Multi-family offices

Bloomberg Wealth Manager has published its second annual review of multi-family offices (PDF download required). Assets managed by these competitors to trust departments grew by 26.6% last year. These are major firms--the mean amount under management was $1.0 billion, the median $2.8 billion. The account minimum ranges from $750,000 to $100 million, with $10 million being most typical.

Part of the growth in the last year came from the phenomenon of single family offices becoming clients of multifamily offices, presumably because it was too hard to keep up with the technological requirements on a standalone basis.

Although these organizations are primarily about asset management, 63% of them also offer trust management in-house, and 27% provide trust service on an out-sourced basis. Have any of you, our trust and private banking department clients, run into these companies? Do you consider them important competitors?

John Roberts, probate realist

Roberts quote from today's New York Times article on the Supreme Court nominee:

“. . . probate disputes begin with a death but have a way of never dying themselves.”

From the databank: hedge funds

Number of hedge funds reported by The Wall Street Journal to have set up shop in Greenwich, Connecticut, in the last few years:
More than 100*
*The office of Bayou Funds was located just over the Greenwich border on the Stamford shoreline.

The New York Times estimate of the total number of hedge funds at year-end 2004:
3,307

Total number of hedge funds as estimated in today's Wall Street Journal (subscribers only):
Over 8,000

Total assets held in hedge funds at end of 2004:
Over $1,000,000,000,000

Average earnings of a top-25 hedge-fund manager in 2001:
Almost $136,000,000

Average earnings of a top-25 hedge-fund manager in 2004:
$251,000,000

Amount earned last year by Greenwich resident Edward Lambert, called world's highest-paid hedge-fund manager by Institutional Investor:
$1,200,000,000

Number of cases brought by the SEC, 2000-2004, alleging fraud by hedge-fund advisers:
51

Total amount that the SEC alleges hedge-fund investors lost through fraud:
Over $1,100,000,000

How long a retirement should we plan for?

Half of today's college students will live to be 100 years old, according Nobel Prize winning economist Robert Fogel, as reported by Robert Samuelson. That's well above the prediction of today's actuarial tables, which Fogel believes are too conservative. He says that in the late 1920s, life insurers "put a cap of 65 on life expectancy." We all know how wrong that is.

One who enters the workforce at age 25, retires at 65 and lives to 100 will spend nearly one half of his or her adult life in retirement, not working. Is that economically tenable? Samuelson advocates the politically unpopular solution of raising the retirement age to 70 over time. I think he's on the right track.

Do today's trust prospects have a good understanding of their likely longevity?

Personal finance blogs in the spotlight

The Wall Street Journal today offers a roundup of noteworthy blogs covering investment and money management subjects. Only one or two of the mentioned blogs seem even indirectly related to financial services marketing. The value of blogging in this arena remains to be demonstrated, though I think that the potential is huge.

Circular 230 will plague us for some time

The flyer for the 40th Heckerling Institute on Estate Planning (the "Miami Institute" to the old-timers) just came in today. You can find more information here. I note with interest a brand new topic, one of the special sessions: The Gathering Storm—Circular 230: What Does It Mean and What Do We Do? Among the questions to be explored: "Should every item of paper and electronic mail generated by a law or accounting firm contain a statement that it cannot be used to avoid tax penalties?"

I submit that to reasonable men, the question answers itself. When disclaimers get plastered on everything, they soon mean nothing. However, it seems that to the regulators (and those who must follow their commands), there's no such thing as too much information.

Another blog about estate planning

Law professors have been prolific pathbreakers in the blogosphere, and lawyers are entering the fray as well. You and Yours Blawg contains the observations of a New Jersey lawyer about estate planning, among threads. Although the blog (or blawg, as some lawyers seem to prefer) doesn't solicit business, I suspect that it could be a valuable practice development tool.

Repent! The end is nigh

Funny thing happened on the way to the teller window at the bank the other day. Picked up a muni fund prospectus and saw there was a sales load of 4.5%. Gosh, I thought, when you added in the first year's fees and expenses, a hapless investor would lose one-twentieth of his money at the start. How terrible!

A generation ago, that thought never would have occured to most investors. Load funds were the norm. Without brokers, mutual funds never would have gained traction in the first place. Now the tide is turning, as this chart from the Mutual Fund Fact Book shows.

But managers of no-load funds, except for index funds, shouldn't feel smug. Take a look at the new book by David Swensen, Yale's all-star endowment manager. Here's an excerpt from the publisher's blurb:

In Unconventional Success, investment legend David F. Swensen offers incontrovertible evidence that the for-profit mutual-fund industry consistently fails the average investor. From excessive management fees to the frequent "churning" of portfolios, the relentless pursuit of profits by mutual-fund management companies harms individual clients. Perhaps most destructive of all are the hidden schemes that limit investor choice and reduce returns, including "pay-to-play" product-placement fees, stale-price trading scams, soft-dollar kickbacks, and 12b-1 distribution charges.

To read more about Swenson, see Joseph Nocera's column in The New York Times.

Estate Tax: Exempt $3.5 million and tax the rest at 15% ?

According to today's Washington Post, that's the leading alternative to repeal at the moment.

By the way, why do reporters keep writing about the estate tax affecting "only the top 1%"? That top one percent represents those who leave the estates from which the tax is extracted. Being dead at the time, they don't really "pay" anything. Basically, their heirs pay. Mightn't an estate have two or three, six or eight, or even 10 or 12 heirs?

Banking's black eye: How did deferred annuities get misdelivered?

Seemed like a good idea: Wrap mutual fund shares in an annuity contract for tax deferral. Sell the packages to high-tax-bracket investors who have maxxed out their 401(k) and IRA contributions. Sellers would get high but inconspicuous sales commissions; buyers who invested aggressively and held for 20 years might make a buck.

One problem: When the others in your foursome are talking hedge funds, do you want to confess to buying an annuity?

A worse problem arrived with the Bush tax cuts. When you can pay 15% tax now on realized gains and dividends, why pay ordinary income tax of 30% or more later?

The marketing of variable annuities needed rethinking. Apparent result: A new target market consisting of unsophisticated senior citizens who chafed at low CD yields and liked the sound of "Your heirs will get back every cent you invest, guaranteed!"

To make sure the new market wouldn't refuse delivery, sales commissions were revved up. In his June 8 column, Jonathan Clements of The Wall Street Journal marveled at how much "annuity gladiators" could rake in:

I can't recall precisely when I got my first message, and I have no idea how I got on this particular email distribution list. But at some point last year, I started receiving emails aimed at insurance agents, offering to pay me commissions of 8%, 10% and even 13% for selling annuities.

The results have been disastrous. Horror stories abound, like this one from a Jane Bryant Quinn column last year. The selling of variable annuities made a list of Top Ten Investment Scams. An elder law center discusses annuity sales in the same breath as Ponzi schemes. (Rumors that the ghost of Charles Ponzi is suing for libel could not be confirmed.)

Can someone explain how banks got caught up in this sorry mess? Suicidal tendencies? A sick urge to get rid of customers over 65? Bank of America certainly didn't help its public image. Neither did Citizens, a Royal Bank of Scotland unit that's $3 million poorer as a result. Can regulators save banks and other annuity sales channels from themselves, or will stronger steps be necessary?

If that question sounds over-dramatic, read on.

This year, 2005, marks the centennial of the beverage we know today as Classic Coke. In 1905 people probably thought of it as New Coke.

The original Coca-Cola had been formulated in Atlanta a generation earlier, in 1886, and the Coca-Cola Company quickly became the Google of its time. From 1890 to 1900, sales of Coca-Cola syrup increased by 4000%!

Despite, or perhaps because of, this smashing success, in 1905 the Coca-Cola Company revamped its formula. No more cocaine.

Please note that "cocaine" was not a loaded word in the 19th century. Cocaine was merely a routine stimulant, found not only in soda-fountain tonics but also in painkillers, including Bayer Aspirin. Only when cocaine became widely abused by addicts was it outlawed.

Today, one response to annuity sales abuse would be to make variable annuities a "controlled investment product." No sales to investors over 50 without a prescription. To be valid, the prescription would have to be signed jointly by the investor's lawyer, a tax accountant and a trust officer or wealth manager.

Waddiyathink?

Free plug: The old delivery truck shown above is actually a toy coin bank, available from the Coca-Cola store.

The gap between what the wealthy want and what financial advisors are delivering

Interesting, if somewhat predictable, information in this survey by SEI Investments. Another boost for "holistic" planning.

Estate tax reform delayed

Earlier this year a compromise on the future of the federal estate tax looked possible. Senators Kyl and Baucus were negotiating a middle ground that might attract enough democratic votes to avoid a filibuster. However this item from Tax Notes (paid subscription required) indicates that nothing will happen before the August recess. Senate Majority Leader Frist was threatening to call for a vote on full estate tax repeal, but Finance Committee Chairman warned against the move.

"I've observed very intense efforts on the part of Sen. Baucus to work on a compromise and I think that he's sincerely trying to get Democrats on board," Grassley said. "I think that anything that would go for complete repeal, even though I support complete repeal, might blow the whole thing up."

So, maybe in September?

He gave up peddling trusts and annuities.

Yes, this Californian had a better idea. Instead of a slimey life selling living-trust packages and annuities to unsuspecting seniors, he opted for good old, straightforward fraud.

Why estate tax repeal doesn't much matter

William J. Bernstein, the Oregon neurologist who turned his hobby, portfolio theory, into a second career, doubts that estate tax repeal would create a new class of perpetually wealthy Americans.

Even with the widening acceptance of dynasty trusts, says Bernstein, vast familial wealth will shrink "faster than the prawn plate at a Cajun wedding."

Read his reasons here.

"Hi! I'm from the Government, and I'm here to cut your taxes"

Did you notice? President Bush asked Congress to map out income-tax hikes totaling as much as $600 billion to $800 billion over ten years. That's how much the Administration needs to kill the monstrous alternative minimum tax without increasing future budget deficits.

What's that? You say it's long been obvious the AMT soon must be done away with or toned down? Maybe so. But future budget deficits have been estimated on the assumption that those AMT revenues will keep on snowballing, engulfing and devouring the incomes of Americans with incomes of $75,000 and up. As this article in today's New York Times suggests, many of your trust and investment clients are among the victims.

Conspiracy theorists suspect the AMT was deliberately designed to cancel much of the benefit of the Bush tax cuts. Nah! Too clever.

But speaking of conspiracies, what's all this talk about killing the death tax? Even if the federal estate tax is abolished, various states are busy revving up their own death taxes. Incautious enough to die in Connecticut? Beware of a death tax with a top rate of 16%. Washington State? 19%

Florida, by contrast, allows residents to die tax free. Could that have anything to do with the 15%-or-more population increase that Florida expects by 2010?

Does Circular 230 Apply to Bank Newsletters?

When playing audit lottery with a tax shelter, some taxpayers were in the habit of buying "insurance" in the form of a legal opinion. The opinion would provide a basis for going ahead with an "aggressive" transaction. It would not guarantee success in a fight with the IRS, but it would show that the taxpayer had exercised reasonable precautions, enough to preclude the imposition of tax penalties.

An unhappy IRS modified Circular 230 last December, changing the rules for giving tax advice. Estate plannners are now justifiably afraid that the rules may apply to them as well.

Attorney and estate planner Natalie Choate penned "How I Will Comply With Circular 230" for the July 2005 issue of Trusts & Estates magazine (not available online, so far as I can tell). Planners need to be concerned with "covered advice," "other written advice," and, according to Ms. Choate, "preliminary advice."

I believe that articles in bank newsletters fall well outside the scope of Circular 230, and if they are covered, they should be considered preliminary advice. As such, it could be prudent to include a disclaimer that "Articles in this newsletter are not intended to be tax or investment advice. Please consult an appropriate professional before taking action or making any decision."

However, at least one of Merrill Anderson's clients believes that newsletter articles that touch on tax matters that are favorable to taxpayers constitute "other written tax advice." As such, to avoid compliance with all the strictures of Circular 230, such articles must include a somewhat more draconian disclaimer. The one this particular client chose is:

This written advice is not intended or writtten to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Before making any decisions or taking any action, seek the advice of qualified tax or investment professionals.

Yes, the client insisted on the boldface type, which was suggested in the December regulations but relaxed in the May amendments. The type still needs to be as large as the text copy.

My sense is that this is a bit of an over reaction, but at the same time compliance matters do need to be taken seriously. What are the other trust and private bankers saying about Circular 230?

Index funds

Jeremy Siegel's new book, The Future for Investors, Why the Tried and True Triumph Over the Bold and the New, includes an interesting exercise in what happens when you invest in an index fund. The current incarnation of the S&P 500 dates back to 1957. The index has been adjusted over the years, because it has to be. Some companies merge, spin pieces off, or are bought by others. The economy is changing over time, and the Index needs to evolve with it to remain an accurate barometer.

Professor Siegel posed the question, what if I bought the original 500 stocks instead of replicating the index? He had three alternatives for dealing with corporate reorganizations, from sticking to the originals only to owning all their descendants. The critical point is that none of the portfolios ever added any of the 917 stocks added to the S&P 500 over the years.

I was surprised to learn that Professor Siegel's portfolios beat the S&P 500 handily. No Microsoft? Limit yourself to big firms from the 50s, and beat the returns from firms delivering the information age economy? But of course it's true, which is why it made it into the book.

This seemed like just the thing to share with the readers of our Investment and Trust Newsletter, so I did a one page summary of Siegel's findings. I was promptly chastised by our clients, who fell into two camps. One side claimed we were slamming index funds, which was a problem become some trust departments rely on index fund investing for smaller trusts. The other school objected that we were endorsing index funds, or at least offering approval of a passive investment approach, which was inconsistent with their investment service.

Needless to say, we respond quickly to client concerns, and the page now covers tax basis and tax management for investment portfolios.

Any suggestions for covering investment matters for wealth management customers in a way that won't ruffle any feathers out there?

History of the estate tax

As you follow the estate tax debate cited below, you'll need a crib sheet on the history of the tax. I pinched this one from the National Center for Policy Analysis.

The first estate tax -- enacted July 6, 1797, to help pay for naval rearmament -- required only the purchase of federal stamps for wills and estates, but was terminated four years later because the need for the revenue passed.

A direct tax on inheritances imposed in 1862 during the Civil War ranged from 0.75 percent to 5 percent.

The top rate was raised to 6 percent in 1864; but the tax was then abolished July 14, 1870.

In 1898, an estate tax with a top rate of 15 percent on estates over $1 million was imposed to pay for the Spanish-American War -- then repealed on April 12, 1902.

America's fourth estate tax, enacted in 1916, set a top rate of 10 percent on estates over $5 million. It was raised to 25 percent in 1917, but this rate applied only to estates over $10 million. Unlike its predecessors, it was not repealed after the war, although the top rate was dropped to 20 percent in 1926.

President Franklin Roosevelt raised the top rate to 60 percent in 1934, and to 70 percent in 1935. The same bill increased the top income tax rate to 75 percent and increased corporate taxes. Altogether the law raised just $250 million annually.

Today [2005] the estate tax goes up to 47 percent. It exists only to redistribute income, since its revenue yield is negligible. But estate planning makes the tax virtually voluntary, according to estate tax experts.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 19, 2000.

The original modern estate tax, circa 1916, sounds good to me. Ten percent rate, $5 million exemption.* Why can't Congress learn to leave well enough alone?

* February 2010 update. I miswrote here. The ten percent rate only kicked in at $5 million, but lower rates, starting at one percent, applied to estates over $50,000.

The final push on estate tax repeal is coming

The surest signal yet that resolution of death tax issues is near is this article: Few Wealthy Farmers Owe Estate Taxes, Report Says - New York Times. Not mentioned in the article is the fact that the presence of death taxes has pushed many farm families to sell out to corporate agribusiness. I can't document how widespread a phenomenon that is (the same is true in the newspaper publishing industry, which was documented in Congressional testimony), but I have anecdotal first hand experience.

One can see the seeds of compromise here. It is very true that middle class farmers stand to lose if carryover basis is brought back into the law. It was the farm lobby that forced repeal of carryover basis in the late 70s (who the heck can guess the tax basis of a tractor?).

I believe that we were on course for bringing the estate tax issue to resolution this month, either with full repeal (30% chance) or a negotiated settlement that would accelerate a larger exemption (70% chance). However, the O'Connor retirement has upset that applecart, and if Rehnquist (and others?) also decide to retire most other Senate business is predicted to grind to a halt.

How to succeed in business: follow Wachovia's lead

When the Senior Assistant Blogger lived in Connecticut, he banked at Home Bank and Trust Company of Darien, which was acquired by a Stamford bank, which became Fairfield Country Trust, which merged with a New Haven bank and became Union Trust, which merged with First Union. If the SAB still lived there, his bank would now be called Wachovia.

Which is why he was interested to come across this article on Wachovia from the Gallup Management Journal. And like any civilian with long acquaintance with large banks, he was blown away to read therein a truly astonishing research finding:

In recent years, most major companies have realized that improving service quality and increasing customer loyalty are key to driving their bottom-line performance.

Will wonders never cease?

Seriously, folks, the article sheds helpful light on the efforts needed to improve service quality. Remember: The higher the level of bank-customer satisfaction, the more likely that customers will use additional services — like wealth management or trusteeship.

Russians now can die tax free. Why not us?

From an editorial in today's Wall Street Journal:

Karl Marx must be rolling in his grave, and don't even ask about V. I. Lenin: Russia eliminated its inheritance tax last month. Its move comes after January's decision by the government of Sweden, the birthplace of the modern-day welfare state, to eliminate its estate tax. Like the Russians, the Swedes have come to believe that the tax is unjust and economically counterproductive. Russia and Sweden join Argentina, Australia, Canada, India, Mexico and Switzerland as nations that don't make death a taxable event.

Subscribers to the Online WSJ can read the entire editorial here.

Advising the women millionaires

Did you know that most of the young millionaires in the UK are women? So reports this article, which offers provocative thoughts on what women want from their financial advisers.

Do women generally prefer to deal with women advisers? Or are women like my late mother-in-law still around? Daughter of a Wall Street mogul, she was financially astute herself but refused to believe a woman banker or broker could have a useful thought in her head.

Is estate tax reform coming?

According to this morning’s Wall Street Journal (subscription required), the Senate is close to a compromise on reforming the estate tax. We have no details as yet on tax rates or effective dates, but the smallest exemption being discussed is $3 million.

There will undoubtedly be additional adjustments, such as elimination of carryover basis, perhaps an additional exemption for family owned businesses.

Reportedly the White House is holding out for total repeal, which is unlikely. According to the Journal, advocates of repeal in the House are likely to accept the compromise.

The target for passage is the end of summer, which means before the August recess (around the ERTA anniversary?). I put the chance of passage of a compromise by August at 75%, because according to Tax Notes the repeal wing is quite strong, strong enough to see that something happens. Yet the Democrats have proved tenacious enough in blocking certain judges and the Bolton nomination that there is no chance for a stand-alone estate tax repeal bill passing. If Kyl strikes a compromise, the Senate Republican leadership is likely to endorse it, and I doubt Bush would veto it.

If the estate tax is changed, Merrill Anderson will have marketing materials in response.

Selling financial services with newsletters

Haven't posted for awhile because I was in Washington DC at the PrimeVest National Sales Conference. Merrill Anderson creates PrimeVest's client newsletter, and we do this with an unusual sales model. Each individual rep buys copies of the newsletter, for his or her clients (or other usage) and pays for the newsletter through commission reduction. Thus, Merrill Anderson has to sell each rep individually, for the most part.

Do the newsletters work? We didn't get any stories along the lines of "I distributed X copies of newsletters and received Y inquiries." We do have plenty of satisfied customers, and they did report getting comments on a fairly regular basis.

More important, usage of the newsletter is positively correlated with success as a PrimeVest registered rep. Overall, just 8% of PrimeVest reps have signed up for the newsletter. Among the "cream" of the brokers, those attending the National Sales Conference, we had a 27% market share. The top 25 reps constitute the "President's Club," and here we count 35% as our customers.

What do the newsletters do? Mostly, they put the face and contact information of the rep in front of the client. The content is polished and professional, good for the rep to associate with.

Drop me an email if you'd like to see a sample.

Private banks and trust companies: a broker's-eye view

Wealth management? You'll find it offered at any big brokerage firm. How does the service offered by private banks and trust companies differ from the brokerage version?

Here's a broker's eye view, from Registered Rep magazine.

Private banks offer more sophisticated service, catering to the customer rather than "pushing product."

Private banks and trust companies offer in-house expertise in trusts and estates and high-end tax advice.

“They are able to manage all aspects of trust accounts in-house, an increasingly important fact with the aging boomer population.”

And, "at the end of the day, it's also partly marketing. Private banks, quite simply, are chi-chi."

As the Registered Rep article illustrates, the battle for wealth-management business can be intramural. In this case it was Schwab vs. Schwab's U.S. Trust unit.

Anybody care to share other examples of brokers and trust new-business people duking it out to gain or keep a client?

From the databank

Percentage of people with net worth of $10 million or more who say they have no will, trust or healthcare proxy:
37
Percentage of affluent Americans who feel that wealth has made them happier:
46
Percentage of those with $10 million or more who say that money brings more problems than it solves:
29
Percentage of those with $10 million or more who worry that they won't be rich enough to support their desired lifestyle in retirement:
19
Median amount of wealth that those with $10 million or more say they would need to feel financially secure for life:
$18.1 million

Source of data: November 2004 HNW Inc. survey, commissioned by PNC Advisors.

2,270,000 millionaires

That's Merrill Lynch and Capgemini's assessment of the current Hign New Worth market in the U.S., according to this study. The study is as of the end of 2003, and that figure is a 14% over the 2002 number.

Is anyone else worried about the flattening yield curve?

I'm surprised that more people aren't alarmed--especially Alan Greenspan inthis recent testimony before Congress--about the fact that long rates have fallen as the Fed has raised short-term rates during the past year. One might think this a sign of economic weakness ahead--are there many exceptions to this well-known market observation?

When money talks, are you listening?

For the edification of wealth-management marketers, the latest Class Matters articles in yesterday's New York Times served up a cornucopia of quotes regarding those who possess large amounts of money, new or old:

Michael Kittredge (sold Yankee Candle Co. for about $500 million):

Successful people like to be with other successful people. "Birds of a feather." *** If you order a $300 bottle in a restaurant, the guy at the next table is ordering a $400 bottle.

[Really big] money makes a lifestyle. It creates a division between the old money and the new.

Roger Horchow (sold catalog business for $117 million):

The only people who are truly class conscious are the second tootsie wives of men with big bankrolls.

Dr. Nina Chandler Murray, psychologist, an 85-year-old relative of the Poor (as in Standard and Poor's) family:

Coming from a New England background, you had a honed discipline of what was expected. Showing off money was a sin.

What has happened in America is that achievement is so important that everyone wants everyone else to know what they have done. And in case you don't know, they want to tell you with a lethal combination of houses, cars and diamonds.

They have just a colossal amount of money. But they don't have any confidence in how they're living. For instance, one woman calls up her interior decorator every morning to find out what kind of flowers she should have. This seems sad.

Nelson Aldrich, old-money author of a book titled (surprise!) Old Money:

For many self-made men, homes, boats and even membership in expensive clubs are trophy signs of wealth. But for the older money, a boat may well be part of a tableau that has to do with family, with his grandparents and his children. It is part of his identity.

Michael Thomas, Wall Streeter turned novelist:

Ultimately, the new money becomes as insular as the old money, because it gains the power to exclude.

Shame has somehow gone out the window.

Letitia Lundeen, antiques dealer on Nantucket:

The old money doesn't like to spend money because they worry about whether they can make it again. Even when they can spend it, they often think it's vulgar and unnecessary.

Arlene Briard, Nantucket taxi driver and long-time resident:

Class has a certain grace. Just because you can go to Chanel and buy a dress does not mean you have class. A person who just pays their bills on time can have class.

Wealth managers must zero in on each client's attitude toward money. But have a care. Generalizations about New Money and Old Money don't always do well in crash tests against reality.

New Money? The Americans with the most are Bill Gates and Warren Buffett — two guys who probably couldn't look flashy if you paid them.

Old Money? The name most likely to be found on people's lips these days is . . . Paris Hilton!

Can this potion turn prospects into clients?

Sounds simple enough. Before you give your next seminar, just spray the room with oxytocin!

How big is the dynasty trust market?

Bigger than I thought. Guess a number before proceeding.

For those who are not familiar with them, Dynasty Trusts are perpetual private trusts. Under the common law, only charitable trusts were permitted an infinite life, while private trusts were governed by the wonderfully intricate "rule against perpetuities." As a practical matter, private trusts usually could not last much longer than a century. Which, one might think, should be plenty.

But the era of very high estate tax rates created an incentive to make trusts last longer, and so the Dynasty Trust was born. Several states reformed or abolished their rules against perpetuities to make such arrangements possible.

The strategy has born fruit. SSRN-Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes by Robert Sitkoff, Max Schanzenbach reveals that according to banking records, through 2003 about $100 billion has been placed in Dynasty Trusts. Interestingly, states that abolished their perpetuities laws but retained income taxes on Dynasty Trusts did not share in the bonanza. Thus,states do not share in the good fortune driectly through tax revenues, but only from the greater employment associated with trust management.

If the estate tax is repealed, will the market for Dynasty Trusts wither? Or is the urge to leave a permanent family financial legacy strong enough to sustain them without tax benefits?

"What's a special-needs trust, Doc?"

From a recent Forbes article on planning for special-needs children:

Parents are aware of the need to make plans, but 66% say there is little financial planning information available that focuses on children with special needs. Surprisingly, 85% parents turn to their doctor for financial advice.

Should trust business-development programs give more attention to this market segment?

If not, why?

Two erudite views on estate taxes

One of the better web destinations for legal thinkers to visit is The Becker-Posner Blog, a forum for the views of University of Chicago Professor Gary Becker and Judge Richard Posner. Last week they debated the efficacy of the federal estate tax.

Becker is against it. In addition to the efficiency and fairness arguments that we've heard before, Becker also thinks that in the information age, wealth is more that physical assets. He writesL

But after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy. Instead, the most important way for parents to “bequeath” economic position is through the transmission of knowledge in the form of education, training, and other human capital. Such capital embodied in people now comprises over 70 per cent of all “wealth” in economically advanced nations, far more important than material capital.

Posner, on the other hand, is reluctant to give up this revenue source, though he would prefer an inheritance tax and recognizes that the estate tax raises little revenue. In particular, he raises concerns about social mobility in the absence of such taxes.

Wealthy people seem increasingly able to guarantee that their children and even grandchildren will remain in the upper income tier, leaving fewer places for the children and grandchildren of the poor to occupy. Through “legacy” admissions (as at Harvard!), expensive private schooling and tutoring, including tutoring in taking college admission tests, as well as by means of direct transfers of wealth, wealthy people are able to “purchase” a secure place for their children and grandchildren in the upper class. Even if, as Becker argues, social mobility has not actually declined in recent decades, it is lower than it used to be and the conditions for a decline seem in place.

This is a well-thought-out discussion, free of the emotionalism and sloganeering sometimes found on both sides of the question. The extensive comments to each article are worthwhile also, as are the authors' responses to the comments, though I haven't had time to read them all. But if the ranks of millionaires are growing as fast as JLM suggests below, this will remain an important policy concern.

Millionaires - an endangered species?

Fear not, marketers to the affluent! U.S. millionaires, a species thought to be in dcline after suffering severely from DCS (Dot Com Syndrome) are making a remarkable comeback. There now are 7.5 million millionaire households in the U.S., breaking the record of 7.1 million set back in 1999.

You can read all about it (for free, thanks to the generous folks at the Pittsburgh Post-Gazette) in Robert Frank's article from today's Wall Street Journal.

Good news and bad news

Rarely does the business section of the Sunday New York Times contain two articles on trusts, much less on facing pages, but that's what confronted your Senior Assistant Blogger this morning.

The good news: Trusts for pets, a concept validated by the Uniform Probate Code and now permitted in 27 states.

The bad news: Harvard Alums can set up charitable remainder trusts that are invested alongside Harvard's legendary endowment. Harvard's returns have been stellar - a 15.9 percent average over the last decade; 21.1 percent last year. Yale, with a return on endowment of 19.4 percent last year, is expected to offer its alums the same service. If another universities follow suit, that means serious new competition for corporate trustees.

Investment tip: Harvard's endowment has reduced its domestic-equities exposure and heavied up on bonds, private equities and hedge funds.