Friday, April 30, 2010

Apple does it again

On my way to LensCrafters to get my glasses fixed, I stopped by the Apple store. To my surprise, they had the  crowd control ropes up, and a line  of 30-40 people was waiting outside the door.  What the . . . ?

So I asked the nice young Apple saleslady monitoring the  door, "What's up?" She said, "This line is for  buying  iPads." 

"But those have  been available for a month," I replied.  "No, the 3G models have just been released today."

The cheapest 3G version runs $629 before buying the data.   Here was a  line of  people waiting to hand Apple that much money, the first chance they had.   And with little  fanfare--I didn't know today was the secondary release day, and I follow Apple pretty closely.

As I was not buying an iPad, I was permitted into the store, which was literally buzzing with activity.  What a remarkable company.

Return of the Dead Hand

Pity the fathers of 1920's flappers. Born in an age when a glimpse of stocking was thought of as something shocking, they sired girls who bobbed their hair and showed their knees. The boys were no better, listening to jazz and dancing the Charleston.

If such a father was smart enough to sell his stocks before the 1929 crash, you can imagine his estate plan. Everything for the kids was tied up in trust, with strict conditions meant to promote proper behavior. And the trustee was directed – no, commanded – to never, ever invest a dollar in the stock market.

Such a father wielded his "dead hand" with good intentions, but the results were often disastrous. The kids hated the conditions and rebelled. (if the SEC couldn't supervise Lehman Brothers, how could a trust company supervise a trust's beneficiaries?) The prohibition against investing in stocks – for which the beneficiaries invariably blamed the trustee, not father – depleted family fortunes.

After World War II, estate planners had many a horror story to cite as they urged their clients to employ the dead hand lightly, if at all.

Now, it seems, the pendulum has swung back with a vengeance. See the Wills, Trusts and Estate Prof for a link to the FT review of Immortality and the Law: The Rising Power of the American Dead.

Wednesday, April 28, 2010

Seeking the Ideal Estate Tax Exemption

Last year I took an informal stab at sampling the fall and rise of the federal estate tax exemption. Now, in The Federal Estate Tax: History, Law, and Economics, the Treasury's David Joulfaian offers an accurate, detailed look at the ever-changing definition of "taxable wealth." (Click on the thumbnail for a readable view of the table.)

Measured in constant, 2008 dollars, the federal estate tax exemption started at around $1 million in 1916, rising to over $1.4 million by 1931. Then began the great downward slide:
  • 1932: under $1 million
  • 1951: under $500,000
  • 1966: under $400,000
  • 1973: under $300,000
  • 1977: under $230,000. No wonder President Carter detected a national "malaise."
The federal estate tax exemption didn't climb back above $1 million until 2002. It did not rise above its 1931 level until 2004.

This year the de facto exemption has reached what some consider its ideal level: unlimited. As Buzz Lightyear might put it, the exemption has soared … to infinity and beyond!

With financial reforms, environmental issues and immigration crowding the Congressional calendar, will the infinite exemption survive through New Year's Eve?

Tuesday, April 27, 2010

“Why Settle for ‘Trust Lite’?”

Running a full-service trust department in a small-to-medium-size bank? You've got a potent marketing theme: "Why Settle for 'Trust Lite'?"

Trust Lite – a.k.a. Trust 1-800 – is increasingly what your far-flung competitors are offering. The big boys are requiring their trust people to handle more accounts, notes this post on the Trust Advisor blog. "And they're routing more of their basic service requests away from trust officers . . . .

"Some of the larger banks now [says recruiter Maggie Cunningham], if there's under $3 million in the account, it goes straight to the call center …."

Even as electrons and pixels make it ever easier to devise substitutes for personal service, guess what? The perceived value of genuine personal service rises. If your organization provides it, flaunt it!

[A word from our sponsor]
Need to raise awareness of your full-service trust department a notch or two? There's a brochure for that.

H/T to the Wills, Trusts & Estates Prof for calling attention to the Trust Advisor post.

Sunday, April 25, 2010

1931: Almost a Pretty Good Year?

Warren Buffett is right. Reading about a long-ago year in periodicals of the day gives you a feel for the times you cannot obtain from organized, sanitized history texts. I'm supplementing summaries of 1931 Wall Street Journals, provided by the now misnamed News From 1930, with browses through 1931 issues of The New Yorker. (Only New Yorker subscribers have that privilege.)

Were it not for that darned Depression, 1931 might have shaped up as a pretty good year. The Empire State Building prepared for its May 1 opening. At least one television company announced it was almost ready to start broadcasting.

And Dodge Boat proposed a solution to New York City's growing traffic problems: Commute to work by water!

". .. no corners to turn, no traffic to buck, and the clean reviving scent of spray instead of fume-filled highways!"

While cruising back to their Larchmont or Oyster Bay home, the couple might have noticed the Guaranty Trust ad at right, also offering convenience. No more tedious trips down to the Wall Street area to see one's trust officer. Just drop by one of Guaranty's midtown offices.

Unlike Dodge Boat, Guaranty Trust survived the Depression. In 1958, when it merged with J.P. Morgan, Guaranty was the ninth largest bank in the country.

Friday, April 23, 2010

Remembering the Bard

Will Shakepeare was born in late April, 1564. He died April 23, 1616. In his homeland The Telegraph mourns the disappearance of the Bard from UK schools. (Is it happening here as well?)

Shakepeare coined many a phrase that continues to come in handy.

Sub-prime mortgage loans? "Vanished into thin air."

Bought a synthetic CDO? "More fool you."

We posted the first page of Shakespeare's will here.

Thursday, April 22, 2010

Another facet in the Roth conversion decision

Dow Jones' Financial Advisor magazine points out another pitfall in the Roth conversion saga.  The temporary boost in taxable income will not be viewed as temporary by college financial aid offices, and so could imperil scholarships.

Some schools take into account real estate assets in their own assessment. But for those that don't, someone with a million dollar home and large 401(k) account could potentially receive more aid than a family with a higher income but far less assets.

They have an example where a Roth conversion by a parent would reduce a daughter's financial aid by $17,000. So, for those with kids in college, think twice before converting your traditional IRAs.

Tug-of-War Over 401(k) Accounts

"Attention, workers," writes Eleanor Laise in the WSJ (subscription): "A battle is brewing over your 401(k)."

As Boomers retire, big 401(k) plans may start shrinking. Can 401(k)s stay big by enticing new retirees to leave their nest eggs in their company plan? If so, new rollover IRA business could be harder to come by.

Wednesday, April 21, 2010


Paul Volcker must feel lonely. He suggested a Value-Added Tax as a possible way to bring more money into the U.S. Treasury. As The Washington Post reports, the idea has proved less popular than swine flu.

Robert Samuelson dislikes the VAT idea because it would have to be enacted alongside the income tax, further complicating the federal tax system. George Will insists the personal income tax must be repealed if a VAT is to be imposed. And both columnists agree that the idea is doomed by politics. Congress could not enact a clean, simple VAT.
  • You can't tax groceries – people have to eat.
  • You can't tax housing – people have to live somewhere.
  • You can't tax cars . . . .
If a VAT is politically impossible, what's the revenue-raising alternative? On paper, reforming the personal income tax has attraction. Tax rates could be kept near Bush levels if if Congress ditched enough "social-engineering" – all the tax credits and deductions intended to encourage everything from working to home buying. Chances of such a neat, clean income tax being enacted? As remote as the chances of enacting a simple, broad-based VAT.

When more revenue must be raised and no remotely sensible way of raising it exists, members of Congress could turn into loose cannons. A return to a $1 million estate-tax exemption? Clever ruses for taxing Roth Ira distributions? Such ideas don't seem quite as wacky as they did a year ago.

No estate tax reform this year?

Deborah Jacobs, writing in Forbes, outlines how we got to the year without estate taxes, how prospects for retroactive restoration have dimmed, and concludes, "It now looks increasingly likely that 2010 will be a year without either tax, followed by what amounts to a drastic increase in those taxes next year."

Our regular readers know that as the law now reads, the exemption will fall to $1 million, the top tax rate will zoom to 55%, and the number of estates that will be required to file will be roughly an order of magnitude greater than it was in 2009.

Could a golden era of wealth transfer be coming to an end?

Tuesday, April 20, 2010

Political risks in Roth IRA conversions

Over at Bank Investment Consultant, comments on the political risks that could affect Roth IRA conversions.

One risk is obvious--how long before Congress changes the tax treatment of Roth IRAs for those "rich" taxpayers who somehow never pay their "fair share"?  Not very long at all, I suspect.  The subtle way will be to count Roth distributions for purposes of calculating the new Medicare surtax and the tax on Social Security benefits.  The unsubtle way would be to directly tax Roth distributions for higher income taxpayers after the recovery of basis.

One commenter suggested an opposite risk I had not considered.  What if there is no mad stampede for Roth conversions this year after all?  The tax hurdle is too high for many, and if you have to tap the Roth to pay the taxes, you probably won't be much better off.

Let's say that hundreds of billions is still sitting in pre-tax IRAs in 2013, and Congress is desperate for more revenue.  Might they sweeten the conversion pot, perhaps taxing the conversion at a flat rate?  What if they allowed long-term capital gain tax rates to apply?  There would doubtless be very few pre-tax IRAs left after that, with a veritable flood of new money for the Treasury.

Sound far-fetched, perhaps wishful thinking?  Maybe.  But there's the recent precedent of the first-time home buyers' "tax credit."  The first installment was really a loan that had to be repaid to the IRS.  Then it was replaced by a much better version, a genuine credit the potentially never has to be repaid.

Insight into the economic recovery

Although the stock market is doing well, total federal income tax withholding is below last year's depressed levels.

Sunday, April 18, 2010

A Tax Cut to Beat the Dutch

April 15 brought tax-related web sites into the spotlight. The Tax History Project at Tax Analysts, for example, where you can browse Form 1040s going back to 1913.

Thanks to historian Joseph J. Thorndike, you also can learn about the original Boston Tea Party, an event actually prompted by a tax cut.

Few proper or improper Bostonians were paying the British tea tax already imposed; they were drinking smuggled Dutch tea. So Parliament cut the tax in order to bolster sales of tea by the British East India Company. Being pushed around by a distant Parliament – plus the thought of the East India Company gaining a tea monopoly – is what irked the merchants of Boston.
It bears repeating that the colonists were not objecting to the financial burden of the tea tax. Or any other tax, for that matter. Instead, they were making a point about political legitimacy. They were more than willing to pay taxes imposed by their own representatives. But they were utterly unwilling to pay taxes imposed by Parliament -- a more or less alien power, given the lack of colonial representation.
Some members of today's Tea Party may share a similar feeling: Taxes are inevitable, at least at the local and state level, but must be minimized when paid to a distant federal government run by politicians, lobbyists and bureaucrats.

On the other hand, one of the first modern tea parties was held in 1999, right outside this blogger's window, to protest a state property tax. The levy, imposed to raise money for school districts in towns experiencing hard times, led to dissension between New Hampshire's "rich" and "poor" towns that continues to this day.

Friday, April 16, 2010

South Dakota solution

Professor Beyer reports that South Dakota has enacted a rule for interpreting wills in the absence of a federal estate tax, if the will refers to such tax.  The assumption will be that the testator intended the federal tax regime of December 31, 2009, to apply, unless the will was later amended.

A similar fix was enacted in Indiana, he reports.

Will the iPad Change Wealth Management?

Don't laugh! Downloading and sorting financial information on PCs got off to a great start a generation ago – remember Managing Your Money? But the possibilities never fully flowered, especially on Macs. More promising, smart-phone apps that allow easy access to all the financial information people already have stored online.

The screen shot at right is from the Pageonce Personal Assistant. Imagine similar and better apps for the iPad, with a screen big enough to see and easily manipulate. The more that investors can readily do themselves, the less need for face time with private bankers or investment advisers.

Straw in the wind: Bank of New York Mellon Corp. is closing nine of its wealth management branches in Pennsylvania, New York, and New Jersey.

“We just didn’t have enough foot traffic to keep these branches open. Our clients are very sophisticated, and they do a lot of their banking online, and in other ways than going to a physical branch.”

Thursday, April 15, 2010

Speaking of Yale . . .

Yesterday I attended a speech at the Macmillan Center at Yale by Lithuania's former President Valdas Adamkus. BTW, he was the European Union's "Man  of the Year" for, I believe, 2009.  Adamkus spoke on the importance of education in helping Lithuania make the transition from communist vassal state to a liberal democracy.

Little known fact: I cooked a lunch for President Adamkus and his wife Alma when they visited Vaiva and me at our home in Riese, a suburb of Vilnius.  I remember most vividly the arrival of the  Presidential cortege turning into our driveway, the state limousines decorated with Lithuanian flags.

Wednesday, April 14, 2010

Why Top Colleges Squeeze You Dry

Most members of the incoming class of 2014 at the Ivies and other elite colleges won't have to pay list price. But those with the best-heeled parents (such as your best wealth-management clients) will get squeezed.

Why? Basically, writes Andrew Manshell in this WSJ opinion piece, because the colleges know they'll pay up.

Jim Gust will likely second Manshell's opinion that endowments are under-spent:
While the prevailing wisdom in higher education (purveyed principally by endowment investment managers and advisers) is that even the 5% endowment payout rate targeted by most schools threatens the preservation of capital, well-designed financial research shows that, particularly given that colleges are constantly fund raising for new endowment resources, higher spending rates are sound. It could be argued that the richest institutions—such as Harvard, Williams, Wellesley, Amherst, Yale and Princeton—might be free and operate from only endowment funds, if they chose to.

Tuesday, April 13, 2010

Congratulations, Professor Beyer!

According to TaxProf Blog, the Wills, Trusts and Estates Prof Blog of MACo regular contributor and counselor Professor Gerry Beyer was ranked 20, 21 or 10 for all law professor blogs that have a sitemeter, for the year ending March 31, 2010.  His site was number 20 in page views, number 21 in visitors, and number 10 in growth of visitors compared to the prior year.

The number one blog, Instapundit, had the third best growth rate, so that could be a hard race to win.

The stock market is up, but income is down

The Washington Examiner reports that per capita income is down 3.2% since the Obama inauguration, according to the Commerce Department's Bureau of Economic Analysis. The country was also in a recession at the start of Bush's first term, and income fell that year by 0.4%.  During the eight years of the Bush presidency, income grew a total of 12.7%.  Mine didn't, however—my highest earning years were during the Clinton presidency.

The drop in national income helps to explain why Social Security has gone cash-flow negative six years earlier than projected as recently as 2008.  I've been surprised by the number of "news" reports I've seen that stick to 2016 as the turning point year.

Monday, April 12, 2010

Is it too late for a retroactive estate tax?

That possibility is raised by The Trust Advisor.  Last December, when the clock ran out on the federal estate tax, many expected it to be restored within a month, two at most, so the retroactivity would be relatively trivial.

Now a full calendar quarter has elapsed, and beneficiaries are doubtless starting to chafe.  The Trust Advisor points to the estate of billionaire Dan Duncan as a bulwark against retroactivity.  His estate, estimated at $6 billion, might have produced several billion in estate taxes.   That's enough money at risk to secure the services of the highest priced legal talent available, so there can be no doubt of a protracted legal fight should Congress decide to reset the federal estate tax back to January 1. 

Ironically, the Trust Advisor reports, last year the CBO projected that the year without estate taxes would only "cost" $468 million in lost revenue.  Now it appears that a single billionaire's estate might have avoided a federal tax liability that large.  However, Duncan's estate plan hasn't been made public. It might have included substantial charitable gifts or other strategies to reduce the tax bite.

Happy Fifth Blogiversary

This blog was started five years ago today. We've had more than 1,500 posts, more than 300 per year.  Thanks, JLM!  You've  done the lion's share of the work.  I especially enjoy your old trust ads.

Friday, April 09, 2010

Statement of the problem

On April 5 the Chairman of the ABA's Section on Taxation, Stuart M. Lewis, sent a letter to key Congressmen urging prompt resolution of the federal estate tax, together with repeal of carryover basis ("poorly understood") clarification of the ambiguities we have in the EGTRRA language that suspends the estate tax this year.  Lewis identified many practical problems, but perhaps the most important is the trouble in settling estates with a cloud of retroactive taxation hanging over them:

The executor (or trustee) of someone who has died in 2010 does not know if the estate will face a federal estate tax obligation, does not know the income tax consequences if assets are sold to meet whatever the estate's obligations are, and may not even know who the beneficiaries of the estate are (if the disposition of the estate is governed by formulas that rely on tax concepts). In light of the executor's fiduciary duty to be prudent and impartial, these uncertainties create extraordinary pressures on the executor and hardship and exasperation for beneficiaries. Executors by and large try to do a conscientious job consistent with their fiduciary duties. Executors generally do not try to take advantage of the tax rules or the uncertainty about those rules. As a result, executors arguably are the most sympathetic group in need of relief. In contrast, it would be understandable if Congress did not provide as much relief to individuals who may have taken opportunistic inter vivos actions in 2010.

“Trust Assets at Risk?” Oh! Never Mind

When a Bank Fails, Are Trust Assets at Risk? This curious post on the Trust Advisor blog devotes 14 paragraphs to discussing why investment advisers and their clients might worry about assets held in trust by banks. Then comes the 15th paragraph:
[I]t won’t matter whether [the bank] fails or not. The fiduciary assets simply roll over to the financial institution that takes it over…
Huh? Anyone know the back story to this strange posting?

Thursday, April 08, 2010

Yale's “Tainted Donations”

When the going gets tough – as in the Great Recession – the reverberations spread far and wide. Here and here, Nonprofit Quarterly reports on questions raised for Yale University by two business bankruptcies. Were seemingly generous donations to Yale "tainted?" Were they made with other people's money?

Tuesday, April 06, 2010

Tax extenders questionable

Last fall I posted about a 2008 tax law change promoting cellulosic ethanol as fuel. CBO scored the new $1.01 per gallon tax credit as costing just $100 million in revenue.  Turns out the paper mills have been doing this for years, recovering something they call "black liquor" from pulp waste and using it to run the mills.  They are clearly eligible for the credit, so the future "revenue cost" has gone up a bit.

To $23 billion.

Note that we haven't spent the $23 billion, it's all future tax benefits.  But even though we never planned to spend that money, Congress never voted on a $23 billion subsidy for paper manufacturers, "closing the loophole" will now count as savings.  The $23 billion goes a long way toward covering the cost of the tax extenders that have been awaiting action this year—closing the "loophole" that the paper mills never asked for is included in the bill.

Trouble is, CCH reports, the same $23 billion "savings" was lumped into the Reconciliation Bill for health care reform.  So it's no longer available for other tax measures—such obvious double counting doesn't quite fly in Washington D.C.

How exactly we "pay" for more health care by canceling a tax credit we never meant to extend is a bit of a mystery to me.

How to Imagine $1.25 Trillion

Barry Habib, from his essay featured in John Mauldin's Outside the Box:
During the past fifteen months, the Fed purchased $1.25 Trillion in MBS, which represented 80% of the mortgage market.…

Just How Much Money is $1.25 Trillion?

…. Picture a stack of $100 bills. It might surprise you to know that it only takes a stack four inches high to be worth $100,000. So $1,000,000 would be a stack of $100 bills 40 inches tall. How about a Billion? Well, you would have to stack $100 bills up to the top of the Empire State order to reach a Billion. So to picture $1.25 Trillion represented by a stack of $100 bills - that stack would be 850 miles high. If you could turn that stack on its side and were able to drive alongside it, it would take you longer than 14 hours to reach the end.

Monday, April 05, 2010

Art for Taxes

"Dancer Looking at the Sole of Her Right Foot"
"Acceptance in Lieu," the Brits call it. Unlike our Internal Revenue Service, which demands cash, the British sometimes accept works of art in payment of inheritance tax. The Degas sculpture above is a recent example.

At London's Courtauld Institute the bronze will keep company with another Degas work, acquired a few years ago under the Acceptance in Lieu program from the estate of art dealer and historian Lillian Browse. (Known as 'The Duchess of Cork Street," this remarkable woman started out as a dancer, moved into the art world and lived until age 99.)

Should the U.S. consider accepting art in payment of taxes?