’Tis the Season to be Gifting

The maximum gift tax rate, 35 percent, is the lowest in a generation. In December the "hurdle rate" for GRATs shrinks to 1.8 percent, the lowest ever. Add the threat of a punitive estate tax next year, and it's no wonder the wealthy may ring out 2010 with tax-minded gifts.

Diligence or Insider Trading?

Back in the day, major trust banks had their own investment analysts. Some of our clients boasted that their guys didn't just sit around poring over financial statements. They got out in the field. Questioned management. Kept their eyes open.

Was traffic at the local McDonald's picking up?

Was the employee parking lot at the local GM plant becoming less crowded?

Those working for today's "expert networks" also ask questions and keep their eyes open. The tidbits they gather form "mosaics" that may yield actionable insights. But it's not like the old days, as Andrew Ross Sorkin explains in the NY Times.

Going into one Gap store and asking the manager how sales are going is no big deal. The Gap has more than 3,000 stores around the globe. "However, if you went store to store and managed to find out sales figures for 1,000 of them, you might have something closer to [inside] information."

After you read Sorkin's column, the question of what constitutes insider trading certainly doesn't look black and white. More like a mosaic.

Kabuki day

Finally, the stars have aligned and President Obama will meet with Congressional leaders today.  The main topic is how to head off an automatic $4 trillion tax increase.  Are they serious about it, or is it just political theater?  From Tax Notes:

The meeting will simply be the beginning of negotiations, White House Press Secretary Robert Gibbs said during a briefing with reporters.
"I do not expect that we'll come out after an hour, an hour-and-a-half, and have full agreement on this," Gibbs said. "I hope there is agreement on the notion of how important it is to get this done by the end of the year." 

So, not serious. 

In addition to the expiration of the "Bush tax cuts for the rich," of which 80% went to the middle class, the minor tax cuts included in the stimulus bill also expire. If I understand Democrat Dick Durbin's position, we can't afford to extend the tax cut for the top 2%, but Democrats will yield on that if Republicans agree to enlarge the "cost" even more with an extension of unemployment benefits and the Make Work Pay credit.

Republicans are saying that this moment in the business cycle is a poor one for any tax increases on anyone. Logically, they should therefore accept at least the Democratic proposal to continue the stimulus bill tax cuts.

I believe that the clock ran out on this game in October, but no one wants to admit it yet.  Payroll services have to be putting new withholding in place for January based upon the law as it is, not as it might be.  Ditto for those writing the tax preparation software.

Another sign of unseriousness: no one is paying attention to the AMT for 2010, which still isn't patched.  I suppose that could be attended to in January retroactively to a prior calendar year, but I am unaware of any other provision that has been handled in this way.

Double Digit Inflation for “Twelve Days of Christmas”

Gold is expensive and the price of French Hens has gone through the roof.

See PNC's cutsey presentation of the 2010 Christmas Price Index.

He Thought He Was Rich (Take Two)

Research before you write. Following that rule would have saved me from missing part of the story surrounding Nick Martin, who thought he was rich.

Mr. Martin adopted a lifestyle apparently aimed at keeping up with his brother and brother-in-law. Both of them did become rich, thanks to their much larger stakes in the family business.

Yet now I discover that the brother-in-law, David Weyrich, also went broke! In the process he seems to have disappointed a number of California brides.

When I was writing the Investment and Trust Newsletter, I might have pointed to Mr. Martin and Mr. Weyrich as examples of why inheritances are best passed down in trust. On his Wills, Trusts and Estates Prof blog, Gerry Beyer makes that very point:

One effective way to prevent beneficiaries from following in the footsteps of the Martins is to place the gifted assets into a trust rather than giving it to them outright.

But now I'm not so sure. Mr. Martin was in his late 40s when his liquidity event occurred. Mr. Weyrich was probably of similar age – a mature businessman. At some point a person ought to be old enough to blow a fortune if he or she really wants to.

Income-Tax Brackets: A Million Dollar Solution?

On Morning Edition, Cokie Roberts says lame-duck sessions of Congress aren't necessarily impotent. Sometimes they do legislate. She believes sentiment is building for an extension of the Bush tax cuts, but with higher rates on incomes over $1 million. We'll see.

Update: Return of Estate Tax Looms as Final Impediment to Extending Bush Tax Cuts.

He Thought He Was Rich. Whoops!

The subjective definition of "rich" is easy: Anybody with noticeably more money than me is rich.

Objective definitions are elusive. Is anyone with income over $200,000 rich, as proponents of limiting the Bush tax cuts assert? $300,000?

To generate $300,000 a year, using Tiger 21's 3% rule, requires $10 million in investable assets. Yet $300,000 per annum doesn't allow for much rich living, as big-city professionals with kids in college have pointed out.

In marketing we often say "rich" – that is, ultra-high net worth – starts at $30 million.

Nick Martin, the man whose plight The New York Times examines here, behaved as if $10 million made him really rich. He now knows that was a mistake. Though he blames investment setbacks and poor advisers, the prime culprit appears to be himself. He spent more than half the $10 million buying and improving residences here and abroad.

Perhaps the subjective definition of "rich" is best after all. Even if a liquidity event brings $30 million, the recipient will realize he or she can't live like those with $300 million.

Good wealth managers help new clients understand the relativity of "rich." The value of this service may exceed their fee.

The First Trust Fund Hippy?

That's how David Brooks characterizes Leo Tolstoy.

Count Lyev Nikolayevich Tolstoy died one hundred years ago this November. The photo, from Wikimedia Commons, shows him at age 20.

Give Thanks for Selective History

Most investment managers – and most private investors, for that matter – have beaten their benchmarks sometimes. Selective history is the art of commemorating the good times, ignoring the bad.

The founders of our Thanksgiving holiday must have had a talent for selective history, too. Otherwise our Holiday tables would be full of codfish. See our Thanksgiving post for 2008.

Update: Give thanks as well that Thanksgiving menus don't include eels.

Eat, drink and be thankful!

Fight Over Millionaire's Estate Taxes

Disputes over which state has a right to tax an estate are familiar. This case is the first I've seen involving which town could claim to be a wealthy decedent's home base.

Is There an Alternative to “Alternative Investments”?

What's all that thrashing about in the hedges? Three funds were raided by the FBI, and the SEC is nosing around Steven A. Cohen's SAC Capital Advisors.

Venture capital isn't looking good either, according to Sean Parker, the entrepreneur played by Justin Timberlake in "The Social Network." In Parker's view, “The risk-reward doesn’t work out … anymore.”

More than two years ago I fantasized about a return to all-natural, plain vanilla investing. Must have been ahead of my time.

George Orwell, call your office

One of the "usual suspects" that Congress rounds up when preparing tax legislation is "closing loopholes."  You might think from the phrase that loopholes get into the tax code by accident, they are drafting errors spotted by diligent accountants.  Not so; every loophole has been inserted quite deliberately.

Apparently, the juice has been drained from the word "loophole" after so many years of repetition.  The deficit commission needed an alternative, one that would instantly convey "badness."  They tried "tax expenditures," but that was too complicated, plus it gives away the game that Congress puts these into the code on purpose, for a purpose.

So, what's another phrase we could use?  Doesn't have to be accurate, just instantly recognizable as something we don't want?

"Tax earmarks." I am not kidding.

From Tax Notes:

Commission Co-Chair Erskine Bowles said November 18 that based on the week's discussions, the commission will refine the draft proposal he and Co-Chair Alan Simpson released the previous week, and that the final product would focus on what he called "earmarks in the tax code." 

 Uh huh.   Prominent examples of tax earmarks that were snuck into the tax code at midnight without a vote when no one was looking include the home mortgage deduction and the exclusion from income of employer provided health insurance.   Yeah, those must be earmarks.

Sell Like a Fiduciary, Quack Like a Pony?

In Dear S.E.C., Please Make Brokers Accountable to Customers, Tara Siegel Bernard begs the regulator to transform broker-dealers and annuity salespeople into fiduciaries. But the problems she acknowledges raise doubts that the fiduciary standard can stretch that far. Maybe there's a simpler solution: Require brokers to call themselves brokers – not "financial advisers" – and stop misusing the term "wealth management."

See also Flawed fiduciary duty and the appended comments, including this from John Olsen:

… the question [is] whether ALL investment advice - even broker-rendered advice that is "solely incidental" to that broker's "conduct of his business as a broker or dealer and who receives no special compensation therefor" [Investment Advisors Act of 1940, Sect. 202(a)(11)(C)] - ought to be subject to the FIDUCIARY standard that generally applies to "investment advice". Sect. 913 of Dodd-Frank specifically states that the charging of commissions is not, per se, a violation of fiduciary duty. But the question remains as to whether the rendering of advice by someone compensated by commissions is subject to that fiduciary duty.

Related post: Dogs and Cats, Fiduciaries and Brokers

Paging Heraclitus

Heraclitus, as imagined by Hendrick ter Brugghen in 1628

Where is the Greek philosopher Heraclitus when Congress needs him?

As Jim Gust notes in recent posts, the Dems and Reps know they're going to extend the Bush tax cuts. But … they just can't figure out how to do it.

Temporary!
Permanent!
Some temporary!
Others permanent!
All temporary!
All permanent!

Give me a break! In my lifetime the Internal Revenue Code has never achieved long-term stability. Never. "Improvements" to the last serious effort at income tax reform, in the 1980s, began metastasizing almost immediately.

All together, now. What did Heraclitus teach us?

Nothing is permanent except change.

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Change on the estate-tax front is a certainty. But what sort of change?

Laura Saunders in the WSJ:

The Bush tax-cut extension has lawmakers so tied up that they have pushed the estate tax to a back burner. According to BNA's Daily Tax Report, Senate Finance Committee Chairman Max Baucus (D., Mont.) said on Nov. 16, "We're barely talking about it, let alone ready to make a decision."

Could this all be a bad dream?

Republicans dig in also

The NYTimes reports that the Republicans have promised to block the Democrats' planned partial extension of the current tax system.  Key point:

Republicans, of course, will take over the majority in the House in January, at which point they would vote to extend all of the lower rates if Congress has not already resolved the issue.

 Yes, in the House. But in the Senate? Will the Democratic majority there even bring such a bill up for a vote?  Doubtful.  Might Obama veto it?

Lots of life left in this drama.

Gamesmanship

Tax Notes offers this additional insider baseball on how the House vote could play out:

The Hoyer aide said no decisions have been made about the bill's structure, its timing, or if the vote would be held under regular order or under suspension of the rules. Bills brought under suspension cannot be amended but require a two-thirds majority to pass. Using that approach would prevent Republicans from adding "poison pill" provisions to the bill, but because Democrats hold less than two-thirds of the chamber's seats, it would also enable the GOP minority to vote the bill down. 

Senate Democrats haven't settled on their strategy yet.

Democrats dig in

The Daily Caller reports that House Democrats have decided that confrontation is  the way to go.

Steny Hoyer, the number two in the House Dem leadership, told Democrats at a caucus meeting this morning that they would get to vote this year on just extending the Bush tax cuts for the middle class, a senior Dem aide tells me, signaling support for a confrontational move towards the GOP that liberals have been pushing.

They will call the Republican's bluff. They will dare the Republicans to vote against a measure to head off tax increases for 98% of taxpayers.  If Republicans hold to their position, the Democrats will accuse them of abandoning the middle class. 

This is an exercise in political theater, it is not serious legislating.  Such a bill is unlikely to even be brought up in the Senate.  I think that the Democrats are signaling that they plan to address the tax code next year, as the Republicans did yesterday.  

I'm also seeing signs that the real action next year won't be about the "Bush tax cuts," it will be about stripping all the "tax expenditures" from the tax code, per the deficit commission's recommendations.

But  what about the AMT for 2010? Will that be kicked down the road as well?

No surprise here

Another day, another discouraging Tax Notes item.  Orrin Hatch has said that of course Republicans will block any attempt to decouple the tax increases of the middle class from those for the top earners. Some Democrats were evidently trying to float a compromise of permanently keeping the current tax code for some, and temporarily extending it for others.

Democrats are too busy with their leadership fights to talk about their tax strategies.  The bipartisan meet-up with the President is deferred until November 30. Scheduling problems.

Most ominous is this: "Hatch said he would prefer to pass a two- or three-year extension of all the tax cuts in the lame-duck session or postpone the debate until early 2011 and find a permanent solution, rather than make some cuts permanent but not others."

So, as I surmised below, some Republicans think that kicking this down the road is an acceptable path.

Once the enlarged AMT hits tax filers in the first quarter, I think we'll see a whole new round of Tea Parties, and they'll be targeting all incumbents, regardless of party.

Still not encouraging

The headline today in Tax Notes:  "Lawmakers Cede No Ground on 2001, 2003 Tax Cuts"

Democrat Dick Durbin complains that Republicans are not compromising, darn it.  They seem to be under the illusion that they won the election.

The usually sensible Max Baucus sticks to the line that a tax increase on the wealthy is essential, failure to allow the tax increase to go forward is "unaffordable."

Congress has become so accustomed to annual gamesmanship with the AMT, they now appear to have no qualms about playing games with whole tax code.  This is really irresponsible.

Which side is going to blink?

Here's the thing.  Republicans might be thinking, let the tax increase take effect, we'll repeal it when we take over in January. And they can do that. But the AMT for 2010 has not been patched yet, so the exemption is a scant $40,000.  If Congress does not act, the federal tax bite in the blue states will skyrocket.

Could the 2010 AMT be patched retroactively in 2011? There are enormous practical problems, it seems to me.  Among them, reprogramming the tax software that everyone now must use to file their returns.

Taxing Capital Gain. Is It Double Taxation?

A comment on Richard Thaler's blog links to Steve Landsberg's fervent argument that taxing capital gains is always double taxation – that is, a surtax on income that has already been taxed before it was invested.

Valid point?

Valid even when I invest the interest from tax-exempt bonds?

Not encouraging

From Tax Notes this morning:

Lawmakers convened a lame-duck session of Congress November 15 with no clear path forward on big-ticket tax items that expire at the end of the year.

Senate Finance Committee Chair Max Baucus, D-Mont., had no conclusive announcements after a meeting with committee Democrats to discuss the year-end tax agenda. 

Further on in the article, it appears that Democrats will demand "offsets" to neutralize any economic benefit of heading off the huge tax increase.  Failing that, they appear poised to allow the full tax increase to go forward, putting the blame on Republican intransigence.  Just as with the estate tax last year, it is a giant game of chicken.

Frankly, if they don't even have legislative language yet, I don't think it's physically possible to get through the process--including getting the budget effect estimates--before the end of the year.

Get ready for the $1 million exemption from federal estate tax. The more interesting question, what happens when the credit for state death tax returns? Do the suspended death taxes return in the states that used to have a "mop up" estate tax?

Rounding Up the Millionaires

Robert Frank's Wealth Report spotlights a new survey of high-net-worth-investors, produced by U.S. Bank and Harris Interactive. Most respondents indicate they've maintained their long-term investments but have not seen their net worth return to 2008 highs. Welcome to the club.

The survey's full name is impressive: The Private Client Reserve of U.S. Bank Millionaire Investor Insights Annual Survey. Reserve? Innovative term for a financial services unit. As a noun, the Oxford Dictionary tells us, "reserve" is generally used in the plural: "financial reserves," "military reserves." The second meaning may be closer to U. S. Bank's intent:

A place set aside for special use, in particular

• an area designated as a habitat for a native people.
• a protected area for wildlife.

Hope this doesn't mean millionaires are an endangered species.

Mind Control (Or, “My Unmentionable Job”)

My first job after the Army was with O'Brien-Sherwood Associates, a market-research firm on New York's Madison Avenue. Our offices were a block or two south of Brooks Brothers and handy to Grand Central, giving me an easy commute from Connecticut.

Mind you, I didn't tell my Connecticut friends I was doing market research. Too embarrassing. "Advertising research," I would mumble, if pressed.

The man to blame for my embarrassment was Ernest Dichter, a psychologist from Vienna,. By the latter 1950s Dr. Dichter had made "market research" synonymous with "motivational research." That wasn't good. Motivational research was widely regarded as a black art – one that sought to use Freud's psychoanalytic concepts to influence consumer behavior.

Dr. Dichter's motivational techniques made a lot of people nervous, including a little-known writer, Vance Packard. While I mumbled about my job, Packard was writing what would prove to be a surprise best seller: The Hidden Persuaders.

When Packard realized that a prime motivator for less-than-rational purchasing decisions was the desire to appear "high class," he followed up with another best seller, The Status Seekers.

(Remember Kaye Miller, the psychologist on Mad Men? She wouldn't be there if not for Dr. Dichter. Some say he invented focus groups.)

Motivational research never had the evil power ascribed to it in the 1950s and 1960s. Yet a significant percentage of hedge-fund investors must be status seekers. And brokers use plenty of hidden persuasion to frame product sales as "advice."

Today motivational research is old hat. There's a new key to creating Ads that Whisper in the Brain. If Vance Packard were still around he'd probably write another book, this one about neuromarketing.

A Public Service Announcement

This message is brought to you by the Ancient and Honorable Guild of Trust and Estate Planners:

(With apologies to the F.D.A. and its proposed new anti-smoking campaign.)

Half measures?

A draft of the deficit commission's report has been released. Their approach looks rather modest, just tweaking around the edges of current policies.  Some adjustments to Social Security, including raising the retirement age to 68 by 2050.  If they were really serious they'd raise it to 68 next year.  Well, maybe by 2020. The mortgage interest deduction would be limited to $500,000 of value, but not eliminated. That would cover most of the homes in the red states, not in the blue states.  Hasn't that deduction outlived its usefulness?  The deduction for state and local taxes would be eliminated.  At least the AMT would finally be eliminated. That provision outlived its usefulness a decade ago.

I was hoping for more. When all the politicians are patting themselves on the back for being so brave in making the proposals, I immediately get suspicious. 

Tea Party Gold Rush

GOLD NUGGETS FROM ARIZONA
Photo via Wikimedia Commons

Think of gold as the Tea Party of investments, advises the NY Times. But don't fall for the notion that gold is hitting new highs. David Leonhardt reminds you to allow for inflation:

"The actual record was set 30 years ago, when the price of gold, in today’s dollars, hit $2,387, or 71 percent higher than it closed on Tuesday. "

Does this mean the gold boom still has a ways to go? Or will investors end up tumbling out of their "24-karat safety net"?

Taxes, Inheritance, Wealth Planning . . . Tell Me More!

As the sponsors of this blog like to point out, people crave information on taxes, inheritance and other facets of wealth planning. The New York Times has taken note. Last Friday it offered a special section on concerns of the Sandwich Generation.

(Sometimes the sandwich is a double-decker. A middle-aged acquaintance of ours was worried not only about his elderly parents but also about his extremely venerable paternal grandmother.)

The next day's Times offered an article on Stepping In For a Parent With Alzheimer's. Included is a nice plug for that bank with the stage coach:

Wells Fargo Private Bank, which requires more than $1 million in investable assets, offers an Elder Services program. It will coordinate a variety of services, from dealing with medical claims, taking the cat to the veterinarian and paying the bills, while keeping a close eye on the accounts for fraudulent activities. The service is included in the bank’s investment management fees, which range from 0.80 to 2 percent of assets. Let’s hope we see more such services — and not just for the wealthy.

Sunday's Times offered Richard Thaler's lucid report on the looming estate tax debate, to be conducted by a lame-duck Congress. Subjecting estates of $1 million to $3.5 million to estate tax would impact "middle-class households," Thaler observes, confirming our suspicion that the middle class isn't what it used to be.

As The Times' Paul Sullivan notes, even middle-class millionaires are low on the wealth ladder these days:

We live in Fairfield County, Conn., one of the more affluent areas of the country. I joke that, for all the money here, there are still three classes of people: upper middle class, upper class and hedge-fund rich.

In other words, marketers of trust services, imagine a set of suburbs exceeding your wildest dreams. Every household contains a prospect!

How can we get the economy growing?

Becker has some good suggestions. Note his reframing of the debate over avoiding a massive tax increase on January 1.  He moves away from the entitlement mindset and who can "afford" to pay more, and instead focuses on how tax rates affect growth.


Posner is skeptical, but also has good observations.

If only our politicians could have such sensible discussions.

The big assumption, of course, is that we actually want more economic growth, as opposed to just talking about it.  Some people consider the current growth rate too high, because of its environmental impact.

New Zealand Abolishes Last Wealth Transfer Tax

New Zealand scrapped its estate tax in 1992. Now the vestigial gift tax is going as well.

If New Zealand can live without death tax and the like, could Washington's new dose of GOP energy drink lead to similar results?

New Zealand's Parliament buildings, via Wikimedia Commons

Searching For The Middle Class

What do the following jobs have in common?

Municipal purchasing director
High school guidance counselor
Registered nurse
Real estate broker

All are now "working-class" occupations. So says this NY Times article on racehorse investors.

To find today's middle class perhaps we have to raise our sights. Some big-city professionals making $300,000-$400,000 or more feel financially pressured and want to keep their Bush tax cut. Are they middle class, or merely upper working class?

Maybe we should look higher still, to The Middle-Class Millionaire. Financially speaking, people with investable assets of $5 million or $10 million might better be called lower upper class. Whatever you call them, writes James Surowiecki in The New Yorker, they have reason to envy the rich … and the very rich … and the unbelievably rich. Surowiecki illustrates in terms of income:

People in the ninety-fifth to the ninety-ninth percentiles of income have represented a fairly constant share of the national income for twenty-five years now. But in that period the top one per cent has seen its share of national income double; in 2007, it captured twenty-three per cent of the nation’s total income. Even within the top one per cent, income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves, they now earn as much as the bottom hundred and twenty million people. So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.

Taxation traditionally pits the have-nots against the haves. This time feels different. Soon the lame duck Congress will restart the debate over income tax cuts and the existence of the estate tax. Even the have-a-lots may be envious enough to agitate for heavier taxes on the have-it-alls. More than likely, the argument will continue to rage when the new Congress convenes

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Marketing note: “Middle class” is a state of mind, not a status measured by income or wealth. You can't assume that one $5-million prospect is like another. Some are proud of their rise from rags to riches and expect you to kowtow. Others may insist on being treated like just plain folks. Middle class folks.

Sign of the times

Ships cross the oceans more slowly now than sailing ships did 150 years ago.  The reason is to offset the capacity glut. Not explained in the article, does this reduce fuel consumption?  Evidently, the higher labor costs of keeping the ships at sea longer is less than the cost of parking or drydocking a portion of the fleet.