Tuesday, September 28, 2010
If we knew that there would be no estate tax this year, and there would be one ever after, the best result is to avoid marital deduction trusts altogether (assuming that the surviving spouse lives until the return of the estate tax). A traditional marital trust will be fully taxed in the survivor's estate. So will a QTIP trust. How's that? Wouldn't the executor elect against the marital deduction so that the entire QTIP is treated as if it subject to estate tax this year? He would if he could, I suppose, but without the need to file Form 706, there's no way to communicate the election to the IRS.
There's been no guidance from the Service on this problem as yet.
Though the investment returns enjoyed by wealthy investors in Europe and elsewhere have dropped, the charges and fees levied by their investment advisers have not. So reports the Financial Times:
An “unsustainable” 40 per cent of wealthy investors’ expected portfolio returns are being swallowed up by fees and other charges, according to research by Royal Bank of Scotland.Do wealthy U.S. investors also have reason to feel overcharged?
European private banks and other wealth managers have maintained their cost base over the past two years, despite plunging investment returns and declining assets under management, RBS found, eroding returns for their clients.
I have given deep thought of how to protect one’s self from poverty in old age but have never found a solution. When I get an idea and analyse it thoroughly, I always find so many things can happen: The banks fail; insurance companies go on the blink; money is apt to be depreciated; stocks and bonds go to nothing; property values go so low you permit the state to sell it for delinquent taxes; nothing is certain but death.H/T to Randy Cassingham's This is True for calling attention to Letters of Note.
Monday, September 27, 2010
What about a gridlocked Congress, such as we may enjoy next year? Nope. Since 1926, according to research cited by Jeff Sommer in the NY Times, during periods when neither party controlled the White House and both chambers of Congress, stocks returned about 7 percent annually. When one party was in full control, the annualized return was significantly higher: 12 percent.
Nevertheless, market timers have a good reason to keep an eye on Congress:
Oddly enough, while the data doesn’t support the idea that gridlock is beneficial, it does show that stocks fare better when Congress is out of session….
The researchers found that more than 90 percent of the price gains over the 108-year life of the Dow Jones industrial average through 2006 came on days when Congress was out of session. And in periods when polls showed that Congress was least popular, this “Congressional effect” was most pronounced.
“Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”
- Mark Twain, a Biography
Friday, September 24, 2010
Over the last ten years, Yale's return did beat Harvard's. But both schools, and a number of others, suffered liquidity problems as a result of an increasing emphasis on alternative investments –timber, oil, real estate, private equity, etc.
Bloomberg Businessweek reports that cash shortages led to unprecedented borrowing:
Harvard University, Yale University and Stanford University, with combined endowments about equal to the gross domestic product of Lithuania, are among 15 of the wealthiest colleges and universities that borrowed $7.2 billion because their highbrow investing left them suddenly strapped for cash.
My view is that this is the worst of all possible worlds. Charles Grassley's comment is apt: " . . . uncertainty is terrible for the economy. Small businesses don't hire people while they sit in limbo, wondering if they'll get hit with a tax increase." Leaving the $4 trillion sword of Damocles over the head of the American taxpayer seems like odd political strategy for any incumbent.
My understanding is that the call to extend all the Bush tax cuts implicitly includes repealing the estate tax. Has anyone seen something to contradict that?
Thursday, September 23, 2010
Wednesday, September 22, 2010
Tuesday, September 21, 2010
Monday, September 20, 2010
Aren't we lucky to have a real estate bust?
Barron's highlights the advantages of giving the younger generation a residence via a qualified personal residence trust or a limited family partnership: Pass Along Your Real Estate Now.
(Note: I'm not a Barron's subscriber, but when I googled qperts, Google gave me access to the article.)
If Google is equally generous to you, see also the sidebar on the outlook for estate tax legislation. Will something happen after the election? Early next year? Either way, action is likely to be paired with the income tax fix:
"The normal thought process on Capitol Hill is that the more pieces in the package, the more likely you can give a little here and take a little there and hit a sweet spot," says George K. Yin, tax professor at the University of Virginia School of Law. With the estate tax in the mix, he says, there may be more flexibility to reach a compromise. Let the political see-sawing begin.Take time also to appreciate how an illustration can enliven even the subject of death and taxes. Of course, the retro artwork is by Picasso:
No, not that Picasso. This Picasso.
Thursday, September 16, 2010
Jacobs' list of estate planning moves to consider in the meantime include
Life insurance trusts funded with new, temporary term policies. Purpose: to cover added estate tax on those who die "too soon" in 2011.
Grantor Retained Annuity Trusts. GRATs remain a good deal thanks to low interest rates, and the short-term variety aren't likely to be available long.
Wednesday, September 15, 2010
Well, of course. Those clueless investors have never met a "broker." All they encounter at wire-house offices are "financial advisers."
See the comment from CA Adviser appended to the above article. I tend to agree. The effort to turn brokers into fiduciaries is probably misguided:
[T]hey should focus on real reform. Stop the obfuscation, stop the total lack of disclosure, stop the misleading titles given to sales personnel….Related post: Dogs and Cats, Fiduciaries and Brokers.
There is nothing wrong with being a salesman, it's just time to call salesmen, "salesmen" again, that's all.
Tuesday, September 14, 2010
There's a big to-do going on about extending the Bush tax cuts. Politicians seem to think that extending those tax cuts for the middle class will have the same effect as a new tax cut. I don't think so. If my taxes fail to go up, but only stay the same compared to my baseline, I'm not going to feel any richer.
How can we solve this problem? By letting all the tax cuts expire, just as we let the estate tax expire, and let everyone feel some pain in January. Then reenact the Bush tax cuts, say in March or so, prospectively only. That way we get three months of "enhanced revenue" (another term from the Reagan years, I think) followed by genuine relief when taxes go back down.
Could it happen? "The beatings will continue until morale improves."
I'm not sure what the point is. Yes, it passes constitutional muster. No, large estates are unlikely to choose a 45% estate tax over a 15% or even 20% capital gains tax. This seems to be simply a way to let estates under $3.5 million off the income tax hook. It can't possibly be scored to raise any revenue, taxpayers are not quite that stupid.
I guess it would increase billings for estate planners, though.
Monday, September 13, 2010
Other financial professionals were a bit happier, especially insurance brokers. After five years on the job, portfolio managers and actuaries hauled in the highest pay.
Overall, the job most likely to make one happy is software quality assurance manager. The least likely? Assisted living administrator. That job that did not push the satisfaction-index arrow off zero.
Sunday, September 12, 2010
Apparently, it does.
Here's the key quote:
In recent days, Mr. Boehner has called for extending all of the Bush tax cuts for two years and freezing government spending at 2008 levels. In addition to the lower marginal income tax rates, aides said that Mr. Boehner would like to continue the current moratorium on the federal estate tax, which is also due to expire on Dec. 31.
Herman thinks the federal estate tax might be revived at year end, in a lame-duck session of Congress. Then again, maybe not.
Q: What is your gut feeling on what is going to happen to the estate-tax law for 2011?—S.M., Yorba Linda, Calif.
A: The murky outlook for the estate tax has grown even more murky lately.
The situation reminds me of an old Washington quip: On the surface, very little is happening. But beneath the surface, nothing is happening.
Saturday, September 11, 2010
While some investment managers worry about deflation, plenty of prices keep rising. Recent example from Bloomberg Business Week: tickets to home football games at Ohio State. Last year's average cost: $319. This year, $523.67.
Friday, September 10, 2010
In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent, according to the Congressional Budget Office. By Reagan's last year in office it was 32.2 percent. From 1989 to 2005 (the last year for which data are available), as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most years it remained in the low 30s, surging to 41 during Clinton's first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent.
Thursday, September 09, 2010
Rock-bottom returns on bonds and bank deposits have left many retirees with little choice but to spend down principal. About all wealth managers can do is to recommend an orderly approach – better to lose a little each year rather than reach for high yield by investing in shaky IOUs or outright scams that result in larger losses. (Adv.: One of the most helpful publications I've seen on the subject is Merrill Anderson's Managing Your Assets in Unsettled Times.)
Back in the late 1970's, retirees saw their nest eggs down-sized by double-digit inflation. (See the graph in the U.S. Trust ad below.) Now they must spend down their assets because government policy penalizes savers by giving borrowers a nearly free ride.
Weren't we all supposed to be deleveraging?
Wednesday, September 08, 2010
Check out the graph to be reminded of the lousy investment climate that prevailed in the late 1970s. The S&P kept slipping sideways while inflation – and oil prices –soared.
Does he mean to freeze the federal estate tax at zero for two years also?
I haven't found an answer, and I doubt that is his intention—but I've learned to never say never. According to this item Boehner will be coming out with a "flat tax" with just two brackets. The estate tax is not mentioned.
Tuesday, September 07, 2010
One item puzzles me. The initial "cost" of the proposal is listed as $100 billion for the extra tax deductions. However, the ten-year cost is only $30 billion, because the purchases would have been fully depreciated anyway. Why isn't the ten-year cost then zero? Because of the time value of money? But at today's interest rates, the time value of money really isn't that large, is it?
And wouldn't the additional economic activity swamp the "cost" with new tax revenue?
Sunday, September 05, 2010
I suspect that this is the beginning of wisdom, or it could be. So what does it mean that it appears in the Times?
Friday, September 03, 2010
Wednesday, September 01, 2010
As this NY Times story explains, players ease up on their second serve because a double fault would instantly lose the point. They're taught to "get the ball in play" and hope for the best. Problem: Many opponents seem to return a second serve faster than it arrives. Result, the server loses about half his second-serve points.
Broadly speaking, tennis players prefer to defer risk of loss, even though it is not to their long-term advantage. See any investment parallels?
And sometimes investing is like driving on a congested interstate highway. Frequent lane-changers think they're switching into a faster-moving line of traffic. A study by Dr. Donald A. Redelmeier found that drivers' perceptions are often wrong. All the lane-changers accomplish is a tripling of their risk of an accident. Know a few stock or commodity traders who fill that bill?
See Think the Answer's Clear?