The Case of the Inherited Tax Shelter

Should a woman who inherits a $43-million UBS account, sheltered years earlier by her husband, receive leniency from Uncle Sam?

Would your answer differ if the widow were age 49 instead of 79?

Would you be influenced by her failure – more likely, her advisers' failure – to disclose her inheritance to Uncle Sam until 2009, when a list of owners of UBS shelters went public?

Mary Estelle Curran has served a prison term most tax evaders can only dream of: five seconds probation. She also may be the only 79-year-old Palm Beach multimillionaire to be described as a "homemaker."

Despite this setback, Uncle Sam's attempts to crack down on offshore shelters are expected to continue. In January Wegelin, Switzerland's oldest private bank, went out of business after pleading guilty to helping more than 100 Americans shelter more than $1.2 billion.

Changing the Investment Landscape

Crowdfunding. In theory, a really great idea. In practice, investor beware. The Washington Post explains.

Intestacy

This looks like some good material for our estate planning newsletters.

Estate Planning Revisited

Paul Sullivan's Wealth Matters column includes a plug for living trusts in California. He also notes that some folks who made $5-million or $10-million gifts in trust may forget they intended to replace cash with non-liquid assets. (Forget about a $5-million gift? Maybe Scott Fitzgerald was right about the rich being different.)

The Wall Street Journal's estate planning update spotlights possible crackdowns on GRATs and dynasty trusts.

Twitter: Compare and Contrast

Graphic by Matt Huynh for The New York Times

Maybe I should pay more attention to Twitter:

     How Twitter is becoming your first source of investment news

Maybe I shouldn't:

     Twitter has no place on Wall Street

Would you risk a client's money on a tweet? What about your own money?

Shakespeare's Will

On April 23, 1616, William Shakespeare died. Robert Brustein's imaginative new play, "Last Will," depicts the ailing Bard's estate planning, guided by his sniveler of a lawyer.

Read Shakespeare's will here. For an actual page from the will, and a link to a more scholarly analysis, go here.

Bring Back the Tontine?

Does the secret of financial security in retirement reside in a product devised by a 17th-century Italian banker? In a WSJ column University of Toronto professor Moshe Milevsky proposes the return of the tontine.

Imagine a group of 1,000 soon-to-be retirees who band together and pool $1,000 each to purchase a million-dollar Treasury bond paying 3% coupons. The bond generates $30,000 in interest yearly, which is split among the 1,000 participants in the pool, for a guaranteed $30 dividend per member. A custodian holds the big bond and charges a trivial fee to administer the annual dividends. So far this structure is the basis for all bond index funds. Nothing new. But in a tontine arrangement the members agree that—if and when they die—their guaranteed $30 dividend is split among those who are still alive. 

So if one decade later only 800 original investors are alive, the $30,000 coupon is divided into 800, for a $37.50 dividend each. Of this, $30 is the guaranteed dividend and $7.50 is other people's money.  

Then, if two decades later only 100 survive the annual cash flow is $300, which is a $30 guaranteed dividend plus $270. When only 30 remain, each receives $1,000 in dividends—a 100% yield in that year alone.

Back in the Gilded Age, Milevsky notes, almost half of U.S. households owned some sort of tontine insurance. The policies appear to have been a form of deferred annuity, spiced up with a longevity bonus. Popularity led to excess – some tontine products amounted to little more than swindles, according to Wikipedia. Since 1906 tontines have been banned in the U.S.

Could the tontine make a comeback?

Francis Guy, The Tontine Coffee House. New-York Historical Society

The Tontine Coffee House on Wall Street, established in 1793, is still remembered because it became overcrowded with brokers. They decided to move out and form a stock exchange.

Seniors, Beware of the Alphabet!

According to Bucks, seniors must beware of financial advisers bearing a bewildering assortment of letters after their names. More than 50 combinations are in use, according to the Consumer Financial Protection Bureau. Here are 46:

AEP, APA, APR, ARA, ARPC, ARPS, BCE, C(k)P, CAPP, CES, CEP, CFG, CFP, CHFP, CIS, CPC, CRC, CRFA, CRP, CRSP, CSA, CSEP, CWPP, CASL, CEPP, CHC, CLU, CRPC, CRPS, CSFP, CTEP, MCEP, PRPS, PRP, PPC, QKA, QFP, QPA, QPFC, REBC, RFC, RFP, RP, RICP, RMA, RPA

How many can you identify? If you need a cheat sheet, see Appendix B of the CFPB report.

What One Trillion Dollars Looks Like

H/T to the Bogleheads for calling attention to this: One picture is worth a trillion dollars.

Update: Scroll down the Boglehead comments and admire the one hundred trillion dollar bill from Zimbabwe.

The WSJ weighs in . . .

. . . on the President's proposal to cap deferrals in qualified retirement plans.

Followup on the Super IRAs

I just thumbed through the "green book" explanation of the revenue segment of the President's proposed budget.  Contrary to my assertion below, limiting plan contributions once a taxpayer has about $3 million is going to raise an extraordinary amount of money, $800 million in the first year alone!

I would dearly love to see the math on that one.

Remember, the new provision only prevents new contributions once the limit is breached, it does not demand disgorgement or taxation of excess accumulations.

For the sake of argument, we'll assume that those facing the contribution limit lose the right to make a $50,000 contribution, the 2012 limit for SEPs (it's $51,000 in 2013, could be more by fiscal 2014).  I assume that Treasury assumed the $50,000 would still be paid as compensation, and would be taxed.  Let's say the applicable tax rate would be 40%, so this taxpayer will pay an additional $20k in income taxes.

That means that to raise $800 million in new revenue there are already 40,000 taxpayers still in their earning years who have accumulated more than $3 million in qualified retirement plan benefits (all plans and all IRAs are aggregated for this test).  All of them would otherwise make a maximum contribution.  Is that credible?  This small group has $120 billion in qualified retirement plan assets?

Am I missing something?  I must be, because these numbers don't make sense to me.

Obama proposes rolling back the estate tax exemption

The Obama budget includes a truly odd detail in the estate tax area. He proposes, as he has done before, going back to the 2009 estate tax regime, with a 45% tax rate and an exemption of $3.5 million and no inflation indexing.  Presumably he'd go back to the $1 million gift tax exemption, though this detail wasn't mentioned. This rollback despite the fact that Congress just made permanent a higher exemption and lower tax rate.

But that's not the odd part.  Obama proposes going back to 2009 in 2018, two years into the term of the next president!  By some crystal ball gazing, he's determined that 2018 will be the optimum moment for a massive estate tax increase. But for the rest of his term, low estate tax rates will be just fine.

He can't be serious, can he?

A block on the "super IRA"

You may recall that last year Mitt Romney revealed he had an IRA worth between $20.7 million and $101.6 million.  How is that possible, when the contribution limits are so low? Two elements.  First, Romney had participated in an SEP-IRA, which had much higher limits. Second, his employer, Bain Capital, permitted plan participants to invest in its takeover deals.  Some of these were spectacularly successful.  Per the Wall Street Journal, some Bain employees saw their IRAs blossom 583-fold in just 20 months.

Obama would like to put a brake on that.  Once your retirement account is more than $3 million, no more contributions for you. However, the account could keep growing, so in fact the $100 million IRA remains theoretically possible.  Here's how Tax Notes explains it:

While the administration has been describing the proposal as a $3 million limit to tax-preferred retirement accounts, the green book explanation of the provision states that taxpayers would be prevented from making additional contributions or receiving additional accruals in retirement plans in excess of the amount necessary to provide for the maximum annuity allowed for tax-qualified defined benefit plans. 

Section 415 currently limits that amount to $205,000, payable in the form of a joint and 100 percent survivor benefit commencing at age 62. That amount is adjusted for inflation. Under Obama's proposal, the maximum accumulation currently for a person age 62 would be approximately $3.4 million. The green book states that assets in the plans could continue to grow with investment earnings and gains, even if a taxpayer was prohibited from contributing. A taxpayer subject to the limitation at one point could make additional contributions if his investment performance was lower than actuarial assumptions, or if the maximum defined benefit level increased because of cost of living adjustments. Excess contributions and accruals would be treated similarly to excess deferrals under current law. 

 Interestingly, they do not mention any dollar impact of this proposal, which suggests that it is negligible. This change would be for the sake of "fairness," that is, for the sake of appearances. But it would be a nightmare to administer.

Is another tax hike on the rich coming?

President Obama has proposed one.

Limiting the value of deductions to 28% has been discussed before.  The article doesn't make clear if that applies to the former tax freedom of muni bond interest, but it should, for the sake of consistency.  The charities will be going nuts over this one.

The proposal includes a cap on IRAs of $3 million. This is the first time I've heard that idea, and I'm curious as to just what they mean by that.  How could it be enforced?  It reminds me of the unlamented repealed tax on "excess accumulations" in retirement plans.  Ever more complexity, more work for accountants.  I'll see if I can find the budget documents on Tax Notes tomorrow.

I think this goes nowhere, given that we already raised taxes on "the rich" once this year.  Maybe we should wait and see how that works out before going to the well again.

Art As a Billion-Dollar Asset Class

More than a score of philanthropists have made, or promised to make, gifts of $1 billion or more. Normally the gifts take the form of securities or cash. Leonard Lauder's $1.1-billion gift to The Metropolitan Museum of Art consists of art, including 33 Picassos and 17 Braques.

Will we be hearing a lot more about art as an asset class from Sotheby's and Christie's?

Picasso's "The Scallop Shell," 1912

The New York Times features a few highlights from Leonard Lauder's collection of cubist art here.

1968: End of an Investment Era

Mad Men resumes today. Even the Brits are excited. Reliable sources say the new shows pick up the story in 1968.

So far, the turmoil of the 1960s has barely touched Mad Men. That's fairly true to life. If your kids hadn't turned hippie and you didn't have to dodge the draft, 1968 might have left you unscathed. Certainly the prototype wealthy man and wealthy woman in these 1968 Chemical ads look as Old Money as ever.

Nevertheless, for the stock market the end was nigh.

 In 1968, the stock market had been rising, with only minor interruptions, for two decades, and the last recession, in 1961, was a distant memory. Many hot initial public offerings doubled the first day they traded. American households had a record 23.7 percent of their assets in stocks -- a figure not exceeded until 1998, when it hit 24.3 percent. (In 1978, after a brutal bear market, the figure was down to 8.5 percent.)

Floyd Norris included that description in his timely 1999 NY Times column, 1968 Redux. Not until 1982 would another great Bull Market begin – and by then, investors had taken the worst beating, after taking inflation into account, since the Great Depression.

Deluded Doctors? Lazy Lawyers?

"I've never known a doctor who bought a stock." Back in the twentieth century a fellow physician made that declaration in a Medical Economics article. His point: Doctors didn't buy stocks; they merely allowed stocks to be sold to them.

These days, reports Paul Sullivan in his Wealth Matters column, doctors are more likely to think they can pick hot investments. Lawyers, by contrast, may be too busy even to read their brokerage statements. Not prudent, as we reported here.

Doctors' belief that smarts are more important than knowledge may carry over to estate planning. Julie M posted this comment on Sullivan's column:

As an estate planning attorney of 20+ years, I have to say doctors (specialists, not GPs) are my worst clients -- they know more than I do about tax law & asset protection because they went to a seminar in Las Vegas .... And, they are impossible to schedule because it all revolves around them and their demands. I've seen too many doctors taken in by scam artists because (1) doctors think they are smarter than everyone else and (2) they are unwilling to admit when they've made a poor decision and tend to throw good money after bad.

***

PS -- most lawyers are no better.

Words of Financial Wisdom

Dover Publications was plugging a book of quotations the other day. The thoughts expressed on this sample page seemed worth sharing.

David Stockman certainly would approve of the first one.

Some Ads Age Better Than Others

Merrill Anderson produced this U.S. Trust ad in 1963. Illustrator John Northcross certainly flattered the investment thinkers. Today, alas, it looks like a meeting of the White Men In Suits Investment Club.

And not without reason. In 1963 even some of the trust company's female customers believed investing was, by its very nature, a man's world.

Happily, 1963 also featured transcontinental jets and an all-mighty dollar. Americans could live  lavishly as they drummed up business around the world. These Irving Trust ads still please the eye.