much as $600 billion to $800 billion over ten years. That's how much the Administration needs to kill the monstrous alternative minimum tax without increasing future budget deficits.

What's that? You say it's long been obvious the AMT soon must be done away with or toned down? Maybe so. But future budget deficits have been estimated on the assumption that those AMT revenues will keep on snowballing, engulfing and devouring the incomes of Americans with incomes of $75,000 and up. As this article in today's New York Times suggests, many of your trust and investment clients are among the victims.

Conspiracy theorists suspect the AMT was deliberately designed to cancel much of the benefit of the Bush tax cuts. Nah! Too clever.

But speaking of conspiracies, what's all this talk about killing the death tax? Even if the federal estate tax is abolished, various states are busy revving up their own death taxes. Incautious enough to die in Connecticut? Beware of a death tax with a top rate of 16%. Washington State? 19%

Florida, by contrast, allows residents to die tax free. Could that have anything to do with the 15%-or-more population increase that Florida expects by 2010?

Does Circular 230 Apply to Bank Newsletters?

When playing audit lottery with a tax shelter, some taxpayers were in the habit of buying "insurance" in the form of a legal opinion. The opinion would provide a basis for going ahead with an "aggressive" transaction. It would not guarantee success in a fight with the IRS, but it would show that the taxpayer had exercised reasonable precautions, enough to preclude the imposition of tax penalties.

An unhappy IRS modified Circular 230 last December, changing the rules for giving tax advice. Estate plannners are now justifiably afraid that the rules may apply to them as well.

Attorney and estate planner Natalie Choate penned "How I Will Comply With Circular 230" for the July 2005 issue of Trusts & Estates magazine (not available online, so far as I can tell). Planners need to be concerned with "covered advice," "other written advice," and, according to Ms. Choate, "preliminary advice."

I believe that articles in bank newsletters fall well outside the scope of Circular 230, and if they are covered, they should be considered preliminary advice. As such, it could be prudent to include a disclaimer that "Articles in this newsletter are not intended to be tax or investment advice. Please consult an appropriate professional before taking action or making any decision."

However, at least one of Merrill Anderson's clients believes that newsletter articles that touch on tax matters that are favorable to taxpayers constitute "other written tax advice." As such, to avoid compliance with all the strictures of Circular 230, such articles must include a somewhat more draconian disclaimer. The one this particular client chose is:

This written advice is not intended or writtten to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Before making any decisions or taking any action, seek the advice of qualified tax or investment professionals.

Yes, the client insisted on the boldface type, which was suggested in the December regulations but relaxed in the May amendments. The type still needs to be as large as the text copy.

My sense is that this is a bit of an over reaction, but at the same time compliance matters do need to be taken seriously. What are the other trust and private bankers saying about Circular 230?

Index funds

Jeremy Siegel's new book, The Future for Investors, Why the Tried and True Triumph Over the Bold and the New, includes an interesting exercise in what happens when you invest in an index fund. The current incarnation of the S&P 500 dates back to 1957. The index has been adjusted over the years, because it has to be. Some companies merge, spin pieces off, or are bought by others. The economy is changing over time, and the Index needs to evolve with it to remain an accurate barometer.

Professor Siegel posed the question, what if I bought the original 500 stocks instead of replicating the index? He had three alternatives for dealing with corporate reorganizations, from sticking to the originals only to owning all their descendants. The critical point is that none of the portfolios ever added any of the 917 stocks added to the S&P 500 over the years.

I was surprised to learn that Professor Siegel's portfolios beat the S&P 500 handily. No Microsoft? Limit yourself to big firms from the 50s, and beat the returns from firms delivering the information age economy? But of course it's true, which is why it made it into the book.

This seemed like just the thing to share with the readers of our Investment and Trust Newsletter, so I did a one page summary of Siegel's findings. I was promptly chastised by our clients, who fell into two camps. One side claimed we were slamming index funds, which was a problem become some trust departments rely on index fund investing for smaller trusts. The other school objected that we were endorsing index funds, or at least offering approval of a passive investment approach, which was inconsistent with their investment service.

Needless to say, we respond quickly to client concerns, and the page now covers tax basis and tax management for investment portfolios.

Any suggestions for covering investment matters for wealth management customers in a way that won't ruffle any feathers out there?

History of the estate tax

As you follow the estate tax debate cited below, you'll need a crib sheet on the history of the tax. I pinched this one from the National Center for Policy Analysis.

The first estate tax -- enacted July 6, 1797, to help pay for naval rearmament -- required only the purchase of federal stamps for wills and estates, but was terminated four years later because the need for the revenue passed.

A direct tax on inheritances imposed in 1862 during the Civil War ranged from 0.75 percent to 5 percent.

The top rate was raised to 6 percent in 1864; but the tax was then abolished July 14, 1870.

In 1898, an estate tax with a top rate of 15 percent on estates over $1 million was imposed to pay for the Spanish-American War -- then repealed on April 12, 1902.

America's fourth estate tax, enacted in 1916, set a top rate of 10 percent on estates over $5 million. It was raised to 25 percent in 1917, but this rate applied only to estates over $10 million. Unlike its predecessors, it was not repealed after the war, although the top rate was dropped to 20 percent in 1926.

President Franklin Roosevelt raised the top rate to 60 percent in 1934, and to 70 percent in 1935. The same bill increased the top income tax rate to 75 percent and increased corporate taxes. Altogether the law raised just $250 million annually.

Today [2005] the estate tax goes up to 47 percent. It exists only to redistribute income, since its revenue yield is negligible. But estate planning makes the tax virtually voluntary, according to estate tax experts.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 19, 2000.

The original modern estate tax, circa 1916, sounds good to me. Ten percent rate, $5 million exemption.* Why can't Congress learn to leave well enough alone?

* February 2010 update. I miswrote here. The ten percent rate only kicked in at $5 million, but lower rates, starting at one percent, applied to estates over $50,000.

The final push on estate tax repeal is coming

The surest signal yet that resolution of death tax issues is near is this article: Few Wealthy Farmers Owe Estate Taxes, Report Says - New York Times. Not mentioned in the article is the fact that the presence of death taxes has pushed many farm families to sell out to corporate agribusiness. I can't document how widespread a phenomenon that is (the same is true in the newspaper publishing industry, which was documented in Congressional testimony), but I have anecdotal first hand experience.

One can see the seeds of compromise here. It is very true that middle class farmers stand to lose if carryover basis is brought back into the law. It was the farm lobby that forced repeal of carryover basis in the late 70s (who the heck can guess the tax basis of a tractor?).

I believe that we were on course for bringing the estate tax issue to resolution this month, either with full repeal (30% chance) or a negotiated settlement that would accelerate a larger exemption (70% chance). However, the O'Connor retirement has upset that applecart, and if Rehnquist (and others?) also decide to retire most other Senate business is predicted to grind to a halt.

How to succeed in business: follow Wachovia's lead

When the Senior Assistant Blogger lived in Connecticut, he banked at Home Bank and Trust Company of Darien, which was acquired by a Stamford bank, which became Fairfield Country Trust, which merged with a New Haven bank and became Union Trust, which merged with First Union. If the SAB still lived there, his bank would now be called Wachovia.

Which is why he was interested to come across this article on Wachovia from the Gallup Management Journal. And like any civilian with long acquaintance with large banks, he was blown away to read therein a truly astonishing research finding:

In recent years, most major companies have realized that improving service quality and increasing customer loyalty are key to driving their bottom-line performance.

Will wonders never cease?

Seriously, folks, the article sheds helpful light on the efforts needed to improve service quality. Remember: The higher the level of bank-customer satisfaction, the more likely that customers will use additional services — like wealth management or trusteeship.

Russians now can die tax free. Why not us?

From an editorial in today's Wall Street Journal:

Karl Marx must be rolling in his grave, and don't even ask about V. I. Lenin: Russia eliminated its inheritance tax last month. Its move comes after January's decision by the government of Sweden, the birthplace of the modern-day welfare state, to eliminate its estate tax. Like the Russians, the Swedes have come to believe that the tax is unjust and economically counterproductive. Russia and Sweden join Argentina, Australia, Canada, India, Mexico and Switzerland as nations that don't make death a taxable event.

Subscribers to the Online WSJ can read the entire editorial here.