Wealth Management, Swiss Style

Finding investment banking profits hard to come by, major Swiss banks are emphasizing the more lucrative business of wealth management, the NY Times reports.

Skill in stock picking is not required, judging from a survey of brokerage accounts at one large Swiss bank. Clients who followed their advisers' advice when buying stocks did worse than those who selected stocks on their own.

U.S. wealth managers who have lost clients to "more sophisticated" Swiss institutions are entitled to smirk.

Divorce Settlement Saves Estate Tax, But . . .

1978: Jimmy Carter was in the White House and an Illinois businessman seems to have been in love, although not with his wife. He divorced her, agreeing in a settlement agreement to leave their three daughters and one son half his estate in equal shares when he died.

He remarried the following year. By the time he made a new will and created a trust he must have forgotten the divorce agreement, for he left the children less than 34% of his estate.

The businessman, Warren Billhartz, died in 2006. The following year his widow must have staged a coup, convincing her stepchildren to waive their rights under the divorce agreement. A federal appeals court summarizes:

According to the Marital Separation Agreement, the four children were to receive 50% of Billhartz’s “estate” (an undefined term), divided evenly. In the end, though, they cumulatively ended up with less than 34% of Billhartz’s assets, divided unevenly. None theless, after receiving notice of this discrepancy, all four children executed an agreement (the “2007 Waiver Agreement”), in which they accepted the lesser shares set out for them in the trust and waived all potential claims they may have been able to assert against either the Estate or the trust. The payments to the children totaled approximately $20 million; each daughter received about $3.5 million, while Ward received $9.5 million.

 How do federal courts enter the story? Even though the divorce agreement was not honored, it was used to claim that $3.5 million per child was a deductible payment of indebtedness rather than an estate-taxable transfer. The IRS objected but ultimately agreed to allow an estate-tax deduction for slightly more than half the payments.

Moneywise, that was good news. Familywise, it was explosive. The children finally realized what they had signed away when they agreed to accept no more than their father had left them by trust.

The daughters and the son went to court seeking their full shares of the estate, and the daughters won an additional $1.45 million each. But that meant the agreement with the IRS no longer looked so good. The children wanted it revised to allow a deduction for at least part of the additional payments. The Tax Court said no, and now the Appeals Court agrees.

Trusts and Estates saves us the trouble of spelling out the details of the story here.

Question for Jim Gust: Did Billhartz hit upon a ploy other wealthy individuals could use to do some estate-tax planning when they shed a spouse?

Proliferating Trusts . . . Bulletproof Trustees

Thanks to Gerry Beyer for calling attention to Adam Hofri-Winogradow's survey of trusts around the world.

"More than ever before," Hofri states, "the trust is now heavily used across most of the globe as a key means for individual and family wealth planning...."

Unsurprisingly, the survey finds that dynasty trusts, designed to last more than a century if not forever, have surged in popularity. But "forever" may prove theoretical. A significant proportion of such trusts may run no longer than conventional generation-skipping arrangements, thanks to children or grandchildren armed with powers of appointment. 

U.S.-based trusts stand out from the global pack in a couple of ways: Greater emphasis on protecting beneficiaries from creditors, and a greater determination on the part of U.S. grantors to keep a degree of control over what they give away.

Until the last generation or two, generally trust beneficiaries could seek legal relief if they suffered losses due to the trustee's negligence. No longer. When the wealthy create trusts they are routinely expected to accept exculpation clauses that shield trustees from liability.  It appears, Hofri-Winogradow finds, "that exculpatory terms, without settlors receiving any quid-pro-quo for their inclusion, are now a conventional, nearly universal standard in donative trusts serviced by professionals. "

(He has enlarged on the theme of vanishing protections for beneficiaries in The Stripping of the Trust.)

Is legislation desirable to roll back the exculpatory tide? Or should the trend be welcomed if it shields trustees from beneficiaries who expect them to adhere to  the Will Rogers Rule of Investing?

You remember the Rule:

Buy stocks that go up. If they don't go up, don't buy them.

Regular Folks Aren’t Hot For Stocks

The ups and downs of the stock market continue to scare savers, judging by this survey from Bankrate. Not so many years ago, real estate proved scary, too. But people don't hear about the daily price fluctuations as they do with the stock market.

Art as Asset Class: the New Gold?

High-priced artworks used to be collectibles. Now they're a red-hot asset class. Is the booming art market a bubble, inflated by speculators flipping paintings, that's about to burst?

Not necessarily, writes Peter Schjeldahl in The New Yorker. He cites an article by J. J. Charlesworth, a British critic who believes the very rich won't panic. Art is merely one of their alternative assets. a minor fraction of their wealth.

Indeed, today's global billionaires may see art not as a speculation but as the new gold.

[T]he most intriguing motive for the rampage of collecting involves a term unfamiliar to me: “store of value,” having nothing to do with a type of retail outlet. It is about liquidity that is vested rather than invested, and it speaks to dread. Besides being something that people buy when they already own everything else, art shares with gold and diamonds the desideratum (lacked by real estate) of being portable. Charlesworth observes that “alongside global prosperity has come a lot more political instability, and it’s in the interests of the social elite to keep their options open as to where they relocate.”

Your van Gogh is thus the equivalent of a packed suitcase kept under the bed against the morning of a telltale noise from the street outside.

Stores of value should be durable, like gold. Today's hot artworks? Maybe not so much. Consider the gilded beer carton.

Budweiser carton gilded by Danh Vo.

The carton was recycled and gilded by Danh Vo, an "early blue chip" artist popular with flippers. His unique artwork got pictured in The New York Times because Vo has a dispute with Bert Krenk, a wealthy Dutch collector. Krenk commissioned Vo to create an installation, perhaps along the lines of this one.  Vo provoked a legal battle by instead offering nothing but the Budweiser carton.

Do you think the corrugated paper box will last long enough to become an icon of our new Gilded Age?

Can Gigantic Family Businesses Avoid Estate Tax?

Some "family businesses" have become humungous. Mars, for instance. Other giant enterprises have sold shares to the public but remain under significant family control, such as Schwab.

At this humungous level, maintaining family ownership or control for another generation may well be socially desirable. Family control counters the short-sightedness typical of businesses that must
please Wall Street analysts. (If Mars Inc. had been a public company for a generation or two, Milky Ways probably would be inedible.)

Estate tax, however, poses a nearly impassable barrier. No wonder, then, that families with humungous businesses fight fiercely to repeal the estate tax. As suggested in this report, their potential tax liabilities are staggering.

Possible alternative: How about borrowing an idea from Paul Newman. Newman's Own, the nearly humungous business the actor founded, devotes its profits to charity. Could we give Mars, Schwab, et al a free pass from estate tax if they agree that 95 percent of profits will be used for the public good?

Dislike Death Taxes? So Do the Brits

"Inheritance tax is one of Britain's least popular taxes," according to The Economist's Economics blog. "A survey in March by YouGov, a pollster, found that 59% of voters thought the tax unfair, the highest figure for any individual levy."

David Cameron's Conservative government proposes to reduce death-tax pain by exempting the transfer of middle-class homes, effectively raising the total exemption for married couples to about $1.5 million. Compared to an exemption of well over $10 million enjoyed by married couples here in Britain's former colony, that's less than generous. The Economist's blogger, however, seems unsympathetic.