Tax Reform? You Should Live So Long

Let's get income tax reform done in 2013, urges the Billings Gazette. This former Congressman believes tax reform can happen. Most taxpayers, not to mention most voters, probably hope he's right.

Before you get your hopes up, read Stan Collender: No Tax Reform Before The End Of This Decade. Collender is an old Washington hand and erstwhile staffer on Congressional tax committees. The last great effort at tax reform took three years to achieve, he points out. And Congress was relatively functional in those days. What's more, the 1986 Tax Reform Act had a dynamic champion in Dan Rostenkowski.

If we can update the corporate tax and classify carried interest as income by the time Obama leaves office, we should count ourselves lucky. 

Perils of Investing in Show Biz

From Vanity Fair:

Justin Bieber Con Artist, Who Wheedled $1 Million Out of California Investor, Faces Sentencing

Related post: Broadway's Biggest Mystery

Millionaires: No Longer Worth Marrying

These days, The New York Times laments, mere millionaires have to keep working; they can't afford to retire. Decades of inflation have reduced $1 million to nonwealth:

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment….

 Remarkably low bond yields make 2013 an especially tough time to retire with a mere $1 million. Or maybe not. Truth is, retirees usually get the short end of the stick, one way or another.

 In 1980, for instance, Treasury bonds yielded double digits – around 10%. After the high taxes of the era, a retiree netted maybe 6%.  No, strike that. In 1980 a retiree netted less than nothing. That year the inflation rate was 12%.

As The Times suggests, retirees need common stocks in order to achieve positive returns. And they shouldn't let Mr. Market's mood swings scare them. That's easy for wealth managers to say, difficult for ordinary people to do.

Oddly, Mr. Market's mood swings don't scare anybody, even the most timid millionaires, when for no good reason he sends the Dow up 30%.

The Case For Trust Fund Babies

“The sooner my kids get experience dealing with the pluses and minuses of having a lot of money, the better.”

– Larry Ellison

“High Income” vs. “Wealth”

High-income folks aren't necessarily High Net Worth – a distinction worth preserving, but probably a lost cause. Credit James Taranto with giving it the old college try:

The relationship between annual income and wealth is analogous to that between caloric intake and body weight: The former obviously contributes to the latter, but they are not the same thing. 

To characterize somebody with a high annual income as wealthy is like assuming anybody who gorges himself at a meal must be fat. Wealthy people can have a low annual income, too. Think of dissolute trust-funders squandering their inheritance--in our analogy, the equivalent of obese starvation dieters.

 Actually, the trust-funders' low income occurs only after they've shrunk from wealthy to affluent. Nevertheless, Taranto makes worthwhile points about how the burden of the federal income tax is analyzed. The flip side of the mortgage-interest deduction, for instance, is higher tax on renters and taxpayers who own their homes outright.

Can Insider Trading Be Curbed?

The New Yorker's James Surowiecki looks at the boom in insider trading, fueled by fierce competition among thousands of hedge funds. Roughly 8,000 hedge funds exist. Eight thousand! On average they underperform the market.

Surowiecki suggests the value of insider information would decline if companies announced every material happening as soon as it happens. Would companies agree to make that information available to competitors? In any case, faster disclosure might not help.

Some companies, Surowiecki notes, no longer even report quarterly earnings. Considering the Wall Street farce that beating quarterly estimates had become, that seems like a plus.

Remember?

Acme CyberGlobal today reported first quarter earnings of $2.15 a share, exceeding analyst estimates of $2.14 per share. This marks the nineteenth consecutive quarter in which Acme's earnings have exceeded estimates by exactly one cent. 

Hedgers caught trading on insider information receive tough sentences these days. As legal threats to notable hedge funds have mounted, nervous investors may head for the exits. Even Steven Cohen's SAC Capital Advisers, Bloomberg reports, could be reduced to a multi-billion-dollar family office.

Woody Allen's "Madoff" Movie

Woody Allen's first creative response to Bernie Madoff's massive fraud was a New Yorker humor piece. Two Madoff victims, Woody imagined, are reincarnated as vicious, vengeful lobsters.

Now he's made a movie, Blue Jasmine. Alec Baldwin plays the Madoff-like figure. Cate Blanchett plays his wife. The film depicts her plight after her husband is imprisoned and stripped of his fortune.

Huguette Clark: "Due Influence"?

Hospital Caring for an Heiress Pressed Her to Give Lavishly

Her face disfigured by cancer, Huguette Clark checked into Beth Israel hospital in 1991. She stayed 20 years.

Huguette had step-siblings from her father's first marriage. Her last will left them nothing, favoring charitable beneficiaries, notably Beth Israel.

The reclusive Huguette seems to have distanced herself from her family, and  she certainly must have become almost family to Beth Israel.

Could this be a case of due influence? Should it be settled by awarding the step-siblings a little and otherwise honoring the last will? What do you think?

The Talk

Nice article in the NYTimes, on what adult children should try to learn about their parents' finances.

Wealth Mismanagement in Texas?

Not long after Invesco announced the sale of Atlantic Trust Wealth Management to CIBC, the head of  Atlantic Trust's Austin, Texas, office was found dead.

Now, The Wall Street Journal reports, "investors have come forward to say they lent him in total millions of dollars, according to people familiar with the matter. At least some of that money appears to have gone missing, the people said."

The Trust Company That Saved Olana

When Don Draper, Roger Sterling and the other Mad Men leafed through the April 27, 1968 issue of The New Yorker, surely they stopped at this lavish two-page spread from Bankers Trust.

The trust company had held Olana, home of famed artist Frederick Church, in an estate long enough for preservationists to save it. The self-congratulatory copy was possibly overdone. Just imagine the news items had the decision gone the other way:

"Only months before preservationists could raise money to save Frederick Church's Persian-styled home on the Hudson, Bankers Trust ordered the contents sold and the mansion razed." Would have been bad PR, to say the least.

Today Olana survives but Bankers Trust does not. After misadventures with derivatives, the trust company was acquired by Deutsche Bank in 1998.

Clouds over Olana, by Frederic Edwin Church, 1872

Wall Street Legend Sues Citigroup

Very old rich people stand a significant chance of being robbed or swindled by younger people. A recent example, as we noted last year, is Wall Street legend William Salomon:

Elder Abuse For The Man Who Once Ran Salomon Brothers?

In January Salomon's secretary, provided by Citigroup and accused of stealing over $l million, was found guilty of bank fraud, wire fraud, money laundering and tax evasion. She is to be sentenced June 5.

The 99-year-old Salomon puts his losses at $3 million. He isn't likely to get his money back from the unfaithful secretary, so he's suing Citigroup. 

Perhaps Sandy Weill should not have been so generous to Salomon. To understand why he was, see The Spectacular Rise And Fall of Salomon Brothers.

The 3% Solution – a Tough Sell

In his weekly Wealth Matters column, Paul Sullivan looks at Evercore Wealth Management. Founded by escapees from US Trust after Bank of America swallowed the nation's oldest trust company, Evercore asks the wealthy to focus on net investment results. That is, net returns after fees, taxes and inflation.

Admirable idea, but a tough sell. Even Sullivan has his doubts:

[W]hat I would have liked to see was a pre-fee return along with the returns before taxes and inflation.

Evercore's web site is cleaner than most. Also worth emulating, their uncluttered, plain-spoken newsletter.

Rich Women of 1968

Another flashback to the Mad Men era. Thanks to the agency that created this Air France ad, we now know the French for, "I want to rent a safe deposit box:"

Je veux louer un coffre-fort.

We've shown you a version of this Chemical ad before, Note the new photo at lower right in the montage. Hope the two guys forced to sit on that low, uncomfortable stone wall weren't her lawyer and her trust officer.

Too Big to Regulate

When you just finished The Big Short by Michael Lewis, this is not the headline you want to see in The New York Times:

Big Banks Get Break in Rules to Limit Risks

Art As (Sometimes Dirty) Money

Andy Warhol, "Dollar Sign"

"It is hard to imagine a business more custom-made for money laundering," That's how the art market is described in this NY Times article. 

Sting operations conducted by law enforcers may be helping to stem the tide. “Around 20 years ago," says Philip Hoffman of the Fine Art Fund, "people used to turn up with cash in suitcases to buy Old Masters and no one really cared.”

Will efforts to crack down on the use of art to move money invisibly, undetected by crime fighters or tax collectors, taint the asset class? Or will UHNW individuals continue to see art as a prestige investment? 

“That Awkward Age”

The New Yorker just posted this to my Facebook page. It's so pertinent to many families – including mine – that I'll forgive them for confusing "deduction" with "exemption."

Stock Certificates: Going, Going …

If your broker jumped out the window during the Great Depression, you were sorry you left your shares in street name.  Prudent investors obtained stock certificates and tucked them in their safe deposit boxes.

For decades seasoned investors continued the precaution. In the 1960's, Robert Morse's Bert Cooper, most venerable of the Mad Men, probably still held tight to his shares. The younger generation more likely left their stocks with their brokers.

Holding on to stock certificates had its inconveniences, as did holding bearer bonds with coupons that had to clipped in order to collect interest payments. That's why Chase Manhattan advertised custody accounts in those classic nest egg ads. Trust institutions held customer certificates in their own vaults or, in later years, in depositories.

In the 21st century securities certificates have become an anachronism. Soon they'll vanish altogether, at least for publicly-traded businesses. The coup de grace was superstorm Sandy. Flooding much of downtown Manhattan, Sandy left Depository Trust and Clearing with 1.7 million soaking wet certificates. One million seven hundred thousand!

How will we introduce kids to the world of investing if we can't give them a couple of shares of Apple?

At least old stock certificates, found at sites such as Scripophily, will help preserve the history of American business. This Edison certificate is signed by the great man himself.

The Warren Buffett show

Many years ago, my Dad got a great stock tip: Buy Berkshire Hathaway at $33,000 per share.  Alas, that was too steep for him at the time. Years later, when the B shares were created, he did buy some of those. Accordingly, he can go to the annual meeting if he wishes, and he can bring 3 guests. Five years ago, he took my Mom.

This year I mentioned to Dad my interest in going to hear Warren Buffett speak.  Mom came along for the trip, though her interest in investing is low to none. We preceded the visit to Omaha with an excellent trip to Branson.

When my folks went the meeting five years ago, there were about 5,000 attendees.  They took in the cocktail party Friday, the barbecue Saturday night, the brunch on Sunday. This year, I heard later, there were 30,000 attendees.  The cocktail party was an absolute zoo, so we skipped the other free meals.

The meeting started at 9:30, the movie at 8:30, so we planned to get to the arena at about 8:00.  Big mistake.  The traffic to the arena was backed up about a mile, three of the four parking lots at the arena were already full.  We took our seats at about 8:45.  Turns out the doors were scheduled to open at 7 am, but they opened early because it was unseasonably cold (presumably because of global warming). When thanked for this courtesy by a questioner, Buffett responded that if Berkshire sold coats they would not have opened the doors early.

My first impression:  Can the shareholders of Berkshire Hathaway really be this young?  Loads of 20-somethings, 30-somethings.  I guess they must be, because guest privileges couldn’t account for all of it. Second impression:  It would be great if they streamed this to the internet, to reduce costs and congestion all around.

I had thought to mention some of the meeting highlights, but the NYTimes Dealbook blog beat me to it.  The Breaking Bad bit during the movie was particularly good.  The contrast between Buffett and Munger was striking, they make a great team. The questions were mostly intelligent, the answers always were.  I'd like to go again next year.

Buffett and Munger on Estate Planning

From Dealbook's report on the Berkshire Hathaway shareholder meeting:

A shareholder and estate planning expert takes the mic. He says that many of his clients want to follow Mr. Buffett’s plan to leave his children a significant sum of money, but donate most of his enormous wealth to charity.

“The idea is leave enough to do anything, but not enough to do nothing,” the investor says. “How much is that?”

The audience laughs. Mr. Buffett responds that children’s behavior is often more dictated by how their parents act rather than how big their inheritance is.

Mr. Munger demurs on answering the question, saying it’s a bad idea to discuss one’s will with one’s children — if they will be treated unequally.

The Fiduciary Way to Win the Derby

Good cheer should fill the offices of Bessemer Trust Monday morning. Orb, owned by Bessemer chairman Stuart Janney III and his cousin, former chairman Ogden Mills "Dinny" Phipps, won the Kentucky Derby.

For decades, the Phipps family and their Hall of Fame trainer, Shug McGaughey, have been a force in racing. But this is their first Derby win.

Moral: Invest for the long term. Patience is a fiduciary virtue.

Exchange Traded Funds: Negative Returns?

Carl Richards doesn't think much of exchange traded funds. But his Bucks post sounds like a rave review compared to the slam John Bogle delivered in a 2011 journal article:

During the five years ended June 2010, ETF investors earned far less than the ETFs in which they invested by a truly remarkable cumulative total of 28 percentage points (average ETF, +15%; average ETF investor -13%), reaffirming an apparently enduring principle of mutual fund performance: Fund investors can be their own worst enemies. 

On the web and out in the real world, there are some who hope to teach investors to profit from ETFs. Could a buy-and-hold strategy catch on?

Related post: For Higher Returns, Fire Your Broker?

The Future of Estate Planning?

Two planners offer a well-organized webinar, including doses of pertinant data:

Future of the Estate Planning Profession: What Practitioners Must Know and Do

One of the planners, Martin Shenkman, discusses the trust-planning impact of higher top tax rates on gains and dividends here.

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?