David Levine (1926-2009)

In the last half of the twentieth century, two artists created caricatures so distinctive that millions of Americans could spot them instantly: Al Hershfeld, who won fame with his drawings of show-biz figures, and David Levine, who seems to have drawn just about every public figure or private celebrity in sight.

Levine died this month at 83. Below are his portayals of Warren Buffett (1996) and Adam Smith (1978) . You can browse hundreds (no, thousands!) more Levine caricatures here.

15 per day, every day

The Wall Street Journal puts the expiration of the estate tax on its front page, with Rich Cling to Life to Beat Tax Man. They quoted many prominent estate planners, all of whom are flabbergasted by the unfolding situation. Michael Graetz at Columbia called it "Congressional malpractice." He also said that if Congress couldn't get this fixed in 2009, what makes anyone think 2010 will be any different?

The Journal points out that even if the federal estate tax only affects 5,500 estates at 2009 exemption levels, the commonly used figure, that's 15 taxable estates per day. There will soon be a meaningful number of large estates passing without any federal estate or generation-skipping transfer tax.

That some families will delay "pulling the plug" on someone to push an inevitable death into 2010 to save on taxes is not very surprising to me, especially if the costs of the extended life support are not being paid by the family. What I found truly shocking in the Journal article is that there have been a serious number of inquiries about euthanisia.

Elderly, wealthy but infirm clients have been asking their lawyers about traveling to Holland to arrange their suicide, so as to lock in the estate tax savings that could be available in 2010!

Such plans would be thwarted if Congress attempts to retroactively restore the estate tax to January 1. The article touches on the constitutionality of that idea briefly. The question is closer than I earlier   believed (I've been looking into it for Merrill Anderson's Estate Planning Report). There is no question, however, that the constitutionality of a retroactive tax would be challenged in court.  It could be years before a final answer is available.

Estate Tax Mystery Solved?

The federal estate tax officially expires on New Year's Eve, even though the House of Representatives voted for a temporary extension. Why wasn't the Senate willing to go along?

At The Christian Science Monitor, David R. Francis offers a possible clue:

[W]ith 46 to 68 millionaires in the Senate (the count hangs on whether one uses minimum or maximum net-worth numbers), will the chamber vote to maintain a tax that could damage its members’ own estates? Because 22 senators own at least $3.5 million and 14 own at least $7 million, should they recuse themselves from a vote that so directly affects their interests? The Center for Responsive Politics calculates the average wealth of US senators in 2008 at $13.9 million.

When the Going Gets Tough . . .

. . . the Ponzi schemes get going.

For evidence of the going getting tough, WSJ subscribers can see Adjusted for Inflation, Dow's Gains Are Puny. The DJIA would have to soar another 25% and more to equal its real 1999 level.

We've called attention to the inflation-adjusted DJIA before. This chart shows the severity of the slow-motion crash in the 1970's. Even if we avoid repeating that slide in the 2010's (keep fingers and toes crossed!) investors may continue to find decent returns hard to come by.

The more frustrated investors become, the faster Ponzi-style plundering proliferates. None of the schemes that unravelled in 2009 equaled Madoff's, but there were an awful lot of them.

Moral: Now more than ever, investors need true fiduciaries to help them navigate in shark-infested waters.

Bad tax ideas

Via TaxProf Blog, here are the Brookings Institution's Ten Worst Tax Ideas of 2009. To my surprise, I agree with some of the analysis.

Thinking Hard About Retirement and Death

Doesn't seem like a popular topic for the Holiday Season, but the most-read article in the Money Section at nytimes.com this morning was Thinking Hard About Retirement and Death.

High-net-worth people really do thirst for information on financial and estate planning. That's why the sponsor of this blog creates newsletters and an impressive library of material for online use.

Incidentally, the NY Times article illustrates the futility of trying to comment on the estate tax snafu. Pity JPMorgan's Janine Racanelli, whom the Times coaxed into giving a quote that boils down to, “If we’re resigned to an estate tax existing, it’s … an acknowledgment we won’t have a repeal.”

Double Your Money in 6,932 Years!

From Saving Money Costs Investors in The New York Times:

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

A YouTube "Christmas Special"

From Wade Johnston.

I liked all 8, but number 5, O Come All Ye Faithful, was my favorite. Creative and charming, the lot of them.

Season’s Greetings!

Let's escape to simpler times for a minute and enjoy this Holiday Greeting from Duke's archive of old advertising.

Click on thumbnail for larger image

Except . . . the early years of the Twentieth Century weren't simpler, were they? By 1914 the automobile was beginning to reshape the American way of life. Eleven years earlier, the Wright Brothers had come to North Carolina and made their airplane fly.

1914 was when the guns of August sounded. In a couple of years, Allied airmen would be dogfighting the Red Baron and his fellow pilots in the skies of Europe.

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Fortunately, Season's Greetings are like the Nobel Peace Prize: all about aspiration. Forget stock market cycles, federal deficits and the crashing of commercial real estate. Go right ahead and have a Merry Christmas . . . and the happiest of Happy New Years!

Upping the ante

Tax Notes Today ($) reports that Senate Finance Chair Max Baucus has promised early action on the $31 billion "tax extenders" bill, already passed by the House. "We intend to extend the provisions without a gap in coverage, just as the House did on December 9th of this year," said Baucus.

On the other hand, permanent estate tax reform may have to be folded into a larger tax reform effort for 2010. Baucus continues to say that the estate tax will be reformed retroactively. There will be serious pushback on that idea, and the longer the Congress dithers the harder it will be to impose a retroactive tax.

The stakes for general tax reform in 2010 are especially high, as all the Bush tax cuts will be expiring at year end. If estate tax reform gets attached to huge tax reform measure, it will be August at the earliest before it is enacted, and it could easily run up against election season.

It's too bad the Congress dedicated all of 2009 to health care insurance reform. I would have preferred positive steps to restore economic growth. If the Democrats freeze out the Republicans on tax reform the way they did on health care, I suspect the leading scenario is that they pass nothing at all.

“Grand Theft Astor:” The Sentence

Quote of the day, from Justice A. Kirke Bartley Jr., who sentenced Anthony Marshall to one to three years in prison for looting the fortune of his mother, Brooke Astor:

“It is a paradox to me that such abundance has led to such incredible sadness."

With time off for good behavior, The New York Times speculates, Marshall may be out of jail in time for Veterans Day.

Fun and Death Taxes

"If you are at the checkout counter, you might want to expedite things."
– Representative Richard Neal, Massachusetts Democrat,
as quoted in the NY Times

Who could have guessed, when the year began, that the main subjects of yucky jokes this holiday season would be Tiger Woods and the federal estate tax?

At least we won't have to usher in the new year watching the crowd at Times Square. We can go online and toast the countdown clock at NoDeathTax.org.

Sobering afterthought: the clock also is counting down to the death of stepped-up basis for computing gain on inherited assets.

An Indispensable Little Folder

[A brief commercial for Facts You Need to Know About Taxes.]

I was wrong.

When I was researching and writing about tax matters all the time, Facts You Need to Know About Taxes seemed redundant. Who needed it? All that stuff was already in my head, and I figured it must be in the head of most High Net Worth Investors.

Now I'm a High Net Worth Investor (Junior Grade) myself. In order to comment on subjects covered in this blog, I probably keep up with tax and investment developments better than most. Yet when the office sent me a sample of Facts You Need to Know for 2010, I realized how little of that tax stuff was in my head anymore. This indispensable folder will have a home on my desk top throughout 2010.

If you're concerned with making your wealth management clients think well of you, Facts You Need to Know can help. For more information, click here.

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Talk of tax changes will fill the Washington, D. C. air next year. (Hot air in 2010, action in 2011?) To understand the talk, you and your wealth-management clients must know where the tax system stands now. In other words, you'll need Facts You Need to Know.

Estate tax to lapse as legislated

There was not enough time all year long to attend to the estate tax, and there isn't enough time before Christmas to get it done. The last, futile gestures are reported by Tax Notes Today ($).

Max Baucus asked for unanimous consent for an extension of the current law, to which minority leader Mitch McConnell objected. McConnell in turn asked for unanimous consent to a measure boosting the exemption to $5 million, and Baucus objected to that. It wouldn't have mattered, because the House won't take up any new legislation before the holidays.

Prominent Democrats are saying they'll restore the estate tax next year, and make it retroactive to January 1. You can have retroactive rate increases, I'm not so sure about retroactive taxes.

Also left unfinished by the Senate, the $31 billion extenders bill. Tax breaks can be granted retroactively, of course, so that one is less problematic.

Can Estates Be Taxed Retroactively?

Looks like we're going to find out: Estate Tax Expiration Sets Up Battle on Retroactive Restoration.

Or as Jim Gust might put it: Never underestimate the ability of Congress to do the unthinkable.

Thinking the unthinkable

Rep. Earl Pomeroy (D-ND)wrote the permanent estate tax reform bill that the House passed earlier this month. He no longer expects the issue to be resolved before year end, according to The Wall Street Journal. Accordingly, the estate tax would expire on January 1, 2010.

Pomeroy reportedly expects Congress to revisit the estate tax next year, with a retroactive effective date. Interesting idea, and almost certainly unconstitutional. True, the U.S. Supreme Court upheld a retroactive increase in the estate tax rate during the early Clinton Administration, but that is much different from a retroactive tax itself.

That may be why Ways and Means Chairman Rangel has been angling for a two-month estate tax patch, hoping to avoid that constitutional question.

Congress Conceives the Temporary Fiduciary

"Investment adviser groups are up in arms about a one-sentence provision buried in the sweeping financial services reform legislation approved last week by the House of Representatives," reports Investment News. The bill would impose fiduciary duty on brokers offering investment advice. But . . .

Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.

Discount brokers prompted the "hat-switching" provision, according to lobbiyists.

I wish they had mentioned this earlier

Tax Cuts Might Accomplish What Spending Hasn’t - NYTimes.com

Actual studies are cited, it's not just political puffery. I wonder why they published this on a Saturday?

Estate tax safety net

According to Tax Notes Today ($) no one expects the Senate to take up the permanent estate tax reform bill passed in the House December 4 (H.R. 4154, the Pomeroy bill). Accordingly, the House leadership is looking at backup plans, to avoid the lapse of the estate tax advocated by The Wall Street Journal, among others.

One idea, according to Tax Notes, is to attach a temporary extension of the 2009 law to "must pass" legislation. A leading candidate is the defense appropriations bill, which will be taken up December 14 and which must be passed by December 18. That would be something that the Senate cannot just ignore.

No word yet as to how long the temporary fix would last.

A game of chicken over the federal estate tax

The House has voted to make the 2009 federal estate tax regime permanent. Apparently, they don't have 60 votes for that in the Senate. They might have 60 votes for a $5 million exemption and 35% tax rate, the bipartisan compromise that was voted down in the House. With the Senate bogged down in health care. the Wall Street Journal calls instead for letting the estate tax expire.

The Journal advocates for carryover basis. Although there is logic to their argument, it is virtually impossible to implement and administer. Especially because the complexities are compounded with special rules to exempt smaller estate and protect surviving spouses. Says the Journal:

But the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes.

This is a dangerous gamble. Advocates for full repeal seem to want to call the bluff of Democrats. But liberals in turn might be willing to accept a year without a federal estate tax if it means that the exemption goes back down to $1 million in 2011.

Should the WSJ Have Banned "Death Tax"?

Probably. The term is too politicized, as the WSJ Style and Substance blog explains.

Like Taxgirl (see below) Style and Substance is a blog we probably should consult more often. The author, Paul Martin, clearly cares about well-worded, properly-arranged writing.

Why Estate Settlement Shouldn't Be Casual

See Taxgirl's Charitable Donations and Estates for a case where heirs who couldn't wait to clean out mom's house may have lost a few charitable deductions.

Hadn't looked at the Taxgirl blog in a long time – I've got to get out on the Web more! Stumbleupon sent me there to read IRS Insists Mom is Too Poor to Support Kids.

The Astor Update

Brooke Astor died in 2007. On December 21 her 85-year-old son, Anthony Marshall, will be sentenced for the criminal offenses of which he was found guilty. (Merry Christmas!) In January 2010 a NY Surrogate's (probate) Court may begin to decide which codicils to her will are valid.

Let's Hear It for “Old Money”

Check out Forbes' America's Richest Families for evidence that Old Money can be surprisingly durable. Although the list starts with New Money, the Waltons, you'll encounter the families of 19th-century media tycoons Hearst and Scripps, the Mellons and various Johnsons – and the du Ponts, whose wealth dates from a gunpowder mill opened in 1802.

The Dorrances of Campbell's Soup also make the list, despite the unhappy tax fate of John Dorrance. He died in 1929, leaving an estate that paid a federal estate tax of $9.5 million and, famously, wound up being taxed by both Pennsylvania and New Jersey as well.

Soup Can by Andy Warhol

Straw in the wind?

Charities are hurting during this economic downturn. So I was surprised to see the angle taken by The New York Times: More Charities Seek Tax Break for Donors, Costing U.S. Billions.

I tend to agree with the sentiment, we've allowed far too much capital go live in the nonprofit arena free from taxes—I'm looking at you, Harvard and Yale. But that's not what concerns the Times, they're afraid that too many "clubs" are masquerading as charities.

That's not where the real money is. But given this attitude as a predicate, could there be a move afoot to rein in (or tax) the charities?

"Funny, You Don't Look Rich"

See the comments to Five Rules for Selling to the Rich at the WSJ Wealth Report for ever-useful reminders. For instance, this from Helen:

What I take away from this is that when I’m dealing with sales people I need to be more demanding - like a rich person would be! Perhaps I’ll get more respect.

This is all good advice and I appreciate it. But, honestly, this advice applies to anyone ….

Back in the 20th century, Thomas Stanley repeatedly told marketers to the rich – including trust new-business execs– that they didn't even know what the rich looked like.

Judging from other comments on this Wealth Report post, you can say the same in the 21st century.

One small step for permanent estate tax reform

Yesterday the House of Representatives passed a permanent extension of the 2009 federal estate tax regime—drop carryover basis, $3.5 million exemption, 45% tax rate.  No Republicans voted for this, and 26 Democrats dissented as well.  The bill was paired with a statutory "pay-go" provision, which many House Democrats advocate.

"Pay-go" sounds responsible, it's sort of "stop me before I spend again."  As a practical matter, it has been used to require every reasonable tax change to be offset with higher taxes somewhere else, presumably on "the rich."  The "pay-go" concept is what prevents a decent reform of the AMT, for example.

Prospects in the Senate are uncertain at the moment—a giant game of chicken is being played.  Some Senate Democrats want to add indexing of the exemption.  Many Republicans favor the bipartison compromise that was shot down in House, a compromise that would slowly lift the exemption to $10 million and reduce the tax rate to 35%.  The problem is that the Senate remains preoccupied with health care reform.  They could easily spend the rest of the year on that.  Said Senate Majority Leader Harry Reid, "We're working our way through these issues."

As I drove home last night, CBS misreported this news, saying that the House bill would allow beneficiaries to receive $7 million free from estate tax.  I know what they were referring to—married couples can, with basic estate planning, arrange to keep $7 million in the family.  That's very different from what they said.  Without a provision for spousal portability for the federal exemption, using that $7 million figure is deeply misleading.

Accuracy matters little to them, apparently.

Does “2KX” Have Legs?

According to Schott's Vocab, 2KX is an increasingly popular abbreviation for the year 2010.

Lights, Camera . . . Last Words

The Wealth Adviser Report in the WSJ includes this article on the pros and cons of videos made to accompany wills.

On the one hand, they can ward off trouble:

Dennis O'Doherty, an attorney in Sayville, N.Y., had a client who taped her will-signing because she was concerned that a problem child, to whom she was leaving less than her other children, would cause a fuss. She was right.

The adult child's attorney contacted Mr. O'Doherty earlier this year, after the mother had died, to say the child intended to contest the will, believing the mother hadn't been mentally fit to execute the document. Mr. O'Doherty told the attorney about the video and invited the attorney to his office to watch it. In the end, the child decided against moving ahead with a legal fight, Mr. O'Doherty says.

On the other . . .

Attorneys generally caution against homemade videos, saying they are more likely to cause problems than those produced in consultation with an attorney. A video filmed by a beneficiary, for example, could give rise to conflict-of-interest questions.*** [V]ideos, whether used for estate or legacy planning, aren't substitutes for in-person discussions.

“Trust Service” or “Trustee Service”?

Followed a link the other day to Evercore, founded by US Trust alumni, and noticed that Evercore Trust Company offers trustee services, not trust services. A trend?

Strictly speaking, trustee services, not trusts, are what corporate fiduciaries provide. Practically speaking, fiduciaries often must explain the advantages of trusts in order to have a chance to sell their services as trustee. That's why US Trust ads offer a pdf on GRATs, as we noted in an earlier post.

Oddly, JP Morgan plays it both ways, marketing trustee services to family offices and trust services to office-less families.

What's your preference?

Looter of Family Office Pleads Guilty

On the first day of his trial on charges of looting the Ayer family office of more than $20 million, John Doorly pleaded guilty. He faces up to 20 years in prison – about one year per million.

Christmas Price Index

If you got it, flaunt it! For decades PNC has had fun tallying the prices of the gifts mentioned in The Twelve Days of Christmas. This year PNC Wealth Management shows marketing initiative by creating a multimedia web page.

After rising 8 percent in 2008, the Christmas Price Index rose less than 2 percent this year. Swans and partridge are a bargain. Gold rings have gone through the roof.

More on Taxing Business-Owning Estates

Ray Madoff's idea of taxing estates heavily but exempting estates of business owners generated several letters to The New York Times. Here's an observation from an accountant:

In my experience, the family business fails upon the death of the patriarch or matriarch because of the family. Spouses from a second marriage do not get along with the children. Children do not get along with one another. And when nobody plans for the inevitable, the business suffers from a lack of unified management and is often split into pieces.

Exempting family businesses from estate tax would encourage keeping a business in the family when it might do better if sold to employees or outsiders. The sponsor of this blog could probably serve as an illustration. If the founder had sought to keep his small advertising and marketing firm in the family, The Merrill Anderson Company probably would not around 75 years after its founding.

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Take a moment to appreciate Jason Logan's illustration that accompanies the letters to The Times. That's not a rock and a hard place between which we're stuck – it's Death and Taxes!

The Great Depression at Yale

Yale's highly-touted investment whiz, David Swensen, recorded worse-than-average losses for the university's endowment last year. Too much messing with hedge funds and alternative assets? Maybe. But during the Great Depression, a conservative investment stance didn't keep Yale's endowment out of trouble.

Here's a snippet from Gaddis Smith's feature story on Yale during the Great Depression in the Yale Alumni Magazine:

Although the university had avoided common stocks and kept most of the Yale endowment in bonds, income from the endowment declined by 21 percent. Gifts to the alumni fund, which had exceeded $1 million for the first time in 1926-27, dropped 85 percent to $142,732 in 1934-35. Not until 1950-51 would gifts be above $1 million again.

Smith's article is worth reading for the feel one gets of the divide between the haves and the have nots during the Depression. The dislike – nay, hatred – that a good number of the haves harbored for FDR can hardly be overstated. According to my memories from toddler days, it easily equalled the venom that "birthers" and others direct at our current President.

How to Keep Peace in the Family

In U.S. News and World Report, Philip Moeller notes an increase in family estate squabbles and will contests. He presents eight estate-planning tips. Can't argue with this one:

Pick the right executor and trustees. Anticipate family friction, and make sure you don't appoint to key positions relatives who can't get along. "If you are concerned about conflict among your heirs," [estate attorney Adam] Gaslowitz says, "it is usually best to appoint a professional fiduciary like a bank to manage your affairs after you are gone."