What the Wealthy Want

"Easy access and personal acquaintance with senior officers." That's what the wealthy want when it comes to their banking, investment and trust needs.

Fifty years ago, nobody knew that better than The Bank of New York. Whatever particular service a BNY ad featured, invariably the ad was accompanied by a quote that carried more marketing clout than the ad copy itself:

"... there is a real place in New York for conservatively managed banks and trust companies of moderate size where customers may have easy access to and personal acquaintance with the senior officers . . . "

The Bank of New York is now part of BNYMellon. Yet even in these tough times, some relatively small bank and trust organizations are developing higher aspirations. For marketing purposes, they would do well to come up with a quote as compelling as BNY's.


Postscript: Notice the BNY offices listed in the ad. Freedomland? Wikipedia tells the now-forgotten tale of "Disneyland East."

Volcker commission report is released

Tax Notes reports that the Volcker commission report on choices for tax reform has been released. Oddly, no mention of it in the NY Times yet.  Perhaps because it's such deadly dull reading, and there are no bombshells that I discovered.  The material is far too complicated to be incorporated into the upcoming fight over extending, in whole or in part, the Bush tax cuts.

Nothing here as sweeping or inspirational as when Reagan took on the tax code and wrestled it to the ground. Nothing to suggest that the tax code might be enlisted in the fight to resurrect the economy.

Also, the estate tax was not included in the charge, and so there's no mention of transfer tax reform.

A Dynasty Trust for Dubya and Barack?

From Curtailing Dead-Hand Control: The American Law Institute Declares the Perpetual-Trust Movement Ill Advised:

If Samuel Hinckley, who died in Massachusetts in 1662, had created a perpetual or a near-perpetual trust for his descendants, the more-than-100,000 beneficiaries living in 2010 would include President Barack Obama and his descendants and former President George H.W. Bush and his descendants (including former President George W. Bush).

H/T to the Wills, Trusts and Estates Prof for calling attention to this paper.

Related post: Return of the Dead Hand

An often overlooked point

Via TaxProf blog: Business success helps society more than philanthropy.

I hope that the Gates Foundation accomplishes something important, but the biggest contribution Bill Gates made to mankind was the creation and management of Microsoft.  It would be very hard to reduce that extraordinary contribution to employment and productivity to dollar terms.  Wouldn't it have been better for the U.S. economy if, instead of giving his money away, Gates had created more companies such as Microsoft?

A Mad Man's Nest Egg?

Say, isn't that nest egg tethered to Roger Sterling, the roguish heir at Sterling Cooper Draper Pryce?

Maybe not. Time period is right, though. Chase's ad ran in The New Yorker in May, 1965, the same year we're now traversing in season four of Mad Men.

Will T-Bond Investors Go Bust?

Last month Jim Gust noted Jeremy Siegel's opinion that stocks are undervalued – way undervalued. Now, in The Great American Bond Bubble, Siegel and Jeremy Schwartz warn fixed-income investors to run for cover:

Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings.***

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. ***

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Three decades ago inflation was running rampant and Treasury bonds were considered terrible investments. (Wouldn't you like to own 12-percent T-bonds now?) Could inflation pick up and turn today's mini-yield Treasuries into disastrous investments?

Chances of a recovery strong enough to rev up inflation seem faint. In another WSJ op-ed, The End of American Optimism, Mortimer Zuckerman seems to consider the Great Recession a normal downturn but does acknowledge one structural change:

The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100%, but in 2007 the debt ratio hit 131% of income. It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%. The pre-bubble norm was 70%. To get to this ratio again, debt would have to be reduced by about $6 trillion.

Siegel and Schwartz retort that the Great Deleveraging won't be all that great a drag on the economy:

Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.

They may have a point. Look at home-equity loans, where the delinquency rate is worse than for credit cards.

Jim Gust's skepticism that stocks are cheap seems sensible. That doesn't mean Siegel and Schwartz are wrong about a Bond Bubble.

How much would you put into 30-year Treasuries?


Related post: The Year the Stock Market Died

Trust Co's Trek to South Dakota

Time was, the State of Delaware reigned as the trust site of choice for those seeking asset protection. According to RBC, over 40 of the Forbes 400 have Delaware trusts.

Now South Dakota and other states are getting into the act, as The Wall Street Journal (subscription) noted recently.

About half a dozen states are actively vying to attract wealthy families' trusts, as well as the jobs and tax revenue that come from the companies that administer these estate-planning vehicles.

States such as Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming have modified their trust laws in recent years to make them more attractive to individuals and families, including nonresidents, looking to minimize taxes, shield assets from creditors and preserve family assets in the event of a divorce, among other things.

"Between 1985 and 2003," according to one study, "some $100 billion—about 10% of reported trust assets held by federally regulated financial institutions—moved to states that allowed long-term trusts and didn't tax trusts created by nonresidents."

More recently, the trust-company battle cry seems to be "South Dakota or Bust!" Trust Advisor points out that this "tax-friendly asset protection jurisdiction" also draws fiduciary start-ups by means of lenient capital requirements. "A new company only needs to post $200,000 for a South Dakota charter, versus up to $1 million elsewhere."

Will a handful of states end up hosting the lion's share of dynastic and asset-protection trusts?

Will Citibank's most celebrated South Dakota employee decide to switch to a new, fiduciary career?

Where the Monied Are

Seeking movers and shakers capable of putting big money into private equity or charitable remainder trusts? Try the Pebble Beach Concours d’Élégance and the assorted races, auctions and frivolities that surround it this weekend.

My favorite vehicle up for auction (Gooding & Company) is this 1933 Bugatti.

Whoops! Just changed my mind.

Look at this amazing French postwar masterpiece, the 1949 Delahaye shown below. RM Auctions expects it to fetch $4 million to $6 million.

1949 Delahaye Type 175S Roadster

Update: The Delahaye, once owned by Diana Dors, "Britain’s answer to Marilyn Monroe," sold for a bit less than hoped for. It fetched $3,300,000.

Perhaps buxom blondes prefer other types of fun these days.

Johnny Carson's Living Trust

Ed McMahon: Oh All-Seeing One, the answer is, "A living trust, stupid!"

Carnac the Magnificant: Obvious, you long-toothed Leatherneck. The question is, "How does television's most illustrious celebrity keep his estate plan private?"

Because Johnny Carson's foundation had to file a Form 990-PF, The Smoking Gun learned the foundation has become Hollywood's best-funded charitable organization by far, thanks to a $156 million transfer from the late entertainer's trust.

Little else is known about Carson's estate. "There has never been a public accounting … so there is no way of knowing its total value, beneficiaries, or what percentage the $156 million represents."

Rosty Remembered

After the Reagan tax cut of the 1980s, somebody pointed out the other day, the top income tax rate remained higher (50 percent) than the top rate (about 40 percent) during the "high-tax" Clinton years.

In the 1980s, the top tax rate didn't drop below 40 percent until the Tax Reform Act of 1986. That legislation, a well-intended but soon disemboweled effort to create a flatter, simpler tax system, was shepherded into being by legendary Congressman Dan Rostenkowski.

Rosty, the second Congressional old-timer to die this week, was the long-time chairman of the Ways and Means Committee. Like the late Senator Ted Stevens of Alaska, he left Washington under a cloud. But he got things done. For samples of Rosty's colorful persona, see Chicago Pol Dan Rostenkowski Remembered.

Rostenkowski was instrumental in passing a huge, sweeping tax reform law in 1986 that closed a bunch of loopholes for corporations and exempted millions of low-income workers from paying taxes. To boost his chances for passing the legislation, he made a rare television appearance in 1985 to urge viewers to show their support for tax reform by writing him a letter. He gave no address.

"Just address it to Rosty," he said. "The Post Office will get it to me."

75,000 letters poured in.

Expiring "tax cuts"

The New York Times reports on a Congressional analysis that is fueling debate over the coming tax increase when "Bush tax cuts" expire.  One of my questions has been answered in this article.  If the 10% tax bracket and other goodies are preserved for the "bottom 98%" of taxpayers, they will be saved for everyone.   So even the wealthiest will retain some portion of their Bush tax cut, under the administration's plan.  Extending the tax cuts for the bottom 98% is projected to "cost" (compared to some hypothetical baseline) $3.1 trillion over ten years. Adding in the top 2% brings up the cost to just $3.8 trillion.  Yes, $700 billion is a big number, but that's over ten years. 

From the way the media has presented the issue, I was under the impression that at last half the benefits or more of the Bush tax cuts flowed to that top 2%.  In fact, the casual observer could be forgiving for assuming that 90% of those benefits went to the wealthiest, as it is plain that many commentors at the NYTimes website believe.

Unanswered by the press report, and key to making any sense of this, is what about investment income?  Dividend taxation? I've read that Obama wants to continue taxing dividends the same as capital gains, but at the elevated top rate of 20%.  That would avoid the punishing 39.6% rate on ordinary income.  Without legislative language, it's hard to know what to expect.

Greenwich Hedge Fund Revives Old Question

When you read that a hedge fund has just leased almost 11,000 square feet at The Anchorage on the Greenwich waterfront, the obvious question springs to mind:

Where are the Customers' Yachts?

The book of that title, Fred Schwed's irreverent send-up of Wall Street in the 1920's, still gladdens the hearts of disgruntled "retail investors." You'll find a sample here.

Good Reason?

"I would put an estate tax in place right now, immediately, because we have no estate tax right now."

– Robert Rubin on CNN

Does the Estate Tax Soak the Rich?

Death triggers the federal estate tax (repealed for this year only). But functionally it is the heirs who pay. They can share only in what's left after taxes.

Are these wealth transfers a case of the rich getting richer? Or in most cases is tax imposed on less impressive amounts of wealth passing to people of relatively moderate means?

The data required to answer that question are scarce. In The Federal Estate Tax: History, Law, and Economics, David Joulfaian indicates that the most reliable source of information is a 1982 IRS study. Researchers looked at what family members got how much from estates and recorded the heirs' income levels before receiving their inheritances.

In the 28 years that have passed, the value of the dollar has dropped by at least half. So in these rough notes all dollar amounts have been doubled as well as rounded off.

Here's some of what I learned:

About half the total wealth reported on estate tax returns, after debts and charitable bequests, passed to surviving spouses. The primary intergenerational transfers were to children.

From estates valued at $2 million to $5 million in today's dollars, a child's inheritance averaged around $400,00-$450,000. High-income children, with Adjusted Gross Incomes over $200,000, received somewhat more – about half a million on average. Children with AGIs of $60,000 or less averaged inheritances of around $350,000.

Overall, these children received inheritances equal to about three times their annual income. More than two-thirds had AGIs under $200,000.

The far smaller number of children who inherited from somewhat wealthier parents – those leaving estates of $5 million to $20 million in today's dollars – received somewhat more wealth, about $700,000 on average. Some were already in high income tax brackets. But here, too, the majority had AGIs under $200,000.

Caveats:

The children were not not always inheriting liquid assets. Homes, vacation cottages, business interests, etc., were no doubt included.

The 1982 study indicates that a good portion of estates passed to trusts rather than directly to heirs. Some of the initial inheritances may have been augmented later, by funds trickling down from the trusts.

•

My conclusion? I sure wouldn't mind inheriting $400,000 or, better yet, $700,000. But it wouldn't make me feel filthy rich.

Let's close this tax loophole for the rich

NY Times: Plum Benefit to Cultural Post: Tax-Free Housing

Seems rather obvious to us peons, who pay for our own homes.

The rich don't like stocks?

Tiger 21, the club for millionaires, surveyed its members on their investment preferences..  I wonder about the resulting report, because stocks, although the number one asset, comprised such a small portion of the total  portfolio.  Some 77% of respondents said that they dedicate 15% or less of their money to equities. I wonder how solid their valuations are.

Here's how they approach stock ownership:

     •   23% of equity-related investments were generated through managed accounts
     •   26% of equity-related investments were generated via mutual funds
     •   23% of equity-related investments were generated through individual stock purchases by Members
     •   14% of equity-related investments were generated through index funds (half of which were broad-based, and half of which were focused on specific industries or geographies)
     •   12% of equity-related investments were generated through ETFs, again, split between broad-based selections and sector/geographic bets
     •   2% of equity-related investments were generated via a long-only hedge fund

I take it the managed accounts category would include living trusts.  I am surprised that index funds didn't rate higher.

How Well Do You Adapt?

Apple isn't perfect. (The balky Wi-Fi antenna in my refurbished iPod Touch no longer works at all.) Still, for anyone interested in marketing, the company is always worth watching.

This weekend Apple opens its 300th store, in Covent Garden, London. You know the look of Apple stores: white, bright, lots of glass. In Covent Garden Apple's designers had to forget the white and adapt to a traditional, historic setting, yet give it an Apple spin.

Did they succeed? Take a virtual tour and judge for yourself.

Notes for the coming tax fight

Tax Notes today confirms JLM's obervations below on the attention that will be paid, in September, finally, to the expiring Bush tax cuts.

I notice that no one wants to talk about the actual issues.  Everyone likes to focus on the few added points to the top tax bracket, and really, that's inconsequential.  The key points are:

• If the Bush tax cuts expire, those in the lowest brackets will see tax increases of 100% and more--because they pay very little right now.  In the middle-income brackets, we're talking 50% tax increases.  This is a meaningful amount of pain.

• The most important tax factor for stimulating the private economy is treatment of capital income and capital gains.  Will dividends get a 100%+ tax hike?  What about capital gains?

• What will happen to the AMT?  It ought to be abolished, it does not affect those in the highest tax brackets, the ostensible target.  Congress has kept it around because every year the urgent need to patch the AMT for inflation gives them cover for other tax hikes to "pay" for it.

• Will the estate tax be brought into the argument?  Proponents of the estate tax can't seem to figure out why there isn't more popular support for it.  The rich are already on board--Gates, Buffett et al.  Why not everyone? Because most people are beneficiaries, they are not yet rich, but they still hope to be.

• How much longer will hedge fund managers get to pay 15% on most of their income, on carried interests?  Much longer, is my prediction.  I'm seeing lots of technical attacks on the current proposal to treat carried interests as ordinary income, citing various flaws and using "solution as bad as the problem" rhetoric, even in places that typically advocate for higher taxes.

• You want more fairness? Then drop the deduction for state taxes--that's a purely personal expense. I'd drop the mortgage interest deduction, too, but that's the last thing the housing industry needs right now.  But these things are unlikely to even be on the table.

I had overlooked the most startling thing in JLM's post--M. Anderson wrote "September Song"! Is that our M. Anderson?  No, it was Maxwell, not Merrill.

Social Networking for Investors

FINRA Warns Investors of Social-Media-Linked Ponzi Schemes. Didn't take long, did it? (We'll ignore the question of how suckers buying into schemes which "purport to offer returns of 20, 30, 100 percent or more per day" can be called investors.)

For real investors, Facebook, Twitter, et al may prove useful. See Investors are Using Social Media to Assess Advisers.

How about this suggestion:

LinkedIn seems to be the most viable target for wealth managers seeking to build their own social networks. Seventy three percent of those who use LinkedIn would consider joining groups to discuss economic and investment topics.

Has anyone had success with this idea?

Tax Legislation in September?

Oh, it's a long, long while from May to December
But the days grow short when you reach September
When the autumn weather turns the leaves to flame
One hasn't got time for the waiting game

– "September Song" (K. Weill, M. Anderson)

Congress slinks out of town Friday, but the legislative troops will be back in five weeks. To the surprise of many, Senate Majority Leader Harry Reid says that the matter of extending the Bush tax cuts – and reforming the soon-to-be-born-again estate tax – will not be ignored until after the November election. Senator Reid plans to get the Senate working on legislation next month.

Coming, a Tax Shelter Boom?

The battle over raising federal income tax rates really has heated up. Liberals and conservatives have wheeled out their big guns.

WHAM! Four Deformations of the Apocalypse. In the NY Times David Stockman launches an all-out attack on Republicans who love to spend but hate to collect tax dollars. (The notion that President Reagan believed slowing the flow of tax dollars would cause Congress to slow its spending now sounds absurd. Yet that's how many people actually expected responsible legislators to behave in previous generations.)

BAM! The Soak-the-Rich Catch 22. In the WSJ Art Laffer insists that low tax rates are essential for people at the top of the income ladder in order to coax them to pay more into the U.S. Treasury.

Regardless of who wins the immediate battle, many sober observers expect more Americans (only half now pay any federal income tax to speak of) will be required to pay taxes until it hurts.

If tax rates rise significantly in top brackets, so will demand for tax shelter. Could that be why Uncle Sam has been so diligent going after funds sheltered in Swiss accounts and elsewhere? Preemptive strikes, if you will?

You only have to look at the case of the Wyly brothers to see how difficult a crackdown on intricate tax dodges can be. (If you're merely "deferring" taxes in your offshore trusts, who's to say you can't keep on deferring?) Although the IRS has been after the Wylys for years, only the SEC seems able to bring charges.

If tax shelters were ETFs, I'd be bullish.

Trying to Keep Smiling in 1931

If you have been reading my favorite blog, you know that in the summer of 1931 The Wall Street Journal was reporting financial catastrophes in Europe and deflation – commodity gluts, falling prices, falling wages – here at home.

How did a magazine such as The New Yorker strive to find a bright side to a bad year? Here are a few quips from Howard Brubaker in the July 25 issue:

A critic complains that the large expenditures authorized by the administration have not as yet resulted in much construction work. Yes, but think how helpful it will be in the depression after next.

•

Returning from Europe, Dudley Field Malone declares that Europe would have been saved from financial ruin if the President had taken his action a year and a half ago. Now it is too late for Herbycide. [As in President Herby Hoover, get it?]

•

The President says it is wrong to bet that grain is going down. At a time like this, traders in wheat should grin and bull it.

Meanwhile, Brooks Brothers was keeping a stiff upper lip, as in this ad from the same issue:

Obamacare starts to unravel

TaxProf Blog: Dems, GOP Vie to be First to Repeal ObamaCare's 1099 Small Business Reporting Rule.

Buried within the health care bill, all businesses will have to file a 1099 for any vendor paid more than $600 in a year. For large companies that have fully computerized their accounting departments, this is no big deal. For small businesses, this is a huge burden. We may have to outsource, the way we do the payroll.

This relates to health care how, exactly?