Tax Facts

Admirable graphic (not sure whether nonsubscribers have access) from yesterday's WSJ. 

N.Y. Times Looks at Gun Trusts

In The New York Times Erica Goode reports on the increasing use of trusts when purchasing firearms and related equipment.

A growing number of shooting enthusiasts are creating legal trusts to acquire machine guns, silencers or other items whose sale is restricted by federal law….

The trusts, called gun trusts, are intended to allow the owners of the firearms to share them legally with family members and to pass them down responsibly. They have gained in popularity, gun owners say, in part because they may offer protection from future legislation intended to prohibit the possession or sale of the firearms. 

But because of a loophole in federal regulations, buying restricted firearms through a trust also exempts the trust’s members from requirements that apply to individual buyers, including being fingerprinted, obtaining the approval of a chief local law enforcement officer and undergoing a background check.

Most gun trusts are benign. Target shooters, for instance, may use gun trusts to purchase silencers –classified as sinister because of their popularity among hit men – simply to CUT DOWN ON THE NOISE.

A few are not. Christopher Dorner, the former Los Angeles police officer turned murderer, apparently used a gun trust to acquire a silencer and a short-barreled rifle.

Model 1795 musket
the first to be manufactured in the U.S. by Eli Whitney.

We Are What We Speak

The language we speak predicts a range of economic and health behaviors, from how much money we save for retirement to how much we exercise, according to research by Keith Chen, a behavioral economist at the Yale School of Management.

Chen found that speakers of languages that do not distinguish between the present and the future save more money, retire with more wealth, smoke less, practice safer sex, and are less obese. “There’s a connection between how you feel about the future and how your language forces you to talk about the future,” says Chen.

Why Small-Town Investment Advisers Love Big National Banks

Anecdote from John Rafal, ranked by Barron's as Connecticut's #1 adviser for 2012:

When Rafal asked a recently widowed investor why she was moving her $135 million account to his firm from a big national bank, she was blisteringly candid. "My current advisors are arrogant, condescending and rude," Rafal says the client told him. "I hate them."

To the best of my knowledge, The Merrill Anderson Company doesn't have a single client who would be rude to a woman with $135 million.

Bermuda Tax Shelters for Hedgies

Bermuda Tax Dodge Aiding Billionaires, Reuters reports. Lovely views, no income tax. Where better than Bermuda to defer federal income tax by cycling hedge fund fees and profits through reinsurance companies?

This year's stiffer top tax rates should boost the appeal of tax deferment.

By setting up reinsurance companies [in Bermuda], money managers can take advantage of a loophole in IRS rules. Ordinarily, when hedge fund managers invest in their funds, they pay either the 39.6 percent rate for ordinary income or the 20 percent long- term capital gains rate, depending on how frequently securities are traded, plus an extra 3.8 percent health-law surcharge. If they were to move the hedge funds to tax havens, they would incur IRS penalties on earnings from what the agency calls “passive foreign investment companies.” 

Here’s the catch: The IRS doesn’t penalize earnings from insurance companies, which it considers to be “active” businesses. As a result, by routing money through a Bermuda reinsurer, which in turn puts its assets back into their own hedge funds, fund managers can defer any taxes until selling the stake. They then pay only the lower capital gains tax rate.

Having a business excuse to visit Bermuda sounds good to me, especially with more snow predicted for this weekend.

Bermuda - looking east from Gibbs Hill.

British Brokers Behaving Badly

A popular social networking group on Linkedin, with thousands of expat Brits as members, has been targeted by financial advisers touting their services. 

The Telegraph story suggests the difficulty of finding the right balance for marketing efforts on social networks. In this case a few brokers making helpful, noncommercial comments were probably welcome. Hundreds making sales pitches are a different kettle of fish.

Famous Last Words, Revisited

This blog has a cool archive. For instance, Jim Gust's 2009 post, "Famous Last Words." Jim marveled at a Brooklyn pizza joint that had just raised is prices from $4 to $5 per slice. Per slice!

“We will never, ever lower the price,” the owner's daughter said. “It can only go up. It can never come down.”

Famous last words? Not so far. Di Fara Pizza is still getting $5 a slice. Maybe $6, according to one comment on Yelp.

In a 2011 video you can view here,  owner Dom DeMarco explains why he can charge so much.

A lot of business people think they can fool the public, Dom says, and they don't make out alright. You can charge what you want, he believes, as long as you don't fool the public. Never fool the public.

The New Money Movers

Money is always there but the pockets change; it is not in the same pockets after a change, and that is all there is to say about money.

– Gertrude Stein 

Banks and trust companies moved money from pocket to pocket in Gertrude's time. Now we have social networks:

Facebook: Social money transfer service.

iTunes: A crowd-sourced ATM.

What next? Maybe estate settlement services (like locating missing heirs) from Google?

New Estate Planning Bible

The New Old Age gives a plug to the new (4th) edition of The American Bar Association Guide to Wills and Estates.

Note the comments to the post. While the 1%  deal with gift-tax exemptions and dynasty trusts, the rest of us worry about mundane matters: Wills or will substitutes?  How to avoid squabbles when the estate is settled?

Next big trust idea?

The "upward trust" to provide financial support to a parent, explained here, among other choices, in the WSJournal.

Will Contest Goes to the Video

Comfortably off and living in a waterfront home, a women in her 90s planned to leave everything to charity until she met a handsome, helpful police sergeant. Seven months before she died, she executed a new will – a trust, actually – leaving the sergeant the bulk of her estate.

Predictable result: a will contest, which now takes a new twist in the form of a video of the signing.

Was the elderly woman competent to reshape her estate plan? You can form your own opinion. This Portsmouth Herald article includes a link to a clip from the video.

Connecting Wealth Managers to the Power Elite

As described by Andrew Ross Sorkin, Relationship Science sounds like a wealth-management marketer's dream: "Forget six degrees of Kevin Bacon. This is six degrees of Henry Kravis."

Search the Relationship Science database and you'll learn how you're connected to Henry Kravis, Gordon Gekko or the Power Elite person of your choice. The world of "Wall Street" and corporate boardrooms is surprisingly insular. The webs of connections should be fascinating.

From Who Rules America?

Access to Relationship Science data costs $3,000 a year. Not to worry. As Sorkin points out, "the possibility that this system could lead to … a new wealth management client means it just might pay for itself."

Trouble ahead for muni bonds?

Apparently in California some towns have gone exotic with their muni bonds, borrowing today and deferring payments for 20 years.  If the bills don't come due for another generation, no doubt spending will go up sharply.  One town will eventually make payments of $1 billion for having borrowed $105 million.

I don't think this is a good idea.

Doll Leads California Tax Revolt!

 "It is getting awfully expensive to be a millionaire in California," today's Times reports. "With the new year, big earners are confronting a 51.9 percent federal-state income tax hit on earnings over $1 million…. That is officially the highest in the nation."

Will income millionaires flee California?  In The Times'  advertising column, Stuart Elliot tells us  one resident already has her house on the market: 

One of the best-known residents of Malibu, Calif., alongside billionaires like David Geffen and Larry Ellison, is embarking on a national promotional effort to help sell her home there for the eye-popping price of $25 million.

The resident? Barbie!

Corporate Law and Trusts No Longer Mix

Debevoise & Plimpton, prominent New York law firm, has decided to abandon its trust and estates practice, The New York Times reports. Estate planning clients don't like paying the firm's going rate of over $1,000 per lawyer-hour. The firm's other partners don't like giving the trusts and estates partner the same million-dollar-plus annual bonus bestowed upon corporate deal makers.

(For a wicked but entertaining portrait of a big corporate law firm, see John Grisham's "The Associate.")

This sign of the times should not be taken as a putdown of trusts and estates work, says Sanford Schlesinger: “Families are going to pass more wealth in the next 10 years than in the history of humankind, and someone is going to have to shepherd that wealth transfer.”

•

The Times still refers to Debevoise as a "white shoe" law firm. How many of today's Times readers actually remember the days when Ivy Leaguers wore dirty white bucks?

Woe to the Trusting Active Investor

From Ron Lieber's column in The Times, we learn that golfing in the investment jungle may have been costly indeed. Not only was the broker Philip Horn defrauding his golfing buddies, he seems to have traded ETFs and otherwise churned his clients' accounts. Lieber cites a study suggesting that actively traded accounts sacrifice three or four percent of return annually. If so, a Horn client with $10 million could have lost out on $300,000 or more per year.

Also in the Sunday Times, Paul Sullivan marks the 20th anniversary of exchange traded funds. The first exchange-traded index funds were a great idea. The proliferation that has followed – not so great. Also, ETFs make it awfully easy to jump in and out of markets and market segments. The temptation is costly but hard to resist.

Postscript. Walking around town this morning, a wealth manager's sign caught my eye. I snapped a photo, though I couldn't quite put a finger on why the sign struck me as odd.

As I wrote this post it came to me. Look at the tagline (to protect the innocent, I've obscured the firm's name).

"Trusted wealth advisors."

Philip Horn was a trusted adviser. For that matter, so was Bernie Madoff. What investors need are trustworthy advisers. Significant difference, don't you think?