Friday, September 30, 2005

Who's even less trustworthy than an accounting firm? Wealth managers!

Accounting firms haven't been getting a lot of good press lately. Latest example, today's reports that KPMG has agreed to pay $195 million to wealthy clients who say the accounting firm sold them illegal tax shelters.

Curiously enough, CPAs and accounting firms were the only financial advisers rated “very trustworthy” by even a bare majority (53%) of respondents to the latest U.S. Trust survey of wealthy folks.

Only 41% deemed private banks very trustworthy, and only 38% were very trustful of fee-based investment managers in general.
Those rated least trustworthy were: mutual fund companies, rated very trustworthy by 21%, insurance companies (20%), and stockbrokers or brokerage firms (19%).
Could it be that today's financial advisers possess less integrity than those of generations past? Or do we simply live in a cynical age?

Thursday, September 29, 2005

Keep your rich uncle on life support!

As Tom Herman reports in The Wall Street Journal (subscribers only), “The timeliest tax advice for thousands of the nation’s richest people couldn't be simpler: Keep breathing — at least until New Year’s Day.”

Don Weigandt of J.P. Morgan Private Bank in LA gave Herman illustrations of why the wealthy need to hang on until 2006:
Suppose someone who is single dies this year and leaves a taxable estate of a mere $2 million. The federal estate tax this year would be $225,000, according to calculations by Mr. Weigandt. But if that person lives until next year, the federal estate tax would be zero.

The rewards for survival get bigger as the size of the estate grows. Suppose a single person with a taxable estate of $5 million dies next year, instead of this year. The tax savings typically would be $255,000, says Mr. Weigandt. Or suppose someone with a taxable estate of $10 million dies next year instead of this year. The tax savings would be $305,000.

For someone with a taxable estate of $100 million, the federal estate tax typically would be $46,285,000. But if that person lives at least until Jan. 1, 2006, the federal estate tax would be only $45,080,000 -- a savings of $1,205,000.

There are other financial incentives to survive into 2006. The annual gift-tax exclusion is scheduled to rise next year, to $12,000 from $11,000, allowing wealthy people to move even more money out of their estates, tax-free.

Although the estate-tax issue often has been in the headlines over the past few years, the percentage of estates taxed by the federal government is very small. In recent years, for example, the number of taxable estate-tax returns represented only about 1.2% to 2.3% of total adult deaths each year, according to the Internal Revenue Service. But organizations such as the National Federation of Independent Business say those numbers are deceptive and that the "death" tax deserves to die. President Bush also has called for permanent repeal.

New IRS statistics show only 65,039 estate-tax returns were filed in 2004, says Martha Britton Eller, economist at the IRS Statistics of Income Division in Washington. That was down from 66,044 in 2003. Many estates weren't taxable. For example, of the 2004 total, only 31,329 -- or less than half the total -- were taxable, Ms. Eller says.

Most of these taxable estates represented the merely rich, not the super rich. For 2004, more than 22,200, or more than 70% of all taxable estates, were valued at less than $2.5 million. And only 1,328 were valued at $10 million or more.

Based on current law, the estate-tax exemption level is scheduled to remain $2 million in 2006, 2007 and 2008, then rise to $3.5 million in 2009 before vanishing entirely in 2010 -- only to return at the $1 million limit in 2011, unless Congress changes the law before then, as it probably will.

Copyright 2005 Dow Jones & Company, Inc.

Does your bank or trust company offer health club and/or home health-care services to the elderly wealthy in your market? Think about it!

Sunday, September 25, 2005

Where the absolutely awesome wealth is

Thanks to 100+ hedge-fund managers, assorted investment bankers and other Wall Streeters, Greenwich, CT is virtually oozing with money, as today's Stamford Advocate reports.

Hedge-fund managers are crowding into the Forbes 400 list of richest Americans (where it takes darn near $1 billion just to make the cut). Today's New York Times offers a comparison of how today's 400 compare with the those on the list 20 years ago.

Friday, September 23, 2005

"Put not your trust in money, but put your money in trust.”

That advice, offered by Oliver Wendell Holmes Sr. to young ladies, was essential in the 19th century. Back then, women who failed to put their money in trust before marriage had to hand over the funds to their husbands.

And it’s still good advice, according to “Beyond the Prenup” (subscribers only) in The Wall Street Journal.

Protecting wealth from the financial ravages of divorce has long been a key concern of families, who often enlist lawyers to draft a detailed prenup spelling out what's his and hers before the wedding invitations are sent out.

But wealth managers are increasingly trying other strategies -- especially the creative use of trusts, which can be effective in sheltering assets a spouse has earned before the marriage or will inherit.

* * *

Premarital planning tactics vary depending on whether the assets in question were generated by the bride or groom or their parents. If it's the parents that are wealthy, advisers recommend that they leave gifts or inheritances to their children in trust, rather than outright. In general, inherited property and gifts, even those received during marriage, are considered out of the marital estate, but income and appreciation may not always be.

When parents transfer family wealth into trusts, that property is segregated into its own bucket, clearly outlining what's inherited or given and what's not. By contrast, says New York lawyer Arlene Dubin, a gift or inheritance deposited into a bank account runs the risk of being subject to division at divorce, if it's commingled with marital assets such as a joint tax refund or even a paycheck.



Saturday, September 17, 2005

Mr. Barnum, meet the hedge funders!

"There's a sucker born every minute," said Phineas T. Barnum. He certainly would have enjoyed the saga of the Bayou funds, chronicled extensively in today's New York Times.

Sam Israel's investment approach for his Bayou funds is said to have appealed to investors because it was understandable. No fancy swaps, no leveraged bets on toxic tranches of CDOs. Just good, old fashioned short-term trading in stocks that always seemed to work out well.

Was he actually the only person on the planet who could trade stocks for consistent profits month and month and year after year? If so, why wasn't he world famous? Some of the smarter money must have had its doubts all along.

As the chart from Bayou's sales brochure shows, the funds never seemed to have a bad year.

They must have had a really great Sharpe Ratio. Alas, William F. Sharpe himself says his ratio is useless for evaluating the "abolute return" potential of hedge funds. The ratio is too easy to fudge. Sharpe points out that Long-Term Capital Managment had a great Sharpe ratio just before it went bust in 1998. The Bayou funds troubles may have started shortly thereafter.

Bayou's admirable returns, it seems, weren't merely merely fudged, they were imagined. (It helps when your "independent auditor" is your CFO.)

Every affluent investor is a potential sucker. Yet in Bayou's case the biggest sucker of all may have been the manager, Sam Israel III. When his funds’ reported assets were over $400 million, he seems to have been down to $100 million or so. And that sum he supposedly entrusted to a miracle worker to invest in “two private, managed, buy/sell leveraged transactions” that in ten years would turn $100 million into $7.1 billion!

LIke to know what annualized return would be required to achieve that miracle?

Fifty-three percent!

Can regulators protect affluent investors against themselves? It won't be easy. The 100 hedge fund managers of Greenwich, CT, are already threatening to leave the country if efforts are made to place them under adult supervision.

Looks like responsible wealth managers and trustees will have to try to provide the protection. That won't be easy, either.

Offer too much protection and clients will think you're way too 20th-century fiduciary and take their business elsewhere.

Offer too little and the suddenly-poorer clients will sue the pants off you.

Life is hard, isn't it?

P. S. According to today's New York Times, Israel told his CFO that the miracle worker had been “referred to us by Alan Greenspan.” Nice touch!



Thursday, September 15, 2005

From the databank: Millionaires

Last year the U.S. produced new millionaires at the rate of 619 per day. What a country!

Number of Americans with a net worth (not counting primary residence) of at least $1 million last year, as estimated in the Merrill Lynch/Cap Gemini World Wealth Report:
2.5 million

Number of people worldwide with a net worth of at least US$1 million:
8.3 million

Number of millionaires worldwide with net worth of $1 million to $5 million:
7.4 million

Number of millionaires worldwide with net worth of $5 million to $30 Million:
744,000

Number of millionaires worldwide with net worth of $30 million or more:
77,500

Number of U.S. households, as estimated by the Boston College Center on Wealth and Philanthropy, with a net worth (not counting primary residence) of $1 million or more:
7.4 million

Number of millionaire U.S. households sorted by age of householder:
Under age 35: 211,000
Age 35-44: 1.0 million
Age 45-64: 3.9 million
Age 65 and older: 2.3 million

Notice that most U.S. millionaire households contain no individual millionaires (7.4 million households but only 2.5 million millionaires). Rather, they consist of households where she has $600,000 and he has $500,000, or he has $800,000 and she has $400,000, etc.

If you're looking for business where the big money is, find one of the maybe 20,000-to-30,000 Americans with a net worth of $30 million or more. Grab his or her family-office business and you're all set.

But if you're looking for a host of clients who will need all the trust and investment help you can give them in the challenging years ahead, give a thought to those "no millionaire" millionaire households. There sure are a lot of them!

Charitable IRA rollovers

According to an e-mail that I received yesterday from Trusts & Estates magazine, Congress is poised to try out the "charitable IRA rollover" concept for the rest of the year in connection with tax relief for Hurricane Katrina. Key portion of the e-mail:
If you have clients who would like to donate more to Katrina relief and who have funds tied up in IRA accounts, this could be part of your year-end strategy. Under the pending legislation, anyone 70 1/2 years old and older would be allowed to roll over amounts from their IRA accounts (and other pension plans that can first be rolled into an IRA) directly to a qualified charitable organization on a tax-free basis.

Taxpayers aged 59 1/2 years old and older would be able to transfer IRA funds to a charitable remainder trust and give that remainder to charity without tax consequence.

I've tried to find the legislation, but according to Tax Notes the language hasn't been drafted yet. I take it that the transfer to charity would count toward the year's minimum distribution requirements, which would be a big part of the appeal. The provision would apparently expire at the end of this year, so it will be important to get the word out quickly.

Thursday, September 08, 2005

A trustee is held liable for bad estate planning advice

Following up on her banker's advice to create and fund a Crummey trust to lower future estate taxes, an individual had her lawyer draft the trust, and began making contributions to it. Unfortunately, the lawyer neglected to include a Crummey power of withdrawal for the beneficiaries, making this a somewhat rare form of that trust.

After a number of contributions were made, the trustee noticed the drafting deficiency and called it to the attention of the draftsman. The draftsman disagreed that a mistake had been made. Neither of them reported the question to the grantor. Oddly, the trustee continued to encourage contributions to the trust "to lower estate tax obligations." Perhaps the trustee expected a retroactive trust amendment or something. Needless to say, the defective trust saved no estate taxes, so the furious beneficiaries sued the trustee for their mother's lawyer's mistake (deeper pockets, perhaps?).

The Wisconsin Supreme Court held that the trustee had no fiduciary duty to review the trust, nor to call the defects to the attention of the grantor. However, continuing to recommend contributions to a trust when the purpose of saving estate taxes could not be met was negligence. Decision for the beneficiaries. [Hat tip: Gerry Beyer.]

Wednesday, September 07, 2005

Can US Trust come back?

As reported here, Peter Scaturro, Schwab's choice to head up the once-renowned trust institution, hopes that hedge funds, private placements and other alternative investments can lead to a revival.

Vote delayed

As JLM surmised yesterday, the vote on estate tax repeal was cancelled, given the urgency of finding a good political response to Katrina. That doesn't kill the reformation process, but it may weaken it. Now under consideration: a tax holiday for aviation fuel, and tax incentives for building new refineries.

Tuesday, September 06, 2005

Estate tax reformation watch

According to today's Tax Notes a cloture vote on the estate tax repeal bill, passed earlier this year in the House, is the second item on the docket when the Senate returns from recess. However, the chances of success are limited, from the same article:

In a Farm Broadcasters News Conference last week, Finance Committee Chair Chuck Grassley, R-Iowa, called the chances of achieving full repeal “zero.”

“We're short of 60 votes,” he said.

What's more, one would think that estate tax repeal wouldn't go down well before all the Katrina-rlated issues are addressed. On the other hand, does this make a compromise plan more likely? Or will the Democrats sense victory and decide to stonewall?