How Pigs Got Slaughtered

Why did people take money they couldn't afford to lose, and invest it in high-risk options strategies playing a single stock? Why did one person invest 50 million dollars in such strategies? And why did any of them trust a kid with no investing track record? It seems incomprehensible to me.

Felix Salmon can't figure it out, and neither can I.

 Wasn't the prospect of getting rich with Apple good enough? Why try for super-rich and lose your shirt, pants and undies?

The Financial Plan That Saved the Real Downton Abbey

Were this season's episodes of Downton Abbey a bit heavy-handed on the subject of wealth management? OK, the Earl of Grantham lost almost everything betting on a Canadian railway. Would he then consider sending more to that chap Ponzi?

Although The Wall Street Journal has tried to draw modern money lessons from the PBS program, we live in another world. Deciding whether to sell grandmother's place in the Berkshires is one thing. Dealing with a vast estate that's been in the family for five or six hundred years is another.

English lords of a century or more ago had to seek different solutions to their money problems. Prime example: the 5th Earl of Carnarvon, whose holdings included Highclere Castle, the inspiration and setting for the TV show.

Highclere in winter

Going for the gold
Three years after inheriting the Earldom in 1890, George "Porchy" Carnarvon found himself heavily in debt. If he hoped to preserve Highclere and his other estates and continue leading his adventurous life, he required an immense financial transfusion. He needed a fortune.

Young American heiresses helped a good number of Engish nobles meet that need. Porchy did even better: Almina, the illegitimate but beloved teenage daughter of Sir Alfred de Rothschild.

Sir Alfred desired the best for his daughter, and he had the wealth to achieve his desires. To seal the deal with the Earl, Rothschild agreed to settle all of  Porchy's debts. In addition, he agreed to provide Almina – and Porchy, if he outlived her – with wealth beyond the dreams of avarice. £12,000 a year! That's equivalent to about $10 million a year today.

Surely Highclere was well-maintained for scores of years to come – with the possible exception of World War I, when Almina converted the castle into a deluxe military hospital.

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For more about Almina and Highclere, see "Lady Almina and the Real Downton Abbey," written by the current Countess.

A crack on the tax-free muni front?

Uh-oh, I'm in agreement with this NYTimes item on ending the tax freedom of muni bonds.  Admittedly, they are only attacking private activity bonds, while I prefer to end all tax exemptions as a matter of fundamental fairness. 

But it's a start.  And it would be vastly simpler than the Obama alternative of trying to cap the tax benefits at 28%. I'm against any tax provisions that can't be calculated without using a computer.

The New Chase Approach to Nest Eggs

The Sunday New York Times front-pages a Dealbook story on Chase Private Client.

"You are not a money manager, you are an asset gatherer."

 Chase Private Client, a program aimed at those with at least half a million, uses JPMorgan brokers. Fiduciary services and investment management are no longer offered under the Chase brand.

How to Become an Art Collector

de Kooning, "Police Gazette"

Advice for would-be collectors from Lisa K. Erf, J.P. Morgan Chase:

[G]oing to see art in person so that you understand what it actually looks like is very important.

Darn! I was hoping to do it all online.

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.”

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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?

Penalty for Tax Evasion: Almost $22 Million!

Tax evasion is getting costly. Example from The Wall Street Journal: 

The U.S. government already has won about 50 criminal cases and collected at least $5.5 billion in connection with undeclared offshore accounts. On Jan. 8, Mary Estelle Curran, a 79-year-old widow best known for volunteer work, pleaded guilty to criminal charges of filing false tax returns and evading about $668,000 in federal tax on $40 million her husband left her in a secret Swiss bank account at UBS. She agreed to pay almost $22 million, which is believed to be the largest penalty in a criminal case on offshore accounts since the UBS agreement.

Ms. Curran is scheduled to be sentenced in West Palm Beach, Fla., federal court March 26. She faces up to six years in prison.

In 1963 Macho Investors Didn't Take Cruises

We've shown you cruise season ads from half a century ago. Here's one that takes a contrarian tack. Real men don't flee to the Caribbean. They stay home, brave the frigid wind and go ice boating.

Chase ran a lot of nest egg ads. This one may take the prize for most precariously perched egg.

Perils of the Art Market

Anybody who bids on "genuine Picasso prints" at a cruise ship auction, as described in Protect Your High-Net-Worth Buyers From Art Ripoffs, probably deserves what he or she gets. But art fraud isn't always obvious. Do high-net-worth art buyers need more protection?

The New York Times thinks so, citing fictitious starting bids at major art auctions and, worse, bids by third parties who have already agreed to buy a painting but who will receive a cut of the profits if they can coax an unwary collector to pay a higher price.

And why do New York art dealers almost never post the prices of works displayed in their galleries, even though they're legally required to do so?

Maybe the art market does need regulating.  Or does risk add zest to art as an "alternative asset?"

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As a public service, here's a real Picasso print.

See Nicholas Forrest: How to Spot a Fake Picasso

Quiet Trusts

Imagined dialogue from late last year:

Top Wealthholder: O.K. Let's put $10 million in trust for our kids and nail down our gift tax exemptions before they disappear. But….

Estate Planner: But what?

TW: I just realized. Once our kids learn about this trust, they'll never work a day in their lives!

EP: Who says they have to know? 

Quiet trusts, also known as silent trusts, gained both fans and foes in the Great 2012 Gifting Stampede. This WSJ column suggests wealthholders will continue to move assets into trusts for unsuspecting beneficiaries.

Is secrecy a good idea? Your answer may show your age:

According to some advisers, whether people favor quiet trusts or not often depends on their age. Older advisers, and older clients, are more likely to think keeping an inheritance secret "is a terrible idea," said Jonathan J. Rikoon, chair of the trust and estates group at law firm Debevoise & Plimpton LLP. Age has given them enough experience to see how secrecy actually plays out, Mr. Rikoon added.

Newer practitioners, especially those working with a new generation of entrepreneurs, may be likelier to see value in keeping things quiet.

This blogger sides with the seniors. (He knows his place.) As a comment to one of the WSJ columns points out, kids who grow up with maids and butlers already expect trust funds. There's nothing to hide.

And there's nothing new about secret inheritances. See Quiet Trusts and Great Expectations.

“Go Someplace Warm. Leave Your Investments With Us”

Why stay in the snow belt? Take a cruise to someplace warm!

Good idea now, and a popular idea fifty years ago. In 1963 even ocean liners were offering cruises. They had to. Jet planes had drained their transatlantic business.

The couple in this City National ad seems to have skipped the cruise and simply hopped a plane to Colombia.

Why would a well-heeled investor wear a business suit on vacation? Because that's the way it was in 1963. (Times were about to change, drastically.)

Trusts For Gun Owners

January 19th is Gun Appreciation Day– an appropriate occasion to wonder whether gun trusts will increase along with gun ownership.

Gun sales have surged recently. Many buyers reportedly want to add to their collections before a feared government crackdown on sales of semi-automatic weaponry. Others are most likely speculators, looking to flip guns rather than houses.

Thus far, gun trusts have been used to facilitate and share ownership of special types of firearms – including machine guns and sawed-off shotguns – that have been taxed and regulated since the days of Al Capone. Will gun trusts proliferate in response to new restrictions?

Will Estate Planning Go Down Market?

For many attendees at the Heckerling Institute of Estate Planning, Deborah Jacobs reports, "it's the end of an era."

The era finished big, as top wealth holders rushed to transfer millions before assets over $1 million became subject to federal transfer taxes. They needn't have bothered. Five million or more continues to be exempt.

This year estate planners may keep busy holding the hands of clients who wonder what they were thinking: "Why did we give that much to our kids?" Next year, Jacobs suggests, tax audits will give planners plenty of work defending their intricate gifting mechanisms. After that . . . ?

Elder law is one option featured at Heckerling. Unfortunately, crass TV and radio commercials have given practitioners an unsavory image. But there's much more to elder law than syphoning off Mom's assets before moving her into a Medicaid-financed nursing home. This video from Bernie Krooks, one of the Heckerling presenters, shows why even something as basic as a durable power of attorney deserves careful thought.

Alas, it's unlikely that drafting revocable trusts and durable powers will pay as well as inventing clever ways to give away $5 million.

Estate-Planning Advice From Unprintable Web Site

In The New York Times Ron Leiber writes that he came across this web site last Tuesday. Does it prove the power of expletive marketing?

$5.25 Million

Bet Jim Gust wasn't the only one wondering what the inflation-adjusted value of the 2013 federal estate-tax exemption (sorry, the "basic exclusion amount") would be. The answer, Deborah Jacobs reports, is $5.25 million.

Clowning Around With Taxes

Who says our Congress is full of petty partisans and grouchy grinches? Two Georgia Congressmen have lightened the mood by sponsoring a bill to do away with the income tax, the estate tax and –yes – the Internal Revenue Service.

For funding, they propose that the federal government rely on a national sales tax – high in rate but gaping with loopholes – administered mainly by the states.

Should they have tried out H.R. 25 at an Atlanta comedy club before going national?

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Caution: Go ahead and snicker at the idea that Uncle Sam should stop collecting taxes. But be aware that the idea of a national sales or "consumption" tax – to supplement, not replace, the income tax – has a number of serious advocates.

Golfing in the Investment Jungle

The broker was a really nice guy, a golfer who spent much of his time on the course, dispensing tips on hot stocks between holes. Once you signed up as a client, he handled your paperwork right there in the club parking lot. What more could a multimillionaire ask?

Using Philip Horn, rogue broker, as exemplar, Dealbook asserts that Financial Fraud Defies Policing. No Madoff, Horn rigged a system that allowed him to trade with his clients' money and skim off the profits.

Some comments appended to the Dealbook article express little sympathy for Horn's victims. You can see their point. One golfer invested $10 million with Horn but couldn't bother to look at the 50-page statements (implying at least ten or twenty double-sided pages of trades per month?!?) that he received from Wells Fargo. "If I had time to do that, I wouldn't need a broker."

Decamillionaires with that attitude should stay out of the investment jungle – or hire a fiduciary.

The new marriage penalty tax

I wasn't the only one who noticed that a pretty big marriage penalty tax has been added for those in the top 1% of earners.  Here's some details, and the math.

Evidently our Congress critters believe that having a spouse who works is the ultimate luxury.

Balanced?

You may recall that Obama called for a "balanced" approach of spending cuts and tax increases.  I remember when President Reagan accepted a deal for $2 of spending cuts for every $1 of tax increases in TEFRA.  The tax increases hit immediately, the promised spending cuts never materialized.

So perhaps we've become a bit more honest in our presentation. The newest deal includes $1 of alleged spending cuts for every $41 of tax increases, according to the CBO.  One wonders why they even bother.

This will be why many Republicans will vote against the deal in the House, but most of the Democrats will get on board. I think it likely to pass.

I also think it's a good time to buy some tax-free munis, and take a wait and see posture on stocks.  After-tax stock returns are about to be hammered, and the value of tax free income will soar.

After all this struggle, will Congress return to meaningful tax reform later this year? Given that the new rates and that AMT patch would be permanent, I seriously doubt it.

Here is the Senate bill.

I'd like to know the federal estate tax exemption for 2013, if anyone sees it.  From my reading of the Senate bill, the exemption is $5 million indexed for inflation since 2010, so it should be higher than the $5.12 million we had in 2012. 

Dangerous Inflation Ahead?

If the House passes the bill already approved by the Senate, the $5-million federal estate tax exemption will be indexed to inflation. Rep. Chris Van Hollen (Md.), the ranking Democrat on the House Budget Committee, expressed dismay. He suggests the cost of living could increase 50% by 2020.

If so, you'll need to pay $15 in 2020 for stuff you now purchase for $10.

Maybe it's finally time to get out of bonds.