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.

Brooke Astor's Son Loses His Appeal

We are not convinced that as an aged felon Marshall should be categorically immune from incarceration.

*** 

The lack of a criminal history is an ordinary circumstance that does not vitiate a prison term for obtaining millions of dollars through financial abuse of an elderly victim.

      – Justice Darcel Clark, New York State Appellate Court

 So ends (barring further legal maneuvers) a saga of elder abuse first noted on this blog almost seven years ago. Anthony Marshall, elderly son of Brooke Astor, faces three years in prison, The NY Post reports.

“Take My Inheritance, Please!”

Today's NY Times offers a special Your Money section, a co-production with APMs "Marketplace Money." The theme: people get emotional about money. True, though not exactly breaking news.

Among Young Inheritors, an Urge to Redistribute, indicates new money isn't always welcome. One heir chose to share his $900,000 inheritance with his extended family. Others gave inheritances to worthy causes, apparently without personal cost. One gets the impression there was "plenty more where that came from."

One also suspects some heirs lack computational skills. A million dollars or so will not support "a life of leisure and luxury" for long. 

Growing Up With a Trust features Stuart Lucas. Back in 2006 this blog plugged his book.

Do Estate Taxes Face Extinction?

Despite concern over wealth inequality, estate taxation may be on the way out. See Is the Estate Tax Doomed?

For much of history, it was easier for a government to record the value of an estate than to track income on an annual basis. The lesson is clear: estate taxation first arose because it was easy, not because of concerns about inequality.

The Times op-ed drew plenty of comments. This one comes from Alice Clark in Winnetka:

The inheritance tax predates capitalism. The Romans used it. Some of my ancestors were serfs, tied to the land in Lower Saxony. At the death of the male head of household, the nobleman who owned my ancestors received one half of all of their property. I'm sure that they hid what they could, but it's hard to hide cows.

“Profitable Sunrise” – Ponzi Globalized

Like to make 2 percent or more  a day –yes, a day – on your money? Welcome to Profitable Sunrise, a  pyramided Ponzi scheme.

Ostensibly based in Manchester, England, Profitable Sunrise may originate in Eastern Europe. Somewhere I read that certain Internet operations were traced to  Virginia.

And where do clueless investors or daring "in-and-outers" wire their money? According to this post, to Baltikums Bank in Nicosia, Cyprus!

It is a small world, after all.

Ledra Street, Nicosia, Cyprus
Photo via Wikimedia Commons

(It's also a world in which everything you read on the Web isn't necessarily so. Baltikums Bank's Cyprus branch appears to be in Limassoi, not Nicosia.)

The Jimmy Fallon tax credit

TaxProf Blog has the reports.

I think that such narrowly drawn tax provisions are very bad policy, and wonder how they can withstand constitutional scrutiny.  But they do, because as it turns out, no one has standing to object to them.

The Richest Woman In the World

Pilbara, Western Australia
Photo via Wikimedia Commons

In The New Yorker William Finnegan profiles Gina Rinehart, The Miner's Daughter. Western Australia sounds like a wild and woolly place to make billions.

Finnegan spins a fascinating tale. It includes knock-down, drag-out fights over Gina's father's estate and a family trust.

Clothes No Longer Make the Man

In 1963 I wouldn't have worn a suit to paint the porch furniture. My father certainly wouldn't have donned one of his Brooks Brothers sack suits before touching up the trim on the barn. So why is the man in this 1963 Chase nest egg ad wearing a suit?

Because a guy wearing an old sweater and stained khakis wouldn't have looked rich.

Half a century later, rich men display a variety of looks: bespoke suit, black tee shirt,  jeans and boots, hoodie . . . . Mark Shaw, the Chase photographer, would have a tough time depicting a generic "rich man."

A decade after this Chase ad ran, Thomas Stanley began studying the affluent. After discovering that many did not look that rich, he became a popular speaker at financial marketing gatherings, gaining national prominence with his 1988 book, "The Millionaire Next Door."

Before that best-seller, Dr. Stanley wrote "Marketing to the Affluent." A generation later, aspiring brokers and investment advisers still might find it worth reading.

Postscript: Strictly speaking, Mark Twain pointed out, clothes do make the man: "Naked people have little or no influence on society."

Do Investment Managers Need Consultants?

"There are all these piranhas circling, " says The Oracle of Tampa.

Former Hedge Fund Manager Arrested

… in the Uffizi Gallery in Florence.

"Florian Homm, a flamboyant former hedge fund manager who spent the last five years in hiding, was arrested in Italy," the NY Times reports. He faces extradition to the United States on securities fraud charges,

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.

•

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!