Happy New Tax Year!

If this evening's agreement gains approval by the Senate and House, estates of $5 million or less will continue to avoid federal estate tax, though larger estates will face a 40% tax rate.

More good news: the annually-threatened imposition of the Alternative Minimum Tax on ordinary taxpayers will be fixed "permanently."

Not so good news for high-income taxpayers: a higher tax rate for couples with incomes over $450,000, a phase-out of deductions for those with incomes over $300,000.

Meanwhile, pending Congressional action, off the fiscal cliff we fall. The New York Times came up with this icon for the occasion.

Estate Tax Debate Goes Down to the Wire

Representative Lynn Jenkins (R), December 20:

Growing up on a Kansas dairy farm, I know the estate tax is a threat to family farms. This tax makes bailing hay and shoveling manure sound like a get-rich-quick scheme, when most family farms make an average of $45,000 a year. Raising the estate tax to 55 percent and dropping the exemption to $1 million might be feasible for a hedge fund manager, but it will jeopardize the future of farmers and their families….

Senator Richard Durbin (D), December 30:

I am troubled by the notion we are somehow going to give [an estate tax] break to some 6,000 very fortunate Americans and incur a new [sic] expense for our Federal Government of some $130 billion or $140 billion in the process. What are we thinking? *** I hope we aren't forced into any agreement that includes it, although I stand here knowing full well if there is an ultimate compromise, there will be parts of it I find disgusting and reprehensible which I may have to swallow….

Care to pick a winner?

We're going over the cliff!

Earlier I mentioned that the only possible way to avoid the fiscal cliff over a very short time frame was for the House to pass S. 3412, which already passed the Senate last July. It provides a one-year extension of the status quo, plus an AMT adjustment for 2012.

Today I learned from Tax Notes that such a path is technically impossible, because Majority Leader Reid never sent the paperwork to the House!  Plus, there's that irritating constitutional requirement that tax legislation originate in the House.  Usually some shell legislation is used to get around that, but that apparently wasn't done for S. 3412.

So, the only remaining path is identical legislation that has been brought to the House Ways and Means Committee.  Evidently, if the House will pass that, the Senate will be available to re-pass it.

It would be another kick of the can down the road.  My feeling is that both sides want to go over the cliff, if only they can be confident that the other side gets the blame.

Is it "Throw Grandma From the Train" time again?

There was much speculation in 2010 that, in the absence of estate tax reform, there would be an uptick in deaths among the wealthy elderly simply to avoid estate taxes. 

Absurd? CNBC has collected some relevant facts on elasticity in dates of birth and death.

By keeping hope for estate tax reform alive until the end of the year, I suspect the problem has been avoided. Had Congress reached an agreement in November to, for example, reduce the federal estate tax exemption dramatically on January 1, perhaps the decisions to withdraw life support might have been accelerated for some families. 

We've known the cliff was coming for two years, but I never believed we'd actually go over it.

State death taxes are about to be resurrected

Fewer than half the states impose death taxes this year.  The decline of state death taxes began with the elimination of the federal estate tax credit for payment of state death taxes, phasing out after 2001.

Please note that I am not making a political statement when I use the politically charged term "state death taxes."  That was what the tax code called the credit, it didn't come from an anti-tax focus group.

When the credit was converted to a deduction, the impact on taxable estates was nominal. But the impact on states was huge, because they could no longer impose the "mop-up" version of a state estate tax, linking their death tax measurement to the federal credit.  Some states thus lost the ability to impose a death tax, based upon state constitutions, and others gave it up voluntarily.  In the larger scheme, this was a revenue grab by the feds from the states, and it worked.

When the Bush tax cuts expire, as they surely will, the deduction for state death taxes will go back to being a credit.  Most states may be expected to restore their death taxes.   Conveniently, the federal exemption of $1 million matches the exemption of many of the states that had decoupled from the federal system to preserve their own death taxes.

Apparently, California is already counting on this new revenue source.  Makes me suspicious.  I wonder if anyone was ever really serious about avoiding the fiscal cliff? Maybe both sides really wanted to go over it, which is why all the jockeying is about who gets the blame?

The Hardest Time to Invest

Disaster struck at 6:11 p.m. EST today – the world did not end. Skittish investors were left to face a looming fiscal cliff, a dysfunctional federal government. Surely this must be the hardest time to invest.

Yes, it is. It always is.

In this classic U.S. Trust ad from the December 29, 1962 issue of The New Yorker, the founder of the Merrill Anderson Company stated an eternal truth:

Investment decisions are always difficult, but always necessary.

Whither the Estate Tax?

The President and the Republicans may be nearing a deal to avert a plunge off the fiscal cliff. Any guesses about what next year's federal estate tax will look like? The President has proposed a $3.5 million exemption and a 45 percent tax rate.

Republicans, if they can't have no death tax at all, want a higher exemption and a lower tax rate. So do some Democrats, especially from farm states. Although housing prices slumped and in some places crashed during the Great Recession, agricultural land prices have kept rising. "Land selling for $1,000 an acre five years ago may now be worth five or 10 times that amount," notes The Modesto Bee.

Most recent support for a much harsher estate tax comes from a group of rich business notables. They see our nation's fiscal instability as a greater threat to wealth than taxation.

Actually, billionaires don't have to worry much about estate tax, unless they own one of the very largest family businesses. Usually a $4-billion family can get along just fine on $2 billion.

For background, see this history of the federal estate tax. One table, reproduced below, shows the remarkable ups and downs in both rates and exemption level from 1915 to 2007. (In 2010, of course, rates and exemptions reached their irreducible minimum: zero.)

Click for larger image.

Santa Money

Once upon a time, Americans used more than 8,000 kinds of money. Any bank could issue notes. One $5 example from the 1880s just sold at auction for over $100,000. 

This Huff Post item links to a wild and crazy slide show of old currency, including the Confederate variety. Check out this Howard Bank note with a vignette of Santa Claus. 

The Muni Bond Loophole

You know that a tax preference is in trouble when it begins to be labeled a "loophole" in the popular press.  The tax freedom for municipal bond interest is starting to get that treatment.  See this, for example.

Personally, I think that eliminating the tax freedom for all future muni bonds is a great idea.  Of course, the value of existing tax-free bonds will then zoom, so there would be some windfall profits. That's the transition price to pay.

Meet the IMWIs

The Telegraph calls attention to a survey of "Internationally Mobile Wealthy Individuals." Real estate is a favored investment, especially among those based in the Asia-Pacific region. U.S. and Canadian millionaires who spend more than half their time outside their home country are more likely to favor stocks, less likely to own three or more homes.

More data from the survey here.

Quality is recognized

Professor Gerry Beyer's estate planning blog is having stunning success.  Visitors and page views are up over 20% in the last quarter, and his is the 20th most popular law professor blog in the country.  (Only those who have site meters are included in the survey.) 

Professor Beyer's blog is well worth your time, which is why we keep a permanent link to it in our template. He's also an occasional contributor to our Estate Planning Studies. 

S. 3412

Following up on this post, the bill the Senate approved is S. 3412.  It passed the Senate 51-48.  Interesting that the Republicans neglected to filibuster it.  To correct my earlier post, it won't need to be taken up by the Senate if the House doesn't change it, it will go straight to the President.

That's the outcome I now expect.

To answer the lingering question in that earlier post, S. 3412 does include the AMT patch.  That bolsters the odds that this is the legislation that will be enacted.  I've read that a retroactive AMT fix, after the new year begins, is theoretically possible but inevitably would delay refunds even more.  It's a bad, bad idea.

More info on S. 3412 is found here.

I've read the entire bill, which is quite short.  But it's written in legislative bafflegab, as amendments to prior legislation, so the meaning is hard to ferret out.  Specifically, I'm unclear on what happens to the estate tax, which is not directly mentioned.

In any event, passage of this bill would mean we get to do this all over again next year, as it is for 2013 only. Theoretically, the idea seems to be that tax reform will really, really, finally, be attended to next year.

Want to restore economic growth? Go back to the bipartisan 1986 tax reform act, and you'll get your economic growth back.

Brubeck and Desmond: the "Take Five" Bequest

Dave Brubeck and Paul Desmond,
October 8, 1954

Dave Brubeck's most memorable hit was"Take Five." Taylor Ho Bynum reminds us that the tune became a significant charitable bequest.

...like the partnership between Duke Ellington and Billy Strayhorn, [the collaboration between Dave Brubeck and Paul Desmond] was a relationship of matched brilliance. And like Ellington’s “Take the A Train,” actually penned by Strayhorn, Brubeck’s signature tune “Take Five” was composed by Desmond.

In the month post-Sandy, we should also remember that when Desmond died, in 1977, he bequeathed the royalties to “Take Five” to the American Red Cross, bringing the organization close to six million dollars. With that composition sure to receive a flurry of performances after Brubeck’s death, it will likely bring in tens of thousands of dollars more to disaster relief at a time when it is sorely needed.

"Have I Got a Hedge Fund For You!"

At Dealbook Jesse Eisinger takes a few playful pokes at the proposed lifting of restrictions on advertising hedge funds.

The rules haven’t been completed, but we can look forward to an ad featuring a wizened couple in matching tubs overlooking a sunset, holding hands and talking about how they just put money with the next George Soros.

Once deluxe investments for university endowments and wealthy individuals, hedge funds have found their way into the portfolios of less sophisticated institutional investors. Now they're poised to target the millionaire next door.

Will the effort further dim their cachet in the high-net-worth market? Eisinger thinks so: 

"If Groucho Marx were alive today, he'd say that he would never want to invest in a hedge fund that would have him as a limited partner."

End game

I don't think that the tax negotiations will end well this year.

Two years ago, the historic compromise was reached by December 6, and we started to blog about it here.    The legislative process was completed in just 11 days, by December 17, showing just how fast Congress can act when Christmas is coming.

No signs of compromise at all this year.  I just don't see how anything can be drafted by year end.

However, apparently the Senate produced legislation last summer to implement an extension of the Bush tax cuts to the bottom 98%.  It didn't have anything on the payroll tax holiday, the debt ceiling, or unemployment benefits.

ABC News reports on a "doomsday plan" by the House Republicans to bring that Senate legislation to the floor.  It does what Obama and the Democrats claim that they want.  Bringing it to the floor "releases the hostage" of the middle class tax cuts.  All Republicans would vote "present," so the bill would pass.  In the minds of Republicans, failing to stop a tax increase is different from voting for one.  I don't see the practical distinction myself.  But at least they could no longer be blamed for allowing the tax increases on the middle class, which is the corner that the Democrats backed them into.

Would the Senate bring it up? Would the President sign it?  It looks to me as if a surprising number of Democrats prefer to go over the cliff instead.

I haven't found the bill yet.  My question, did it include the inflation adjustment for the 2012 AMT?

Tax Notes reports that the IRS has already programmed their computers for another inflation patch to the AMT, assuming that Congress would never let that expire.  Some tax failures can be retroactively fixed, like the lapsed estate tax, but not this.  Per Tax Notes, failure to patch the AMT now will do much more than impose the tax on many more taxpayers, it will also delay tax refunds for everyone else by six weeks or so.  That delayed cash flow alone could have negative economic fallout.

If that Senate bill includes the 2012 AMT patch, I believe that the Senate would act and President Obama would sign it.  But that has to be concluded by December 17, when he leaves for Hawaii for the holidays.  I suppose that they could have a signing ceremony out there.

Final note.  This has been a titanic struggle just to leave the tax code unchanged.  Tax cuts have contributed to an economic bounce in the past.  Leaving the tax code unchanged has not.  Although the media talks about middle class tax cuts, no one will see lower taxes next year under any scenario.  Dodging a scheduled tax increase just doesn't excite the animal spirits the way ERTA did back in 1981.

Estate Planning Boom Ahead?

The President's proposal to cut the amount exempted from federal estate tax from about $5 million to $3.5 million could double the number of estates exposed to tax. Result, a surge in the number of families needing tax-effecient estate plans.

A few Democrats, including Senate Finance Committee Chairman Max Baucus, favor keeping the higher exemption. Which way do you think Congress will lean?

Jeremy Siegel, Stock Market Pessimist

Happened on Jim Gust's July, 2010 post. He noted that Jeremy Siegel believed stocks were undervalued by 25-30%. Jim seemed dubious, and rightly so. The S&P 500 is not up 25-30% since the start of July, 2010.

 As of November 30, it's up 37%.

Getting a Man's Nest Egg With a Gun

Chase Manhattan's legendary nest-egg ads of the 1950's and 1960's usually featured manly pursuits – sailing, fishing…and, of course, shooting. See examples picturing men with guns here, here and here.

This ad from December, 1962 also shows a man with a gun – except that a Purdey shotgun or rifle is a gun only in the sense that a $60,000 Swiss chronometer is a wristwatch. Purdey provides sporting weaponry to The Queen, The Duke of Edinburgh and The Prince of Wales. One of their shotguns could set you back $100,000 or more.

James Purdey and Sons is now owned by Richemont, a Swiss luxury goods holding company. Richemont also owns several watchmakers.

Should a Bank Join the Occupy Wall Street Movement?

Probably not. See Danske Bank pulls #occupy image from ad campaign.

Full Frontal Inheritance?

From a post on Wills, Trusts & Estates Prof Blog:

The collaborative process is less time-consuming, less expensive and less confrontational than a traditional adversarial case. It is especially effective in disputes where monty is not the sole issue.

Apologies to Gerry Beyer. Couldn't resist chuckling at the typo because earlier this year I attended an excellent production of the musical. One of our daughters played in the pit band.

Drought Hits Christmas Price Index

The West Coast may be awash now, but soaring feed costs caused by this year's lack of rain have made Christmas birds expensive. Swans: up 11%. Geese: up almost 30%.

For the price performance of other gifts listed in The Twelve Days of Christmas, see PNC's Christmas Price Index.

If a $65-million Painting Cannot be Sold . . .

. . . what is the painting's taxable value in an art dealer's estate?

In the case of Robert Rauschenberg's "Canyon,"zero.

However, the newly announced settlement with the IRS requires the art dealer's heirs to "donate 'Canyon' to a museum where it would be publicly exhibited and claim no tax deduction."

The lucky museum? The Museum of Modern Art, which agreed to add the name of dealer, Ileana Sonnabend, to the list of the museum's founders. 

Her heirs had been threatened with an IRS claim of $29.2 million in estate tax plus $11.7 million in penalties.

What Each Generation of Investors Needs to Learn

Cleaned out an old file drawer and found this 1988 postcard, produced by The Merrill Anderson Company for a marketing campaign. The point of the campaign is long forgotten. The message rings true as ever. 

A new tax bubble?

One idea reportedly being floated in DC is to hold the top rate at 35%, but tax the "rich" at a flat rate of 35%, so they don't get the benefit of the lower tax brackets.  Sound like a win for both sides?

Personally, I hate the idea.  It makes the tax code less transparent, or as I would put it, more dishonest. To implement this idea you have to add hidden, temporary tax brackets above the 35% tax rate.  These are known as "tax bubbles."

Nate Silver does a good job of explaining the mechanics, and if you read it, I think you'll agree with me. 

The more I think about it, the more I like the new Buffett proposal.  It actually applies to those who are making the most money, unlike the tax bubbles.  I don't think it would raise much money, or close the deficit, but it could allow the political focus to shift to getting spending under control.

Here's another great idea: a lifetime cap on the charitable deduction of $1 million.  I resent how Buffett has all these recommendation for everyone else's taxes, while he's sheltered his huge fortune from participation.  His philanthropy ought to be as nondeductible as my purchases of food and fuel.

Even better, eliminate the charitable deduction entirely, and end the nonprofit status of rich foundations and endowments.  I'll know that the politicians are serious about taxing the truly rich when they move in this direction.

Taxing Those Who Like to Pay Tax

Jim Gust calls the proposed AMT for the rich "sensible-seeming" but fails to mention the sheer genius of Warren Buffet's idea.

Most of us don't like to pay income tax. Most of us sure don't want to pay more income tax. Most, but not all.

Among those labelled "rich," more and more wealth holders have gone to considerable trouble to pay significantly more income tax than required. You know them as creators of I Dig It Trusts. (With these trusts, basically Dad moves income-producing assets into a trust for the kids but continues to pay tax on the income flow.)

Raising taxes on those who already volunteer to pay more! How can you improve on that?

The reality, of course, would be more complicated. As Jim notes, those harvesting millions in interest from tax-exempt bonds might escape such an AMT, although adjustments could be made. Buffet's proposal would hit heavily the top 400, generally taxpayers who realize once-in-a-lifetime capital gains. Do they deserve the same tax treatment as corporate big-shots who, year after year, "earn" fifty times as much as their rank-and-file employees?

An actual AMT for the rich?

In today's NYTimes Warren Buffett proposes a sensible-seeming idea, a minimum income tax on income in excess of $1 million. See here.  He wants a 30% tax on $1 million to $10 million, and a 35% flat tax on all income over $10 million.  Buffett claims that such a tax will have zero impact on the investment decisions of the rich.  In today's ultra-low interest rate environment, he may have a point.

As background, keep in mind that the current AMT is not, in general, paid by the rich, because for the most part their ordinary tax rates come in higher than the AMT rates.  The real AMT target is the merely affluent, mostly those families who live in the high-cost, high-tax blue states.  It's their above-average use of deductions that push them into the arms of the AMT.

Buffett's proposal would be a meaningful tax hike at the high end, but there is a dog not barking in his op-ed.  He implies that the highest-income taxpayers enjoy low rates because they don't top out at 39.6% instead of 35%, and because they take advantage of the 15% rate on long-term capital gains.

Warren completely ignores the role of tax-free muni bond income in this equation.   For his 35% minimum tax to have any meaning at all, muni bond income needs to be fully taxed, at that 35% rate.  Otherwise, this is just a lot of smoke.

I, for one, welcome the full taxation of muni bonds, even though I own some and would be hurt by the change.

A Thanksgiving Thought

Six years ago we posted a Thanksgiving commentary from Ben Pease of TD Bank. This excerpt bears repeating:

We have a meaningful - if not somewhat tormenting - tradition at my home on Thanksgiving Day. As the food hits the table and our stomachs are growling in anticipation, we pause for a few moments to allow each person to declare what they have been thankful for over the past year. Generally, it includes things such as appreciation for family, new children, a promotion or a newfound relationship. I can't remember a time when I've heard someone say they were thankful for the recent bond rally, the FOMC decision, or XYZ finally beating analyst estimates. It is interesting, in this age of long hours and long days; the most valuable things in life are still free. Have a wonderful Thanksgiving. . . .

Happy Thanksgiving to All!

Capital Gains: A Great Unlocking

Fifty years ago, when The Merrill Anderson Company created this ad, federal income tax on long-term capital gain was levied at the rate of 25 percent. Coaxing investors to sell was difficult.

This year could be the last for paying tax on stock profits at 15 percent. (That's 15 percent at the Mitt-Romney income level. Lesser mortals have paid much more.) As a result, The New York Times reports, we're experiencing a Great Unlocking – a stampede to take profits that's reminiscent of the Reagan years:

[S]ome experts expect a substantial bump in tax collections in the short term as investors take a multitude of steps now that they would have taken in future years. After the top tax rate on capital gains rose to 28 percent from 20 percent at the end of 1986, federal receipts from such gains doubled to $52.9 billion in 1987, as sales surged at the end of the previous tax year.

Maybe our much-maligned U.S. Congress deserves a little respect for cutting the deficit by cliff-hanging.

Is Art the New Gold?

Christie's auction of contemporary art drew spirited bidding, much of it from foreign buyers said to be seeking a safe haven for their surplus wealth.

Buyers will be happy indeed if they fare as well as the seller of this Warhol:

Six people fought for the Pop artist’s 1966 image of a sexy Marlon Brando leaning on his motorcycle’s handlebars, which was being sold by Donald L. Bryant Jr., a New York businessman. Mr. Bryant had bought the painting at Christie’s in 2003 for $5 million. On Wednesday it…ended up making $20.1 million or $23.7 million with fees.

Wealth and Worry

From The WSJ's Total Return blog:

Raising the bar. The threshold for "high net worth" is now $5 million.

Worry, worry, worry. A State Street Center for Applied Research survey finds, "investors don’t trust advisers, money managers don’t trust brokers and exchanges, regulators doubt their ability to police the markets, everyone thinks policymakers are incorrigible bumblers…."

Investment Ads From 1962

James Bond isn't what he was when Sean Connery debuted in "Doctor No." Neither is the world of investing. From the same 1962 issue of The New Yorker in which Geoffrey Hellman reported on his two-martini lunch with Ian Fleming, here are three ads.

Forecasting is tricky. Fifty years ago growth stocks had become the way to go. Even bond-heavy pension funds started buying them. But, then and now, picking stocks that actually grow isn't easy. Here, Shearson suggests it's like weather forecasting.

To our knowledge this Merrill Lynch column is the only brokerage ad extant that begins with Xerxes crossing the Hellespont.

"The stock market is a little like the Hellespont. Cursing and cajoling has no effect on it at all. Neither does propitiation. But the practical man who accepts its changeable nature and plans accordingly can be its master. Just as a general should read weather reports, an investor should read the financial pages of his newspaper, which are the weather reports of the stock market. *** The stock market is always subject to change without notice. That is its nature – and its fascination."                                                            

Over the past half century weather forecasting has improved by leaps and bounds. Stock-market forecasting, not so much.

The woman investor. Not a call center in sight when City ran this ad set in India.  The ad was cutting edge in one respect: The American couple have his and hers investment accounts.

" His is a portfolio earmarked for growth – composed chiefly of aggressive, common stocks with promise of a dynamic future. Hers is a more conservative program, planned for stability and made up of both stocks and bonds."

In reality, both probably shared the same investment goals. But in 1962, only the man was expected to have enough earning power to make up for serious investment losses.  The woman would have to type her way back up. 

These days? Thanks to strategic asset allocation, we all invest like women. 

Ian Fleming, Wealth Manager

1933: You're a well-schooled young Brit (Eton, Sandhurst), covering the Soviet Union for Reuters. The family wants you to get a real job.

Despite the Great Depression, Ian Fleming chose what we call wealth management:

I decided I ought to make some money, and went into the banking and stock-brokerage business– first with Cull & Company and then with Rowe & Pitman. Six years altogether, until the war came along. Those financial firms are tremendous clubs, and great fun, but I never could figure out what a sixty-fourth of a point was.

Geoffrey Hellman of The New Yorker gathered that quote in 1962, at a two-martini lunch with Fleming. The interview is summarized here, in honor of the fiftieth anniversary of the first James Bond movie.

Like most English-speaking persons of note, Fleming was a Scot, grandson of Robert Fleming, founder of Flemings. A few years before its decline and acquisition by Chase in 2000, Robert Fleming & Co. operated in 44 countries in Asia, Eastern Europe, the Americas and Africa.

Where Most Pentamillionaires Don't Go . . . Yet

Most pentamillionaires – more than two out of three – never use YouTube, according to the Spectrem survey mentioned in this WSJ story. Those with $5 million or more who do use the video site are likely to be under age 44.

Nevertheless, plenty of mere millionaires and mass-affluents must be users. So some advisers and planners have started prospecting on YouTube. Good idea?

That depends. A cursory survey suggests that YouTube's wealth-management videos range from surprisingly good to painfully embarrassing.

Best are the few that are professionally produced and content rich. Far more common are routine promotional videos, many virtually interchangeable and lacking the tone likely to appeal to the $5-million-and-up market A few are so amateurish they remind you of SNL parodies. You feel sorry for the poor souls who exposed themselves to public view.

Bottom line: Aim high and seek professional help if you seek to market yourself on YouTube. You probably can't produce something comparable to a Warren Buffett monologue or a TED lecture, but you'll be competing on the same playing field.

The Great Middle-Class Tax Hike

From today's Washington Post:

Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year. Because those people have never paid the AMT, they have no idea they are in its crosshairs . . . . 

Birth of the Estate Tax

Gotta love the Internet. Media Decoder at The New York Times asked which deceased magazines people missed, which led an old timer to mention The Saturday Evening Post, which led to another comment asserting that the Post was still alive, sort of. 

Sure enough, besides  a smattering of current articles, the Post web site offers selections from the magazine's archives. And not just the Norman-Rockwell-era archives. Remember, the publication was founded by Ben Franklin. From 1906 comes Swollen Fortunes, an appreciation of Teddy Roosevelt's eagerness to tax the One Percent. The article's author, David Graham Phillips, sums up Teddy's crusade:

What is our problem of concentrated wealth? Mr. Roosevelt has compacted the whole of it . . .

First – Enormous, swollen fortunes.

Second – The use of those fortunes to narrow independent opportunity, to monopolize industry, to raise prices and lower income, to manufacture a few thousand millions out of millions of men and a few billionaires out of the millionaires.

Third – The use of those fortunes to control political machinery and, so, both the making and the administration of the law. . . .

Any resemblance between the early 20th and early 21st centuries is, of course, purely coincidental.

“Rich” – Hard to Define But Always Interesting

You become "rich" when you have enough money. But how many dollars are enough?

A couple of million, carefully invested, might generate something like the median family income. But a median income won't allow you to live rich.

Ten million is sometimes termed "entry-level rich." All but the most exclusive trust companies or multifamily offices will let you in the door.

Thirty million, the threshold of Ultra High Net Worth, is probably about the level where you can start to live rich. Still, much depends on whether you're living it up in your Midwest hometown or a town house near Central Park.

The ambiguity of "rich" helps explain its popular appeal. If this blog wants to attract more readers, for example, we should use "rich" in the headlines of our posts. See Deborah Jacobs:

Superman Quits Day Job To Become Blogger; Three Things He (And Other New Bloggers) Need To Know

OK, we used "rich" in a headline. According to Jacobs, we'd be smart to use "Apple" next.

What do you think? Is Apple's new iPad Mini overpriced at $329?

1962: Three Ads and a Little History

Fifty years ago, the chauffeur wore gloves, even in Florida:

Also from 1962, a Chase nest egg ad I don't remember. If the ad didn't run much, perhaps it's because it could be entitled "The loneliness of the long-distance target shooter."

Finally, this 1962 ad, unrelated to banks and trust companies but relevant to our times.  The United States Lines was battling the competition from transatlantic jet service. (They lost.)  Featured is the family of John Frair, "returning from a military mission in Iran." At a guess, he had been training the army of the Shah, who had ruled Iran since the United States deposed Mosaddegh in 1953.

Douglas MacArthur II, shown at lower left in the ad, was the nephew of the Old Soldier. He was enjoying a posting in Belgium after a tough job as ambassador to Japan.

After leaving Belgium for assignments in Washington and Austria, MacArthur became the American ambassador to Iran in 1969, serving until 1972. Six years later, a revolution deposed the Shah and brought Ayatollah Ruhollah Khomeini back from exile.

The reverberations continue to be felt today.

Elder Abuse for the Man Who Once Ran Salomon Brothers?

At 98, William Salomon still goes to the office provided him by Citigroup. (Sandy Weill acquired Salomon Brothers along with Travelers as he built his universal bank.)

With the office came a secretary who kept track of Mr. Salomon's appointments and paid his bills. Karen Febles is now accused of embezzling almost $2 million from her boss. Apparently the thefts began around 2008, the year that Salomon's wife of more than 70 years died.

Secretaries, it seems, aren't as faithful as they used to be. But then, Wall Street isn't what it used to be, as Mr. Salomon lamented in 1991:

“In my time, the customer was God and we would no more take advantage of him than we’d fly out the window."

Why the Market Tanked 25 Years Ago

Oldtimers remember "portfolio insurance." One of them, Floyd Norris, explains how an earlier generation of computers took the concept and ran with it, raising havoc on October 19th, 1987. With program trading, you needn't need an economic downturn to make the stock market crash.

After reading the article, you can resume worrying about today's  high-frequency trading.

Haves and Have Nots, Young Adult Division

Haves. Managers of family investments are Courting the Next Generation of the Rich. Business retention is the motive.

 Success may be limited – sticking with your parents' investment people is seldom cool. The programs do provide some financial education. Also, participants welcome the opportunity to network with their peers.

Have nots. Two-thirds of college seniors in the class of 2011 graduated with student loan debt, averaging $26,000.

Debt loads varied widely from state to state. Three out of four graduates in New Hampshire owed an average of $32,440. In Utah a majority graduated debt free, and the minority owed an average of $17,227.

Got any good ideas for A) reducing the cost of college or B) increasing the supply of wealthy parents and grandparents?

Worried About High-Frequency Trading?

Maybe you should worry about the decline in high-frequency trading. Felix Salmon explains.

Did you realize that less ice for polar bears portends even faster trading? Give a listen to Salmon's audio essay for the BBC.

Photo via Wikimedia Commons

60% stocks, 40% bonds would have been better

The attempt by college endowments to imitate the investment strategies of Harvard and Yale have not done so well.  Unconventional ideas lose their potency if they become conventional, evidently.  Most shocking bit:

Harvard reported a 0.05 percent loss and a drop in its endowment of over $1 billion in the same period, even as a simple Standard & Poor’s 500-stock index fund gained about 5.5 percent. Harvard’s endowment decline is more than the entire endowments of roughly 90 percent of all colleges and universities.

How much is enough for Harvard?

A “Grossly Negligent and Reckless” Trustee

Jamie Dimon did not enjoy today's New York Times.

On the front page JPMorgan's CEO was greeted with a story on emerging criminal prosecutions, focused on traders associated with Morgan's infamous London Whale and his $6-billion trading loss.

The business section was just as depressing: JPMorgan Told to Pay $18 Million to a Trust.

The trust case concerns an oil heiress with lots of Exxon Mobil stock and the trustee's use of a complex investment product, designed to cash in on appreciated shares without triggering tax on capital gain.

Judge Linda G. Morrissey of the Tulsa County District Court in Oklahoma said that the bank had breached a series of fiduciary duties in its handling of the trust of Carolyn S. Burford, an oil heiress who died in 1996. The court also ordered JPMorgan to pay punitive damages, to be set at a later date, along with the trust’s legal fees.

Judge Morrissey concluded that JPMorgan had breached its fiduciary duty in 2000 when it sold what are known as variable prepaid forward contracts to the trust, a complex fee-rich product that the judge determined was unsuitable for the trust.

* * *

The judge found that JPMorgan, which ended up with the account after a series of bank mergers, had not properly explained the product to its client and had failed to disclose that the bank was benefiting from the transaction. The bank also breached its duty when it invested the proceeds of the contracts in its own investment products, which the judge said “amounted to double dipping” that was unreasonable.

Jamie Dimon is widely admired in the financial world, and rightly so. Yet he has to be wondering whether it's possible to build a financial institution that's too big to fail without creating one that's too big to manage.

Old Money Rap, New Money Rap

Who Says Trust Fund Babies Can't Rap? We raised the question six years ago, answering with a link to Tea Partay. That promotional video for Smirnoff, cheerfully mocking the Trust Fund Preppies of Greenwich and The Vineyard, went viral, attracting millions of hits.

Here's a rap video that's attracting hundreds of millions of hits – a dance-crazy salute to the New Money lifestyle in the land of Hyundai and Samsung.

From Korea,  Psy's Gangnam Style.

Psy, a rapper in his mid-thirties, probably thought he was over the hill. Now he's a phenomenon, a worldwide celebrity. Gangnam, the area whose style he raps about, is a modern, flourishing district south of the river in Seoul. Someone has called it Seoul's Beverly Hills.

Why has Gangnam Style attracted hundreds of millions of viewers? Hard to explain, as Scott Adams acknowledges. This blogger's teenage grandson writes: "No mere mortal could have been this clever. I suggest we find the guy who made this and put him in charge of everything."

Psy in Gangnam Style

Korea's New Money is attracting private bankers and wealth managers galore. Citi has had a presence in Korea since the early 1980's. Now it's beefing up marketing efforts directed at Koreans with $1 million and up. 

Next Year's Gift Tax Exclusion, $14,000

This year a gift of as much as $13,000 is  excluded from federal gift tax. Next year, thanks to an inflation adjustment, the annual exclusion rises to $14,000.

Larger gifts require the donor to file a federal gift tax return. Always happens, right?

Not exactly. Uncle Patrick just gave his favorite niece a $18,000 Elantra to drive off to college. Do you expect him to file a return and reduce his Unified Tax Credit by $5,000? (Oct. 3 Correction: Patrick would reduce what amounts to his transfer-tax exemption by $5,000. The UTC itself would shrink by a smaller amount.)

What about that $15,000 watch Aunt Mame just bought for  her favorite nephew? Expect her to knock $2,000 off her lifetime exemption from gift tax?

Donors careless enough to die soon after gift-making may get snared in a tax audit. Otherwise, the exclusion seems based mostly on the honor system. Cheating, mostly unintentional, would be even more widespread were not payments of another person's tuition or medical expenses deemed nongifts.

Out of curiosity, your blogger checked out the annual gift exclusion of eighty years ago. It was $5,000. That was a lot of money in 1932 – over $82,000 in current dollars.

Shouldn't Uncle Patrick be able to buy his niece a Porsche without gift tax worries?

My Memory of “Punch”

I once met Punch Sulzberger, the long-time publisher of The New York Times. It was no big deal. Here's the comment I posted to his obituary.

After getting out the army in the summer of 1956, I worked in market research. One assignment was to call on New York business leaders and ask them how our airline client could improve its printed flight schedules. 

Business big-shots were more accessible in those days, but I struck out at The New York Times. "You cannot go up to the elder Mr. Sulzberger's office," a gatekeeper told me. He gestured down a hall. "Why don't you talk with young Mr. Sulzberger."

I headed toward the back of the ground floor. The office of young Mr. Sulzberger looked like a small storeroom. He received me graciously, answered my questions, and impressed me as a level-headed sort.

In 1963, when fate propelled him into the publisher's position, I had a hunch he'd do better than people expected.

Always nice to be proved right. 

In Two Years, $20 Billion in Investment Fraud!

These are tough times for investors in need of income. One result, a surge in investment fraud and Ponzi schemes. Federal attorneys are fighting back with regional "investment fraud summits."

Nationwide, federal prosecutors looking at investment cases from the last two years identified 500 prosecutions that targeted 800 defendants and involved more than $20 billion in fraud, according to Connecticut U.S. Attorney David Fein. For two recent examples from Connecticut, see here and here.

Income investors who avoid Ponzi schemes by putting their money in dividend-paying stocks aren't necessarily safe. As this NY Times article notes, "the Federal Reserve and other central banks have been flooding the planet with money." A lot of that cash presumably has been sloshing into the stock market. How deep will the Dow dip when it sloshes out again?

Conscientious investment advisers can't always make their clients rich, but often they can keep them from becoming poor.

A 28% Solution

In The New York Times, University of Chicago professor Richard Thaler proposes tax reform from the top down. He'd tax income exceeding $1 million – including dividends and capital gain – at 28 percent, with no deductions. He also proposes dropping the federal estate tax rate to 28 percent, although he would reduce the current exemption as well.

Could taxes really be reformed starting at the top? In the midst of a presidential election featuring a rich guy running against a richer guy, with billionaires throwing money around trying to influence the result, who can say what's possible?

Intentionally Defective Grantor Trust Makes Headlines!

It takes a celebrity – or in this case, a politician – to put sophisticated trust planning in the spotlight. Estate planners, give three cheers for Mitt Romney's "I Dig It" trust.

If the next wave of tax reform axes I Dig It trusts, would the crackdown really "put an end to much of estate planning as we know it"?

Broadway's Biggest Mystery

When clients find equities and bonds boring, advisers may suggest spicing things up with alternative investments: private equity, vintage Aston Martins, one-eighth of a race horse. How about backing a Broadway show?

Amazingly, The New York Times observes, otherwise sane people may think that's a cool idea.

The business of Broadway has always been cloaked in mystery. Most of its 40 theaters are run by three private organizations that operate out of public view. Producers keep deal-making under wraps. The biggest mystery of all is why so many sophisticated investors go along with business-as-usual on Broadway when few shows turn a profit.

The Times article chronicles the troubled effort to bring"Rebecca," a musical that has enjoyed success in Vienna and elsewhere in Europe, to The Big Apple. A scheduled opening last April failed for lack of funding. Miraculously, Paul Abrams, a consultant working out of South Africa, came to the rescue with the promise of $4.5 million. That must have made the show's other investors feel much better.

They don't feel better now. Just before coming up with the money, Mr. Abrams suddenly died. 

Will his estate honor his commitment? Probably not. Turns out there's no evidence of Paul Abram's death and, so far,  little evidence of his existence.

Maybe stocks and bonds aren't so dull.

Private Banks For Name Droppers

Exclusivity. Social status. Along with quality and "overall client experience," those are the criteria Luxury Institute uses to rank the year's top private bank brands. This year's winner, determined by a survey of investors with at least $5 million: Brown Brothers Harriman, followed by Boston Private Bank. Neuberger Berman Private Asset Management and Bessemer Trust.

A year ago different names possessed the snob appeal: Atlantic Trust, Glen Mede Trust and Rockefeller Wealth Management.

(When I was very young, my father used to stop by the Rockefeller office to drop off a bookbinding job or pick up a check. The notion that a family had an office impressed me immensely. In those days the place must have been truly exclusive  – you probably had to marry into it.)

These days, the exclusivity of Rockefeller, Bessemer and other former family offices resides in the eye of the  beholder. Marketingwise, a little snob appeal probably can't hurt. Or could perceived exclusivity impede growth?

Despite their prestige, fiduciary-style wealth managers aren't exactly cornering the high-net-worth market."Morgan Stanley, Merrill Lynch and Wells Fargo are the top three primary wealth managers to the wealthy," Luxury Institute noted last year. More than one third of the multimillionaires surveyed said a full-service broker was their primary adviser.

"The Lifetime Trust"

“ [T]he lifetime trust is an excellent tool to reduce creditor, divorce and death tax concerns while positioning an inheritance to be available to provide for one's heirs for the rest of their lives.”

Unclaimed Inheritances

Kudos to Cleveland's Plain Dealer for setting up a searchable database of unclaimed inheritances  in Cuyahoga County.  Wealth managers in other areas where such data are hard to access might burnish their brand by sponsoring similar sites..

Forget the Rich. Look For “Core Millionaires”

For tips on gaining wealth-management business by coddling folks with $25 million or more, see How Private Banks Are Luring the Super-Rich. Better yet, take a hint from the article and lower your sights:

So-called 'Core Millionaires', with assets of between $1 million and $10 million, generate investment revenue margins on average two to three times higher than their wealthier counterparts, making greater use of more profitable banking and lending products, a survey by McKinsey estimates.

Charitable Bequest Wins, 4-6, 7-5, 6-3, 6-4

What with Andy Murray winning Olympic gold and then the U.S. Open, I missed this Wimbledon story about a charitable bequest.

Nick Newlife

Nick Newlife is variously described as a recluse or shut-in. Like tennis fans everywhere, he was dazzled by young Roger Federer when Roger won his first Wimbledon championship in 2003. Nick wagered that Roger would win seven Wimbledons by 2019. Seven!

Federer had won but six Wimbledon championships when Newlife died in 2009. Nick left his estate – apparently consisting largely of betting slips for future wagers – to the charity Oxfam.

When Federer beat Murray to win Wimbledon again this year, Newlife''s bet, at odds of 66 to one, paid off. Oxfam gets about $158,000 to use for its good works.

Nice going, Roger.

Rich People Thought For the Day

Average people think MONEY is the root of all evil. 

Rich people believe POVERTY is the root of all evil.

– Steve Siebold, as quoted here.

How bad is the newspaper business?

Revenues (inflation adjusted) have fallen back to the level of 1950.  Adding in online revenue makes a negligible contribution to the industry.

Holy cow!

American Business Creates More Than Jobs

Who says Democrats and Republicans can't agree? Both parties claim they love business owners to death, although Democrats limit their affection to proprietors, partners or stockholders making $250,000 a year or less. Republicans are more inclusive.

Just fifty years ago, business was getting lots of love from a bank. Anyone know why The Bank of New York felt businesses were threatened in 1962? The high taxes of the time? New regulations?

BofNY admired business for creating profits, not jobs. Still, today's political wordsmiths might want to borrow the ad's conclusion.

Our form of government is based on the freedom of the individual – political, religious, intellectual and economic. *** And to the nation which protects his economic freedom, the individual owes the exercise of his fullest energies. The hope of America lies in the vigor and enterprise of each of its citizens.

“Stop Me Before I Trade Again!” No. 2

John Bogle as quoted in USA Today:

 I was talking about buy and hold to some investment advisers, and one said, "I tell my investors to do this, and the next year, they ask what they should do, and I say, do nothing, and the third year, I say do nothing. The investor says, 'Every year, you tell me to do nothing. What do I need you for?'" And I told them, "You need me to keep you from doing anything."

So how do we convince nervous wealth-holders that successful investing is about as exciting as watching grass grow?

Related Post: "Stop Me Before I Trade Again!"

A “Sound Service” . . . An “Inquisitive Organization”

These two ads appeared in The New Yorker just fifty years ago, September, 1962.

The U.S. Trust ad, prepared by The Merrill Anderson Co. and intended mainly for newspapers, looks drab compared with First National City's salute to the amazing classical structures of Baalbek.

The copy holds up, however. The headline, dealing with the psychology of investing, attracted considerable attention. Trust companies today continue to help the wealthy get their heads around their money.

Reinventing Investment Service

When the going gets tough, investors need fiduciaries, as we posted recently. Private banks and trust companies and legions of registered investment advisers can fill the bill. Provided you're High Net Worth.

Not so rich? Can't afford fees and expenses of two or three percent a year?  That's a problem. To obtain guidance inexpensive enough to please John Bogle, you would need to settle for an adviser whose previous job was flipping burgers.

O.K. Let's think outside the box. How about a virtual fiduciary? See The Wealth Manager For Rich Geeks.

This virtual fiduciary is called Wealthfront, and its CEO says, “We add very little value, and we price accordingly.” Wealthpoint offers ETF portfolios created by algorithm.  Fees and expenses are minimal.

Check out Wealthfront's inviting web site, a marvel of simplicity. Notice the promotional video. 

For comparison, I visited Vanguard, Fidelity and T. Rowe Price online. Each site was full of information, but none offered a simple, easy path for putting one's money to work. (I'm guessing fund companies would find it difficult, for legal and other reasons,  to create such a path.)

With skimpy stock and bond returns expected for a while, a truly inexpensive investment service has clear appeal. Even John Bogle might applaud a service that takes advantage of ETFs while removing the temptation to trade them.

Is Wealthfront on to something?

Related Post: Wealthfront's CEO is the same Andy Rachleff we linked to in "Private Banking " Dissected.

Auctioning Brooke Astor's Stuff

Next month Sotheby's will auction off items from the late Brooke Astor's Park Avenue duplex and her country place, Holly Hill. Above, a detail from her portrait by Aaron Shikler,  expected to fetch $10,000-$20,000.

Below, a portrait of an Aberdeen Angus bull by Herbert Haseltine. Like Shikler, Haseltine was popular with the high-society set, and Astor owned a number of his bronzes.

Will collectors be eager to acquire Astor's knick-knacks? We'll see.

“Private Banking” Dissected

What are the pros and cons of having a private banker? Private banking as an ex-VC guy sees it. Note the comments, including one praising GRATs.

How different are the truly rich?

Very different.

Willing and able to pay $455,352 in annual apartment maintenance fees.

Why Executors Always Should Look in the Barn

After the death of Baroness Gisela von Krieger in 1989, lawyers settling her estate found this remarkable asset in the family's Greenwich, CT barn.

At Gooding's Pebble Beach auction, the 1936 Mercedes-Benz 540 K Special Roadster sold for $11,770,000. You can read all about the car – only 30 were built and perhaps a dozen survive – and the Baroness here.