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.