David Levine (1926-2009)

In the last half of the twentieth century, two artists created caricatures so distinctive that millions of Americans could spot them instantly: Al Hershfeld, who won fame with his drawings of show-biz figures, and David Levine, who seems to have drawn just about every public figure or private celebrity in sight.

Levine died this month at 83. Below are his portayals of Warren Buffett (1996) and Adam Smith (1978) . You can browse hundreds (no, thousands!) more Levine caricatures here.

15 per day, every day

The Wall Street Journal puts the expiration of the estate tax on its front page, with Rich Cling to Life to Beat Tax Man. They quoted many prominent estate planners, all of whom are flabbergasted by the unfolding situation. Michael Graetz at Columbia called it "Congressional malpractice." He also said that if Congress couldn't get this fixed in 2009, what makes anyone think 2010 will be any different?

The Journal points out that even if the federal estate tax only affects 5,500 estates at 2009 exemption levels, the commonly used figure, that's 15 taxable estates per day. There will soon be a meaningful number of large estates passing without any federal estate or generation-skipping transfer tax.

That some families will delay "pulling the plug" on someone to push an inevitable death into 2010 to save on taxes is not very surprising to me, especially if the costs of the extended life support are not being paid by the family. What I found truly shocking in the Journal article is that there have been a serious number of inquiries about euthanisia.

Elderly, wealthy but infirm clients have been asking their lawyers about traveling to Holland to arrange their suicide, so as to lock in the estate tax savings that could be available in 2010!

Such plans would be thwarted if Congress attempts to retroactively restore the estate tax to January 1. The article touches on the constitutionality of that idea briefly. The question is closer than I earlier   believed (I've been looking into it for Merrill Anderson's Estate Planning Report). There is no question, however, that the constitutionality of a retroactive tax would be challenged in court.  It could be years before a final answer is available.

Estate Tax Mystery Solved?

The federal estate tax officially expires on New Year's Eve, even though the House of Representatives voted for a temporary extension. Why wasn't the Senate willing to go along?

At The Christian Science Monitor, David R. Francis offers a possible clue:

[W]ith 46 to 68 millionaires in the Senate (the count hangs on whether one uses minimum or maximum net-worth numbers), will the chamber vote to maintain a tax that could damage its members’ own estates? Because 22 senators own at least $3.5 million and 14 own at least $7 million, should they recuse themselves from a vote that so directly affects their interests? The Center for Responsive Politics calculates the average wealth of US senators in 2008 at $13.9 million.

When the Going Gets Tough . . .

. . . the Ponzi schemes get going.

For evidence of the going getting tough, WSJ subscribers can see Adjusted for Inflation, Dow's Gains Are Puny. The DJIA would have to soar another 25% and more to equal its real 1999 level.

We've called attention to the inflation-adjusted DJIA before. This chart shows the severity of the slow-motion crash in the 1970's. Even if we avoid repeating that slide in the 2010's (keep fingers and toes crossed!) investors may continue to find decent returns hard to come by.

The more frustrated investors become, the faster Ponzi-style plundering proliferates. None of the schemes that unravelled in 2009 equaled Madoff's, but there were an awful lot of them.

Moral: Now more than ever, investors need true fiduciaries to help them navigate in shark-infested waters.

Bad tax ideas

Via TaxProf Blog, here are the Brookings Institution's Ten Worst Tax Ideas of 2009. To my surprise, I agree with some of the analysis.

Thinking Hard About Retirement and Death

Doesn't seem like a popular topic for the Holiday Season, but the most-read article in the Money Section at nytimes.com this morning was Thinking Hard About Retirement and Death.

High-net-worth people really do thirst for information on financial and estate planning. That's why the sponsor of this blog creates newsletters and an impressive library of material for online use.

Incidentally, the NY Times article illustrates the futility of trying to comment on the estate tax snafu. Pity JPMorgan's Janine Racanelli, whom the Times coaxed into giving a quote that boils down to, “If we’re resigned to an estate tax existing, it’s … an acknowledgment we won’t have a repeal.”

Double Your Money in 6,932 Years!

From Saving Money Costs Investors in The New York Times:

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

A YouTube "Christmas Special"

From Wade Johnston.

I liked all 8, but number 5, O Come All Ye Faithful, was my favorite. Creative and charming, the lot of them.

Season’s Greetings!

Let's escape to simpler times for a minute and enjoy this Holiday Greeting from Duke's archive of old advertising.

Click on thumbnail for larger image

Except . . . the early years of the Twentieth Century weren't simpler, were they? By 1914 the automobile was beginning to reshape the American way of life. Eleven years earlier, the Wright Brothers had come to North Carolina and made their airplane fly.

1914 was when the guns of August sounded. In a couple of years, Allied airmen would be dogfighting the Red Baron and his fellow pilots in the skies of Europe.

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Fortunately, Season's Greetings are like the Nobel Peace Prize: all about aspiration. Forget stock market cycles, federal deficits and the crashing of commercial real estate. Go right ahead and have a Merry Christmas . . . and the happiest of Happy New Years!

Upping the ante

Tax Notes Today ($) reports that Senate Finance Chair Max Baucus has promised early action on the $31 billion "tax extenders" bill, already passed by the House. "We intend to extend the provisions without a gap in coverage, just as the House did on December 9th of this year," said Baucus.

On the other hand, permanent estate tax reform may have to be folded into a larger tax reform effort for 2010. Baucus continues to say that the estate tax will be reformed retroactively. There will be serious pushback on that idea, and the longer the Congress dithers the harder it will be to impose a retroactive tax.

The stakes for general tax reform in 2010 are especially high, as all the Bush tax cuts will be expiring at year end. If estate tax reform gets attached to huge tax reform measure, it will be August at the earliest before it is enacted, and it could easily run up against election season.

It's too bad the Congress dedicated all of 2009 to health care insurance reform. I would have preferred positive steps to restore economic growth. If the Democrats freeze out the Republicans on tax reform the way they did on health care, I suspect the leading scenario is that they pass nothing at all.

“Grand Theft Astor:” The Sentence

Quote of the day, from Justice A. Kirke Bartley Jr., who sentenced Anthony Marshall to one to three years in prison for looting the fortune of his mother, Brooke Astor:

“It is a paradox to me that such abundance has led to such incredible sadness."

With time off for good behavior, The New York Times speculates, Marshall may be out of jail in time for Veterans Day.

Fun and Death Taxes

"If you are at the checkout counter, you might want to expedite things."
– Representative Richard Neal, Massachusetts Democrat,
as quoted in the NY Times

Who could have guessed, when the year began, that the main subjects of yucky jokes this holiday season would be Tiger Woods and the federal estate tax?

At least we won't have to usher in the new year watching the crowd at Times Square. We can go online and toast the countdown clock at NoDeathTax.org.

Sobering afterthought: the clock also is counting down to the death of stepped-up basis for computing gain on inherited assets.

An Indispensable Little Folder

[A brief commercial for Facts You Need to Know About Taxes.]

I was wrong.

When I was researching and writing about tax matters all the time, Facts You Need to Know About Taxes seemed redundant. Who needed it? All that stuff was already in my head, and I figured it must be in the head of most High Net Worth Investors.

Now I'm a High Net Worth Investor (Junior Grade) myself. In order to comment on subjects covered in this blog, I probably keep up with tax and investment developments better than most. Yet when the office sent me a sample of Facts You Need to Know for 2010, I realized how little of that tax stuff was in my head anymore. This indispensable folder will have a home on my desk top throughout 2010.

If you're concerned with making your wealth management clients think well of you, Facts You Need to Know can help. For more information, click here.

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Talk of tax changes will fill the Washington, D. C. air next year. (Hot air in 2010, action in 2011?) To understand the talk, you and your wealth-management clients must know where the tax system stands now. In other words, you'll need Facts You Need to Know.

Estate tax to lapse as legislated

There was not enough time all year long to attend to the estate tax, and there isn't enough time before Christmas to get it done. The last, futile gestures are reported by Tax Notes Today ($).

Max Baucus asked for unanimous consent for an extension of the current law, to which minority leader Mitch McConnell objected. McConnell in turn asked for unanimous consent to a measure boosting the exemption to $5 million, and Baucus objected to that. It wouldn't have mattered, because the House won't take up any new legislation before the holidays.

Prominent Democrats are saying they'll restore the estate tax next year, and make it retroactive to January 1. You can have retroactive rate increases, I'm not so sure about retroactive taxes.

Also left unfinished by the Senate, the $31 billion extenders bill. Tax breaks can be granted retroactively, of course, so that one is less problematic.

Can Estates Be Taxed Retroactively?

Looks like we're going to find out: Estate Tax Expiration Sets Up Battle on Retroactive Restoration.

Or as Jim Gust might put it: Never underestimate the ability of Congress to do the unthinkable.

Thinking the unthinkable

Rep. Earl Pomeroy (D-ND)wrote the permanent estate tax reform bill that the House passed earlier this month. He no longer expects the issue to be resolved before year end, according to The Wall Street Journal. Accordingly, the estate tax would expire on January 1, 2010.

Pomeroy reportedly expects Congress to revisit the estate tax next year, with a retroactive effective date. Interesting idea, and almost certainly unconstitutional. True, the U.S. Supreme Court upheld a retroactive increase in the estate tax rate during the early Clinton Administration, but that is much different from a retroactive tax itself.

That may be why Ways and Means Chairman Rangel has been angling for a two-month estate tax patch, hoping to avoid that constitutional question.

Congress Conceives the Temporary Fiduciary

"Investment adviser groups are up in arms about a one-sentence provision buried in the sweeping financial services reform legislation approved last week by the House of Representatives," reports Investment News. The bill would impose fiduciary duty on brokers offering investment advice. But . . .

Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.

Discount brokers prompted the "hat-switching" provision, according to lobbiyists.

I wish they had mentioned this earlier

Tax Cuts Might Accomplish What Spending Hasn’t - NYTimes.com

Actual studies are cited, it's not just political puffery. I wonder why they published this on a Saturday?

Estate tax safety net

According to Tax Notes Today ($) no one expects the Senate to take up the permanent estate tax reform bill passed in the House December 4 (H.R. 4154, the Pomeroy bill). Accordingly, the House leadership is looking at backup plans, to avoid the lapse of the estate tax advocated by The Wall Street Journal, among others.

One idea, according to Tax Notes, is to attach a temporary extension of the 2009 law to "must pass" legislation. A leading candidate is the defense appropriations bill, which will be taken up December 14 and which must be passed by December 18. That would be something that the Senate cannot just ignore.

No word yet as to how long the temporary fix would last.

A game of chicken over the federal estate tax

The House has voted to make the 2009 federal estate tax regime permanent. Apparently, they don't have 60 votes for that in the Senate. They might have 60 votes for a $5 million exemption and 35% tax rate, the bipartisan compromise that was voted down in the House. With the Senate bogged down in health care. the Wall Street Journal calls instead for letting the estate tax expire.

The Journal advocates for carryover basis. Although there is logic to their argument, it is virtually impossible to implement and administer. Especially because the complexities are compounded with special rules to exempt smaller estate and protect surviving spouses. Says the Journal:

But the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes.

This is a dangerous gamble. Advocates for full repeal seem to want to call the bluff of Democrats. But liberals in turn might be willing to accept a year without a federal estate tax if it means that the exemption goes back down to $1 million in 2011.

Should the WSJ Have Banned "Death Tax"?

Probably. The term is too politicized, as the WSJ Style and Substance blog explains.

Like Taxgirl (see below) Style and Substance is a blog we probably should consult more often. The author, Paul Martin, clearly cares about well-worded, properly-arranged writing.

Why Estate Settlement Shouldn't Be Casual

See Taxgirl's Charitable Donations and Estates for a case where heirs who couldn't wait to clean out mom's house may have lost a few charitable deductions.

Hadn't looked at the Taxgirl blog in a long time – I've got to get out on the Web more! Stumbleupon sent me there to read IRS Insists Mom is Too Poor to Support Kids.

The Astor Update

Brooke Astor died in 2007. On December 21 her 85-year-old son, Anthony Marshall, will be sentenced for the criminal offenses of which he was found guilty. (Merry Christmas!) In January 2010 a NY Surrogate's (probate) Court may begin to decide which codicils to her will are valid.

Let's Hear It for “Old Money”

Check out Forbes' America's Richest Families for evidence that Old Money can be surprisingly durable. Although the list starts with New Money, the Waltons, you'll encounter the families of 19th-century media tycoons Hearst and Scripps, the Mellons and various Johnsons – and the du Ponts, whose wealth dates from a gunpowder mill opened in 1802.

The Dorrances of Campbell's Soup also make the list, despite the unhappy tax fate of John Dorrance. He died in 1929, leaving an estate that paid a federal estate tax of $9.5 million and, famously, wound up being taxed by both Pennsylvania and New Jersey as well.

Soup Can by Andy Warhol

Straw in the wind?

Charities are hurting during this economic downturn. So I was surprised to see the angle taken by The New York Times: More Charities Seek Tax Break for Donors, Costing U.S. Billions.

I tend to agree with the sentiment, we've allowed far too much capital go live in the nonprofit arena free from taxes—I'm looking at you, Harvard and Yale. But that's not what concerns the Times, they're afraid that too many "clubs" are masquerading as charities.

That's not where the real money is. But given this attitude as a predicate, could there be a move afoot to rein in (or tax) the charities?

"Funny, You Don't Look Rich"

See the comments to Five Rules for Selling to the Rich at the WSJ Wealth Report for ever-useful reminders. For instance, this from Helen:

What I take away from this is that when I’m dealing with sales people I need to be more demanding - like a rich person would be! Perhaps I’ll get more respect.

This is all good advice and I appreciate it. But, honestly, this advice applies to anyone ….

Back in the 20th century, Thomas Stanley repeatedly told marketers to the rich – including trust new-business execs– that they didn't even know what the rich looked like.

Judging from other comments on this Wealth Report post, you can say the same in the 21st century.

One small step for permanent estate tax reform

Yesterday the House of Representatives passed a permanent extension of the 2009 federal estate tax regime—drop carryover basis, $3.5 million exemption, 45% tax rate.  No Republicans voted for this, and 26 Democrats dissented as well.  The bill was paired with a statutory "pay-go" provision, which many House Democrats advocate.

"Pay-go" sounds responsible, it's sort of "stop me before I spend again."  As a practical matter, it has been used to require every reasonable tax change to be offset with higher taxes somewhere else, presumably on "the rich."  The "pay-go" concept is what prevents a decent reform of the AMT, for example.

Prospects in the Senate are uncertain at the moment—a giant game of chicken is being played.  Some Senate Democrats want to add indexing of the exemption.  Many Republicans favor the bipartison compromise that was shot down in House, a compromise that would slowly lift the exemption to $10 million and reduce the tax rate to 35%.  The problem is that the Senate remains preoccupied with health care reform.  They could easily spend the rest of the year on that.  Said Senate Majority Leader Harry Reid, "We're working our way through these issues."

As I drove home last night, CBS misreported this news, saying that the House bill would allow beneficiaries to receive $7 million free from estate tax.  I know what they were referring to—married couples can, with basic estate planning, arrange to keep $7 million in the family.  That's very different from what they said.  Without a provision for spousal portability for the federal exemption, using that $7 million figure is deeply misleading.

Accuracy matters little to them, apparently.

Does “2KX” Have Legs?

According to Schott's Vocab, 2KX is an increasingly popular abbreviation for the year 2010.

Lights, Camera . . . Last Words

The Wealth Adviser Report in the WSJ includes this article on the pros and cons of videos made to accompany wills.

On the one hand, they can ward off trouble:

Dennis O'Doherty, an attorney in Sayville, N.Y., had a client who taped her will-signing because she was concerned that a problem child, to whom she was leaving less than her other children, would cause a fuss. She was right.

The adult child's attorney contacted Mr. O'Doherty earlier this year, after the mother had died, to say the child intended to contest the will, believing the mother hadn't been mentally fit to execute the document. Mr. O'Doherty told the attorney about the video and invited the attorney to his office to watch it. In the end, the child decided against moving ahead with a legal fight, Mr. O'Doherty says.

On the other . . .

Attorneys generally caution against homemade videos, saying they are more likely to cause problems than those produced in consultation with an attorney. A video filmed by a beneficiary, for example, could give rise to conflict-of-interest questions.*** [V]ideos, whether used for estate or legacy planning, aren't substitutes for in-person discussions.

“Trust Service” or “Trustee Service”?

Followed a link the other day to Evercore, founded by US Trust alumni, and noticed that Evercore Trust Company offers trustee services, not trust services. A trend?

Strictly speaking, trustee services, not trusts, are what corporate fiduciaries provide. Practically speaking, fiduciaries often must explain the advantages of trusts in order to have a chance to sell their services as trustee. That's why US Trust ads offer a pdf on GRATs, as we noted in an earlier post.

Oddly, JP Morgan plays it both ways, marketing trustee services to family offices and trust services to office-less families.

What's your preference?

Looter of Family Office Pleads Guilty

On the first day of his trial on charges of looting the Ayer family office of more than $20 million, John Doorly pleaded guilty. He faces up to 20 years in prison – about one year per million.

Christmas Price Index

If you got it, flaunt it! For decades PNC has had fun tallying the prices of the gifts mentioned in The Twelve Days of Christmas. This year PNC Wealth Management shows marketing initiative by creating a multimedia web page.

After rising 8 percent in 2008, the Christmas Price Index rose less than 2 percent this year. Swans and partridge are a bargain. Gold rings have gone through the roof.

More on Taxing Business-Owning Estates

Ray Madoff's idea of taxing estates heavily but exempting estates of business owners generated several letters to The New York Times. Here's an observation from an accountant:

In my experience, the family business fails upon the death of the patriarch or matriarch because of the family. Spouses from a second marriage do not get along with the children. Children do not get along with one another. And when nobody plans for the inevitable, the business suffers from a lack of unified management and is often split into pieces.

Exempting family businesses from estate tax would encourage keeping a business in the family when it might do better if sold to employees or outsiders. The sponsor of this blog could probably serve as an illustration. If the founder had sought to keep his small advertising and marketing firm in the family, The Merrill Anderson Company probably would not around 75 years after its founding.

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Take a moment to appreciate Jason Logan's illustration that accompanies the letters to The Times. That's not a rock and a hard place between which we're stuck – it's Death and Taxes!

The Great Depression at Yale

Yale's highly-touted investment whiz, David Swensen, recorded worse-than-average losses for the university's endowment last year. Too much messing with hedge funds and alternative assets? Maybe. But during the Great Depression, a conservative investment stance didn't keep Yale's endowment out of trouble.

Here's a snippet from Gaddis Smith's feature story on Yale during the Great Depression in the Yale Alumni Magazine:

Although the university had avoided common stocks and kept most of the Yale endowment in bonds, income from the endowment declined by 21 percent. Gifts to the alumni fund, which had exceeded $1 million for the first time in 1926-27, dropped 85 percent to $142,732 in 1934-35. Not until 1950-51 would gifts be above $1 million again.

Smith's article is worth reading for the feel one gets of the divide between the haves and the have nots during the Depression. The dislike – nay, hatred – that a good number of the haves harbored for FDR can hardly be overstated. According to my memories from toddler days, it easily equalled the venom that "birthers" and others direct at our current President.

How to Keep Peace in the Family

In U.S. News and World Report, Philip Moeller notes an increase in family estate squabbles and will contests. He presents eight estate-planning tips. Can't argue with this one:

Pick the right executor and trustees. Anticipate family friction, and make sure you don't appoint to key positions relatives who can't get along. "If you are concerned about conflict among your heirs," [estate attorney Adam] Gaslowitz says, "it is usually best to appoint a professional fiduciary like a bank to manage your affairs after you are gone."

Don't Forget to Relax

Thanksgiving kicks off the annual round of holiday travel, family feasting, shopping, gifting and making small talk with all those people you haven't seen since last year.

Don't forget to relax a little. As this Chase nest-egg ad from 1959 reminds us, the chance to enjoy a little peace and quiet is a luxury beyond price.

Are the World's Smartest Investors Norwegian?

An item in Wealth Bulletin wonders why one finds so few private banks in the world's second richest country.

Well, Norway's population isn't large, and the relatively small number of rich people may send their money to Switzerland.

But there might be a more legitimate reason why many wealth managers steer clear of Norway – and is to be found in the performance of the country’s sovereign wealth fund.

Last week, that fund, one of the biggest in the world with more than €300bn under management, said it returned a very impressive 13.5% in local currency terms in the third quarter of the year.

The fund is run by external managers, but with a great deal of input from local experts. Most wealth managers would have been hard pressed to deliver these returns during the same period.

So maybe Norwegians feel they simply can't afford to entrust their fortunes to "world class" investment management.

NORTHERN NORWAY
Photo via Wikimedia Commons

No Death Tax for Family Farms and Businesses?

What if you stiffened the federal estate tax –say, a $1 million exemption and a 50% tax rate – but granted a generous special exemption – say, $5 million or $10 million – for a family business? To qualify for the exemption, family heirs would have to keep themselves on the payroll and not sell the business.

Could something along those lines, as envisioned by Ray D. Madoff of Boston College School of Law, actually work? Or would estate planners have a field day constructing "businesslike" tax shelters?

What a Good Year to Retire. Really!

Nice to see Jonathan Clements back in The Wall Street Journal, even as a guest columnist. Investment advisers and financial planners can glean useful thoughts from his Case for Retiring in a Bear Market. A sampling:

The total value of your nest egg is not as important as you think it is. What really counts is the level of income that your savings can support.

If you plan to generate a chunk of this income through dividends and interest, as many investors do, it doesn't much matter that the Dow Jones Industrial Average has soared some 60% over the past eight months or that bond prices have been climbing. The dollar value of the dividends and interest you're receiving likely hasn't changed too drastically.

Today, with the stock market yielding less than 2½% and 10-year Treasury notes paying below 3½%, very few retirees could cover the bills solely with dividends and interest. Instead, seniors might need to create their own dividends—by occasionally unloading some of their investments.

True, you want to sell only when your stocks and bonds are up handsomely. But at the same time, you don't want to retire with a false sense of security because the value of your portfolio has been puffed up by a rip-roaring bull market. *** That's why bear markets aren't such a bad time to retire: If stock prices are already off 20%, 30% or more, a lot of the exuberance has likely been squeezed out of the market and you can have a little more confidence that you aren't looking at bubble prices.

Retiring in bad times doesn't guarantee dazzling results in the years ahead. Still, everything else being equal, if the stock market has been knocked lower, future returns ought to be higher—and thus every $1 saved should be able to support a higher level of retirement income.

Rewrite the Internal Revenue Code in 2010?

From a CQ dispatch:

During a meeting Wednesday morning, committee Democrats agreed to back a one-year extension [of current estate tax levels] and tie it to a broader overhaul of the tax code in 2010.

Tax reform in 2010? Great idea! It's an election year for Congress. We all know how thoughtful and statesmanlike members of Congress become in election years.

When Revocable Trusts Invaded New York

New York State still resisted the idea of living trusts as will substitutes when Earl MacNeill wrote "Making the Most of Your Estate," published in 1957. Perhaps the State had mellowed two years later, when Chemical ran this living trust ad.


Scripophily.com hosts a detailed listing of the births, matings and disappearances of New York banks. (Some national history, too.) Turns out 1959 was the year Chemical acquired New York Trust. Ten years later the NY Trust name vanished. Eventually Chemical acquired Chase and assumed the Chase name. Today, the widow's grandchildren would be receiving their trust distributions from JPMorgan.

November 30 target for estate tax reform

Tax Notes Today ($) reports this morning that the House hopes to take up estate tax reform the week of November 30. Sounds like a permanent extension of the $3.5 million exemption and 45% tax rate are not controversial, at least among Democrats, but they want to consider new jobs-related tax credits first.

Meanwhile, the Senate remains consumed by the health care debate.

I don't understand the advantage to any side of leaving this in limbo for so long.

How to Raise Revenue Without Raising Taxes

“We are talking about billions of dollars coming into the U.S. Treasury," says the IRS Commissioner. Almost 15,000 Americans with offshore accounts, many but not all of them UBS clients, have 'fessed up and sought amnesty. Last August, UBS agreed to turn over the names of about 4,450 suspected tax evaders. Apparently, thousands more turned themselves in because they feared they might show up on the list.

The expected billions in new tax revenue won't solve Uncle Sam's trillion-dollar deficit problems, but the windfall should help a little.

So will next year's expansion of Roth IRA conversion privileges, if wealth managers pitch in. By convincing your upper-income clients to convert, you flood the U.S. Treasury with tax dollars that otherwise would trickle in over the lifetimes of your clients and their beneficiaries.

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What's that? You want to know how the Treasury will replace that future flow of revenue? Best not to think about it.

Roth IRA Desperados?

Maybe Jim Gust is right about Roth IRA conversions. So I thought when I saw this item from Investment News, citing evidence that investors are "desperate" for information on the subject.

Well, maybe not. The evidence turns out to be a tripling in the number of people searching via Google for "Roth IRA conversion" recently, compared with last January. Seems more likely that virtually nobody was googling the topic when the year began.

While interest among upper-income people about the opportunity to covert traditional IRAs to Roths may not be red hot, it is heating up. T. Rowe Price is among the fund families that has responded with good doses of detailed analysis, as I found when I downloaded the Fall T. Rowe Price Report here.

For a well-heeled IRA holder who can afford to move a sizable sum into a Roth IRA and leave it untouched for an heir, the results could be dramatic, according to this T. Rowe Price table:

Will we go the way of Japan?

That's the question posed on the The Becker-Posner Blog, warning of the consequences continued unrestrained deficits. Apparently the Japanese economy is experiencing even more distress than the U.S. economy.

In terms of the ratio of national debt to GDP, we are about where Japan was in 1995.

Becker argues that the answer is more economic growth, which requires lower taxes and less regulation.

In effect, the desirable policies to stimulate growth involve a retreat from the anti-business rhetoric that pervades Congressional Democrats and some of the top players in the executive offices, and a more pro-consumer and pro-business mentality. It is necessary to maintain the minimalist anti-trust policy that developed during the 1980s and 1990s under Democratic as well as Republican administrations, to retreat from the policy that banks and other businesses, such as GM, cannot be allowed to fail when they are mismanaged.

Makes sense to me.

Might As Well Stay Hitched?

Remember Dorothy Parker's advice to the suicidal?

Razors pain you; Rivers are damp;
Acids stain you; And drugs cause cramp.
Guns aren't lawful; Nooses give;
Gas smells awful; You might as well live.

Like living, marriage starts to look like the lesser evil after reading Ron Lieber's Financial Decisions to Make as You Divorce. To the problems he lists you can add one more: the need for new estate planning.

These days, that need may well lead people to seek wills and trusts online. At the WSJ, Jane Hodges conducted a comparative Test of Online Wills. Suse Orman offered the best price, plus an alert about the changing estate tax.

Planned Gift? See a Trust Officer

A generation ago, Mr. and Mrs. Gotrocks might have needed the services of a trust officer at their friendly bank in order to set up a planned gift. A charitable remainder annuity trust, for instance.

In this century, donors find it easy to eliminate the trust-officer middleman and set up planned gifts, including annuities, directly. Easy, but not always safe. See Charity Bankruptcy Leaves Many Donors in Distress.

Banks aren't so friendly anymore (your's excluded, of course!) but maybe prospective donors should get back in the habit of consulting the bank's trust and investment pros.

CDOs Cubed

From Floyd Norris' column in The New York Times:

MBIA is suing Merrill Lynch, which paid MBIA to insure securities backed by extraordinarily complex securities, among them collateralized debt obligations secured by collateralized debt obligations secured by collateralized debt obligations that were secured by mortgage-backed securities. Such a thing is known as a C.D.O. cubed . . . .

No comment necessary.

Art is Money, Money is Art

Andy Warhol did Sotheby's proud. Warhol's "200 One Dollar Bills," expected to be the star of this week's contemporary art auction, sold for more than $43 million.

Over at Christie's, art consigned by Peter Brant did not sell. Star of the sale: Peter Doig's "Reflection (What does your soul look like)," which brought over $10 million.

Offhand, the take-away seems to be (1) collectors really, really like art that looks like money, and (2) hard times have made collectors more receptive to works that would not have offended Monet or Andy Wyeth.

Peter Doig's "Reflection (What does your soul look like)"

Do Charities Need the Death Tax?

If the federal estate tax were repealed, would charitable donations dip by 6% to 12% per year? Would charitable bequests decline by 16% to 28%?

Those estimates by the Congressional Budget Office are cited in this Dow Jones column.

Are charitable donors really so estate-tax sensitive? Aren't they more likely to be influenced by income tax deductions (likely to become more valuable for those with incomes over $500,000) and the ability to take capital gains tax free (via charitable remainder trusts)?

Charitable bequests no doubt would drop off without the estate tax, but probably not by much. Significant bequests usually spring from other motivations. Case in point, the (reportedly) $7.5 million bequest to The Metropolitan Opera left by Mona Webster, the lighthouse keeper's daughter who became in later life the wealthy widow of an investment manager.

Mrs. Webster, who died at age 96, didn't even earn her estate a tax deduction, according to the NYT account.

Another American Success Story

Wealth managers can prosper in up markets, down markets, even mad markets, as long as they have well-heeled clients. Success requires only a steady stream of HNWIs and even UHNWIs.

Where does a wealth manager find these possessors of new money? The answer is constantly fascinating, as illustrated by this individual's story from Sunday's New York Times.

The kid and his family came to this country from Pakistan when he was 11. Dad worked as a machinist, moonlighted at McDonalds. The kid delivered papers, mowed lawns – and happened to get a job watering plants for a florist. One thing led to another, and ere long the kid was running three flower shops. In 1986 he became an American citizen. In 1999 he and his brother conceived the idea of selling arrangements of … fruit!

Today Tariq Farid is CEO of Edible Arrangements, doing business on an international scale, and has founded several related companies.

The first moral of Farid's story is– keep your eyes open. Wealth is generated in this country in more ways, by more people, than we can imagine or foresee.

You can guess the second moral: One American Muslim has betrayed his uniform and his country. Thousands and thousands of American Muslims such as Tariq Farid have done this country proud. All of us, especially those in uniform, should work hard to remember that.

You can read more about Tariq Farid at Wikipedia.

Will Madoff's Victims Be Picower's Heirs?

Ten days before he died in his swimming pool, billionaire Jeffry Picower signed a new will. The "longtime investor in Bernard L. Madoff’s fraud scheme" left $225 million to his wife and daughter and $10 million to his long-time assistant. The reminder of the estate is left to charity.

Or perhaps it will go to the truly needy.

The New York Times reports that Irving Picard, the trustee representing Madoff's victims, has demanded that the Picower estate hand over $7 billion that the Picowers received in payouts from Madoff. The estate argues that the trustee is entitled to no more than $2.4 billion.

All told, trustee Picard estimates that Madoff's victims lost around $21 billion. Additional "losses" were imaginary profits that never existed.

The Year the Stock Market Died

Jim Gust's celebration of his 30 years at Merrill Anderson prompted a browse in The New Yorker's archives. Like to see what ads offering investment services looked like back in 1979?

Sorry. No luck! It was a fool's errand.

As Business Week famously declared that year, in 1979 the stock market was dead – cold and stiff, deceased as that Monty Python parrot.

The only Merrill Lynch ad in view was this one, promoting tax shelters.

Citibank, in the ad below, delivered an early pitch for private banking, with trust and investment-management services buried in the small print.

The malaise of 1979 is almost impossible to grasp today. Inflation was rampant, taxes were high, and anyone lucky enough to make more money fast enough to keep up with inflation ended up in even higher tax brackets.

"Every Investor Has 20-20 Hindsight," to quote the most noted Merrill Anderson ad for U.S. Trust. Looking back we can see that 1979 was about as close to heaven as a long-term investor is likely to get in her lifetime. In November of that year the Dow Jones Industrial Average stood a bit above 800. Ten years later – over 2,600!

In 1979 runaway inflation pushed long-term Treasury yields into double digits, and yields continued rising. Anyone who bought 30-year bonds in 1979-81 and kept them must feel like crying as the issues mature. No more golden eggs.

There are those who feel like we're reliving the 1970's. Not quite. We certainly haven't arrived at the equivalent of 1979. Investors would need to suffer much, much more to reach the same depth of despair. Let's hope we muddle through less painfully.

But if we don't, the youngest Boomers and the Generation X'ers will have awesome wealth-building opportunities before the next stock market boom.

“Stimulus” From Wall Street Bonuses?

On The Wealth Report, Robert Frank wonders whether Wall Street bonuses are fueling a yacht binge.

Perhaps Wall Street's shaking of the money tree can help the real estate market, too. Greenwich, for instance, has plenty of genuinely impressive estates for sale.

Topping the list: Dunellen Hall, now offered at $60 million, less than half the original asking price.

Estate Tax: Up, Down or Out?

Uncertainty over the fate of the federal estate tax is complicating the role of financial advisers, Dow Jones reports. Two ideas in the news:

Exempt family farms, and businesses worth no more than $8 million, from tax as long as they stay in the family.

Raise the estate exemption to $5 million over ten years and cut the tax rate to 35%.

What will the federal estate tax actually look like in 2011? Any guesses?

He Wrote His Will on the Wall

Newspapers are struggling in the internet era. They have lost their role as "news aggregators." The good, grey New York Times used to play that role in surprisingly lively fashion, judging from front pages of a century ago that Kellogg's is reprinting. (Corn Flakes have been around for more than 100 years!)

The front page of The New York Times of Thursday, November 4, 1909 was a veritable fountain of information. Tammany Hall was in trouble, the NYC criminal court building was falling down, and – according to a dispatch from London – the Montagu who ran away with Lady Crofton was not the Lord Montagu of Beaulieu. And alas, the "aristocrat" Miss Ada Durlacher just married in Paris was not a marquis.

Better yet are the collection of news tidbits that fill out the page, including the one shown below.

Peter Leist, who claimed a dozen trades and professions, but who was a hermit, was found dead at his home near Savannah to-day …. He was seated in a chair apparently staring at the wall of his room, on which he had written his will, leaving his property, which is considerable, to his son …."

30 years of service

To celebrate my 30 years of employment at The Merrill Anderson Company, the staff and I had a luncheon at the Shell Station.

I received a gold star for my years of service and creative contributions.

Lifestyle of the Still Pretty Rich but Divorced

The fall art auctions (see post below) are said to rely on the three D's: death, divorce and debt. Divorce is the presumed motivator for Peter Brant to dispose of this six-panel painting by Basquet, "Brother Sausage." Christie's hopes it will sell for at least $9 million.


According to the Connecticut Post, Brant, who made his money in newsprint, is also closing down the polo team he supports on his Greenwich, CT "working farm." Yet the average ultra-high-net-worth individual wouldn't mind settling for Brant's somewhat diminished lifestyle.

Data from the Post article:

Brant's assets: $490 million.
His income, monthly: $1.552 million
Court-ordered alimony and child support, monthly: $370,000
Running expenses for farm, monthly: $500,000

Most trust and investment management groups serve folks who have a few million and, with luck, an occasional rich family with $20-30 million. That's far from the top of the heap, as stories like Brant's illustrate.

Dollars: the Downside and the Upside

Could America Go Broke? Robert Samuelson's Washington Post column reminds us that a lot depends on confidence. When confidence vanishes, you get a run on the bank … or, in this case, a run on the country.

On the upside, the dollar looks strong in the art market. In other words, expected sales prices at upcoming auctions look like relative bargains.

Appropriately, one of the works expected to sell for the largest number of dollars is Andy Warhol's “200 One Dollar Bills.” In 1986 the estate of pop-art collector Robert Scull sold this early Warhol silk-screen painting at auction for $385,000. Now it's back on the auction block at Sotheby's, expected to sell for $8 million or more.

Revenge of the Small Banks

Small Banks Move In as Giants Falter, reports The New York Times. Some have banded together to launch more powerful marketing campaigns.

Should community bank trust departments consider similar moves?

Different Regulators for Different RIAs?

Unlike brokers, Registered Investment Advisers are held to a fiduciary standard. Generally, they're regulated by the SEC. Congressman Bachus of Alabama has a different idea, Investment News reports. He's added an amendment to a bill being marked up in the Financial Services Committee that would shift regulation of Registered Investment Advisers associated with broker-dealers to FINRA.

Is it a good idea to take regulation of some advisers away from the SEC? No, was my snap judgment. Then I remembered who was supposed to be regulating Madoff.

Trusts from The Times

On closer reading, trusts popped up in a couple of places in the NYT Wealth and Personal Finance section (see post below). Buried deep in Running Scared is this trust note:

Delaware asset protection trusts […] allow people to shield money from creditors after the assets have been in the trust for four years.

When these trusts were created in 1997, doctors, lawyers and accountants were drawn to them because they feared their liability insurance would not cover them fully. Today, people starting hedge funds and private equity firms are interested, said Dan Lindley, president of the Northern Trust Company of Delaware. “They say, ‘I want to put some of my assets into this trust and have that be my rainy day fund if the fund performs badly and investors turn on me,’ ” he said.

This may be hiding money from creditors, but Delaware law permits it so long as the person was unaware of any claims against him when he set up the trust.

A full-page ad from the US Trust brand at BofA offers a pdf of Not Your Grandfather's Trust. Behind the booklet's cryptic title lurks a brisk discussion of two-year GRATs and how multiple Grantor Retained Annuity Trusts may be designed, sequenced and invested.

“In Terrorem” in the Times

The Wealth and Personal Finance section in today's NYT includes Clauses Aimed at Keeping the Heirs Quiet.

Get Rich Dead?

Forbes estimates that Michael Jackson has made $90 million in gross earnings since his death.

Wanted: Performance!

What a difference a decade makes! In 1959 (see preceding post) investors faced the unfamiliar notion that stocks could yield less than bonds. Equities were to be viewed as … growth stocks!

By the mid-1960s the Dow had soared to 1000. Then the ride got bumpy. But by 1969 the Go-Go Years promised instant gratification, supplied by "gunslinger" fund managers who bought first, researched later.

The name of the game was performance. In this October, 1969 ad, Manny Hanny gamely tried to play along:

Wanted: Will Appointments

By the 1960s, staid old trust institutions were actively seeking immediate-fee business. In October, 1959, however, these two companies still thought their services as executor or trustee were worth advertising:

More on H.R. 3905

There's a press release today from the sponsors of the just-introduced estate tax reform bill, Tax Notes reports. I've read the bill, which is very short and to the point. It does not include portability of the estate tax exemption, but it does have one surprise.

In the last century, the feds and state government shared death tax revenue through a mechanism called "the credit for state death taxes." To mitigate the loss of federal revenue with the 2001 estate tax reform, the credit was phased out, replaced by a deduction for state death taxes. This had the effect, intended or not, of eliminating death taxes in those states with regimes keyed to the federal credit.

H.R. 3905 would complete this cycle by phasing out the deduction for state death taxes over ten years, as it reduces the tax rate to 35%.

If this passes, it will greatly increase the pressure on those states who have been hanging on to their estate or inheritance taxes. Their wealthy residents will have a fairly easy solution for avoiding the states' death tax designs.

Three e's for the Ways and Means Committee

Ron Aucutt reports in Leimberg Information Systems ($) that the Ways and Means Committee is poised to turn its attention to the economy, the extenders and the estate tax. Conventional wisdom has been that Congress might settle for an estate tax patch, extending the 2009 exemption and rates for one year only. But Aucutt says that there support for a permanent solution is emerging. He mentions a new bipartisan bill:

On the same day, Ways and Means Committee members Shelley Berkley (D-NV), Kevin Brady (R-TX), Artur Davis (D-AL), and Devin Nunes (R-CA) introduced H.R. 3905, called the “Estate Tax Relief Act of 2009.” Under H.R. 3905, in each of the ten years from 2010 through 2019, the estate tax applicable exclusion amount would increase by $150,000 and the top rate would decrease by 1 percent. Thus, by 2019 the exemption and rate would be $5 million and 35 percent.

Is there time to get this done before Thanksgiving?

Could Suspending the Estate Tax Soak the Rich?

If the federal estate tax vanishes next year as scheduled, revenue from taxing capital gain could help take up the slack. Reason: the return of carry-over basis. But as a corrected WSJ article explains, only the heirs of high-net-worth decedents would suffer:

[T]he 2010 law as written gives each taxpayer $1.3 million worth of "free" step-up at death, but this is a far cry from the unlimited basis step-up under current law. Married couples get an additional $3 million at the death of the first spouse, heavily favoring them over individuals.

Congress is expected to extend the current estate tax for another year. What if Congress is too distracted to act until next year? That could get tricky:

Under Congressional bookkeeping, any extension of the current system into next year counts as raising revenue because the tax is currently slated to lapse in 2010.

In 2011, however, the exemption is supposed return to $1 million. So extending the $3.5 million exemption beyond 2010 will count a revenue loser at a time when deficit-cutting pressures will be intense.

Maybe it was a mistake to let the inmates run the asylum.

Photo from Wikimedia Commons

Ten Trillion Here, Ten Trillion There . . .

At Scripophily.com they're giving away these ten trillion dollar bills with orders over $200.

The Ultimate Halloween Costume?

With the passage of time, workaday necessities sometimes morph into expensive status symbols – blatantly ostentatious objects worn mainly for show. Wristwatches with five-figure price tags, for modern example.

In Japan in centuries past, Samurai guys appear to have made fashion statements with their armor. This suit from the 18th century would make a killer Halloween costume.

The New York Times offers a slide show here of items from The Metropolitan Museum of Art's current exhibition of Samurai armor. (Bet you didn't know Darth Vader was Japanese!)

From "Scoop of the 20th Century" to Abused Elder

Clare Hollingworth went to work for The Daily Telegraph in 1939. Her career took off almost instantly:

She had been in the business for only a week in 1939 when she noticed, travelling towards the Polish border from Germany, that huge screens of hessian had been erected along the roadside, concealing the valley behind from passing traffic.

As she looked, the wind caught a loose piece of tarpaulin, revealing large numbers of troops, hundreds of tanks, armoured cars and field guns, lined up, battle ready - and facing Poland. She had stumbled across the beginning of World War Two.

 Miss Hollingworth went on to cover wars in Algeria and Vietnam. Now 98 and living in Hong Kong. she has been unfortunate enough, the Telegraph reports, to attract one of those creatures who believe the elderly and their money should live apart:

Sadly Miss Hollingworth, whose hearing and eyesight are not what they once were, has been subject to a mercurial acquaintance, who separated her from her money and has failed to repay it, even following a court case at the end of which he agreed to do so.

Fun facts on the first-time homebuyer's tax credit

From NYTimes.com:

$10 billion -- gross value of credits claimed to date
1.4 million -- number of claimants
400,000 -- number of sales that would not have happened without the credit
1 million -- therefore, the number of buyers who simply got a windfall
107,000 -- IRS audits of questionable credit claims
167 -- criminal schemes to exploit the credit
4 -- age of the youngest credit claimant
60% -- percentage of claimants with income below $50,000 -- how could they afford to buy a house?

I wonder what other responsibilities we could have the Feds shoulder?

How Uncle Sam Rewards Savers

If artificially low interest rates encourage borrowing and spending, what do they discourage?

Saving.

The plight of retirees and other fixed-income investors receives surprisingly little coverage. This column from Allan Sloan is a happy exception.

Life Spans and Estate Plans

In Making the Most of Your Estate, Milo Watts, Earl MacNeill's typical salaried man of the Nifty Fifties, is 43; Mary, his wife, is 38. Mac tells us three of their four parents are dead. Only Milo's mom survives at age 68. That's how it was in those days. At least that's how it had been. Hard-driving businessmen were expected to keel over with fatal heart attacks in their fifties, and many did so.

Yet life spans were already lengthening, and estate planning began to adapt. Planning inheritances for minor children lost prominence. Planning trusts for the grandkids took over. Some years later, at Merrill Anderson, Mac urged men to review their old wills with this warning: Your Heirline is Receding!

As life spans kept stretching, estate planning expanded to include living trusts for financial protection in old age … durable powers of attorney … living wills. Not to mention "Medicaid planning."

Durable powers of attorney were seen as a growing necessity, but not without danger. Wish I could remember Mac's views. Certainly he made me aware that a traditional power of attorney relied on the supervision of the individual granting it. If Mr. Gotrocks gave me his power of attorney while he sailed around the world, I could be in big trouble if he didn't like what he found when he got home.

The exercise of durable powers usually cannot be supervised by the individuals who grant them. Since the Brooke Astor case, concern regarding that hazard seems to be growing.

Are Roth IRA conversions a tough sell?

Investment News reports that Advisers find Roth IRA conversion opportunity a tough sell.

SHH warned us about this--few people really want to accelerate their tax liabilities, especially when the benefit seems vague and in the future.

However, there are two more facets that I had not considered. First, the fact that asset values are down means the taxable cost of the conversion is at what could be a historic low. I thought that made the conversion attractive, but apparently it's having the opposite effect. Traditional IRA owners feel like they already lost a ton of money in their accounts, and they don't want to make it worse with an optional tax bill.

Second, they don't trust their government.

Some particularly conservative clients are so mistrustful of the government that they are worried that Congress might decide down the road that Roth IRA withdrawals are taxable and thus they will end up paying taxes twice, Mr. Neuschwander said.

This is what happened with Social Security, he said. “Some clients have asked me, ‘What happens if Congress changes the rules and we have to pay taxes again,’” he said. “To be completely honest, that’s an unknown.”

Wow. They have a point. An item in the NY Times six or so months ago mentioned the possibility of having something like an "excess accumulations" tax on overly large Roth IRAs. Or, perhaps less insidiously, they could start counting Roth distributions in figuring the tax on Social Security benefits.

Planning for the Fringes

Twelve years after Earl MacNeill's Making the Most of Your Estate, this 1969 ad from Chase still found it timely to focus on the salaried man's employee benefits:

"If you're a corporate executive, the sum total of your fringe benefits may actually constitute the bulk of your estate."

What should a 401(k) restatement cost?

Our new 401(k) recordkeeper is doing the required EGTRRA restatement of its prototype plan, which we adopted. With essentially no explanation, they have said that our share of this restatement cost will be $1,000. I think this is outrageous (do they even go to the trouble of putting our name on a form?), but then again, I haven't priced these services recently.

What is the normal fee out there for a restatement from a prototype plan?