Marital trusts in 2010

The Trust Advisor Blog makes several interesting points about marital trusts during this year without estate taxes.  The context is the estates of George Steinbrenner and John Kluge, who were survived by spouses.

If we knew that there would be no estate tax  this year, and there would be one ever after, the best result is to avoid marital deduction trusts altogether (assuming that the surviving spouse lives until the return of the estate tax). A traditional marital trust will be fully taxed in the survivor's estate.  So will a QTIP trust.  How's that?  Wouldn't the executor elect against the marital deduction so that the entire QTIP is treated as if it subject to estate tax this year?  He would if he could, I suppose, but without the need to file Form 706, there's no way to communicate the election to the IRS. 

There's been no guidance from the Service on this problem as yet.

“Wealth Managers Too Costly”

Though the investment returns enjoyed by wealthy investors in Europe and elsewhere have dropped, the charges and fees levied by their investment advisers have not. So reports the Financial Times:

An “unsustainable” 40 per cent of wealthy investors’ expected portfolio returns are being swallowed up by fees and other charges, according to research by Royal Bank of Scotland.

European private banks and other wealth managers have maintained their cost base over the past two years, despite plunging investment returns and declining assets under management, RBS found, eroding returns for their clients.

Do wealthy U.S. investors also have reason to feel overcharged?

W. C. Fields: Retirement Planning Realist

From a letter written by W. C. Fields to his mistress, minor movie actress Carlotta Monti, in 1939:

I have given deep thought of how to protect one’s self from poverty in old age but have never found a solution. When I get an idea and analyse it thoroughly, I always find so many things can happen: The banks fail; insurance companies go on the blink; money is apt to be depreciated; stocks and bonds go to nothing; property values go so low you permit the state to sell it for delinquent taxes; nothing is certain but death.

H/T to Randy Cassingham's This is True for calling attention to Letters of Note.

Timing the Market? Watch Congress

Wall Street's belief that national politics offers clues to timing the market is often frustrated. For instance, you might think stocks would do better under Republican presidents. Generally they do not.

What about a gridlocked Congress, such as we may enjoy next year? Nope. Since 1926, according to research cited by Jeff Sommer in the NY Times, during periods when neither party controlled the White House and both chambers of Congress, stocks returned about 7 percent annually. When one party was in full control, the annualized return was significantly higher: 12 percent.

Nevertheless, market timers have a good reason to keep an eye on Congress:

Oddly enough, while the data doesn’t support the idea that gridlock is beneficial, it does show that stocks fare better when Congress is out of session….

***

The researchers found that more than 90 percent of the price gains over the 108-year life of the Dow Jones industrial average through 2006 came on days when Congress was out of session. And in periods when polls showed that Congress was least popular, this “Congressional effect” was most pronounced.

“Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”

- Mark Twain, a Biography

Harvard 11, Yale 9

After losing close to 30 percent in fiscal year 2009, the endowments of Harvard and Yale have staged modest comebacks. In the 12 months ending last June, Harvard's endowment recorded an 11 percent return. Yale was up 8.9 percent.

Over the last ten years, Yale's return did beat Harvard's. But both schools, and a number of others, suffered liquidity problems as a result of an increasing emphasis on alternative investments –timber, oil, real estate, private equity, etc.

Bloomberg Businessweek reports that cash shortages led to unprecedented borrowing:

Harvard University, Yale University and Stanford University, with combined endowments about equal to the gross domestic product of Lithuania, are among 15 of the wealthiest colleges and universities that borrowed $7.2 billion because their highbrow investing left them suddenly strapped for cash.

Senate again kicks the can down the road

The Senate can't make up its mind about which vote would help the most in the November election--extend all the Bush tax cuts, or just those for the bottom 98% of taxpayers.  So they are taking the coward's way out, and have promised to vote first thing after the election, according to Tax Notes.  Nor will the compromise position of a 2-year extension for all the cuts get a vote.

My view is that this is the worst of all possible worlds.  Charles Grassley's comment is apt: " . . . uncertainty is terrible for the economy. Small businesses don't hire people while they sit in limbo, wondering if they'll get hit with a tax increase."  Leaving the $4 trillion sword of Damocles over the head of the American taxpayer seems like odd political strategy for any incumbent.

My understanding is that the call to extend all the Bush tax cuts implicitly includes repealing the estate tax. Has anyone seen something to contradict that?

Singapore is the New Switzerland

Photo via Wikimedia Commons

"For centuries," the NY Times observes, "Switzerland has been the sanctuary of choice for wealthy people seeking to hide their fortunes and evade taxes. Now, amid a growing crackdown on Swiss private banking, the rich are flocking to Singapore and Hong Kong…."

Death and Taxes For British Expats

To well-off Brits, even the $1 million exemption now scheduled for Uncle Sam's estate tax would sound good. For Brits living abroad, the tax-wisest way to move wealth from one generation to another may be a family limited partnership. Howard Bilton, the Telegraph's offshore finance guru, explains the virtues of a UK FLP in Death, taxes and keeping it in the family.

Restoring the estate tax costs 1.5 million jobs

Via TaxProf Blog.

When we consider how few jobs were created for the millions of stimulus dollars, this seems like a decent argument, doesn't it?

Barron's Plugs Qperts

To make the most of the lifetime exemption from federal gift tax, ideally one should give assets that are temporarily depressed in value.

Aren't we lucky to have a real estate bust?

Barron's highlights the advantages of giving the younger generation a residence via a qualified personal residence trust or a limited family partnership: Pass Along Your Real Estate Now.

(Note: I'm not a Barron's subscriber, but when I googled qperts, Google gave me access to the article.)

If Google is equally generous to you, see also the sidebar on the outlook for estate tax legislation. Will something happen after the election? Early next year? Either way, action is likely to be paired with the income tax fix:

"The normal thought process on Capitol Hill is that the more pieces in the package, the more likely you can give a little here and take a little there and hit a sweet spot," says George K. Yin, tax professor at the University of Virginia School of Law. With the estate tax in the mix, he says, there may be more flexibility to reach a compromise. Let the political see-sawing begin.

Take time also to appreciate how an illustration can enliven even the subject of death and taxes. Of course, the retro artwork is by Picasso:

No, not that Picasso. This Picasso.

Women and Wall Street, Then and Now

Fifty years ago today

September, 2010

Women Sue Goldman, Alleging Bias. "Goldman Sachs Group Inc. was sued by three former female employees who allege that the investment bank practices a system in which women are paid less, promoted less and 'systematically circumvented and excluded.'"

Estate Planning Strategies

In Strategies While the Estate Tax Is in Limbo, Deborah L. Jacobs quotes an estate planner who reckons Congress won't adjust next year's high-rate estate tax (aimed at wealth over $1 million) until months have passed in 2011. Could Jim Gust's diabolical thought come doubly true?

Jacobs' list of estate planning moves to consider in the meantime include

Life insurance trusts funded with new, temporary term policies. Purpose: to cover added estate tax on those who die "too soon" in 2011.

Grantor Retained Annuity Trusts. GRATs remain a good deal thanks to low interest rates, and the short-term variety aren't likely to be available long.

“I Sell Investments. May I Help You?”

'Clueless' investors think brokers are fiduciaries, survey says.

Well, of course. Those clueless investors have never met a "broker." All they encounter at wire-house offices are "financial advisers."

See the comment from CA Adviser appended to the above article. I tend to agree. The effort to turn brokers into fiduciaries is probably misguided:

[T]hey should focus on real reform. Stop the obfuscation, stop the total lack of disclosure, stop the misleading titles given to sales personnel….

There is nothing wrong with being a salesman, it's just time to call salesmen, "salesmen" again, that's all.

Related post: Dogs and Cats, Fiduciaries and Brokers.

A diabolical thought

One proven way to help an economy in recession, in my view, is to cut everyone's taxes. Worked for Reagan, worked for Bush. We haven't done that in this recession, mostly because we still have the Bush tax cuts in place, with the result that nearly 50% of workers no longer pay income taxes anyway.

There's a big to-do going on about extending the Bush tax cuts. Politicians seem to think that extending those tax cuts for the middle class will have the same effect as a new tax cut. I don't think so. If my taxes fail to go up, but only stay the same compared to my baseline, I'm not going to feel any richer.

How can we solve this problem? By letting all the tax cuts expire, just as we let the estate tax expire, and let everyone feel some pain in January. Then reenact the Bush tax cuts, say in March or so, prospectively only. That way we get three months of "enhanced revenue" (another term from the Reagan years, I think) followed by genuine relief when taxes go back down.

Could it happen? "The beatings will continue until morale improves."

A new choice

Per Tax Notes, the Obama Administration is considering a proposal to give 2010 decedent's estates the choice of opting for the 2009 estate tax law, with a $3.5 million exemption and full basis stepup, or the 2010 law, with no estate tax but only a $1.3 million basis step up.

I'm not sure what the point is.  Yes, it passes constitutional muster. No, large estates are unlikely to choose a 45% estate tax over a 15% or even 20% capital gains tax.  This seems to be simply a way to let estates under $3.5 million off the income tax hook. It can't possibly be scored to raise any revenue, taxpayers are not quite that stupid.

I guess it would increase billings for estate planners, though.

Unhappy is the Financial Planner

What careers are likely to make you happy? Not financial planning, according to rankings concocted by The Wall Street Journal. On a "satisfaction" index scaled from zero to 100, the job of Certified Financial Planner ranked a near-miserable 20.2.

Other financial professionals were a bit happier, especially insurance brokers. After five years on the job, portfolio managers and actuaries hauled in the highest pay.

Overall, the job most likely to make one happy is software quality assurance manager. The least likely? Assisted living administrator. That job that did not push the satisfaction-index arrow off zero.

My question is answered

Earlier, I wondered if the GOP's sweeping call to freeze today's tax rates for everyone for two years included keeping the estate tax in suspense. 

Apparently, it does.

Here's the key quote:

In recent days, Mr. Boehner has called for extending all of the Bush tax cuts for two years and freezing government spending at 2008 levels. In addition to the lower marginal income tax rates, aides said that Mr. Boehner would like to continue the current moratorium on the federal estate tax, which is also due to expire on Dec. 31.

Estate Tax: Wait For the Lame Duck?

From Tom Herman's tax column in the Sunday Journal:

Q: What is your gut feeling on what is going to happen to the estate-tax law for 2011?

—S.M., Yorba Linda, Calif.

A: The murky outlook for the estate tax has grown even more murky lately.

The situation reminds me of an old Washington quip: On the surface, very little is happening. But beneath the surface, nothing is happening.

Herman thinks the federal estate tax might be revived at year end, in a lame-duck session of Congress. Then again, maybe not.

Deflation or Inflation?

Will dollars buy more goods and services or fewer in a year or two?

While some investment managers worry about deflation, plenty of prices keep rising. Recent example from Bloomberg Business Week: tickets to home football games at Ohio State. Last year's average cost: $319. This year, $523.67.

Income inequality

There's some excellent tax data buried in Did federal government policy create the Great Divergence? (5) - By Timothy Noah - Slate Magazine. The bits I think I can use:

In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent, according to the Congressional Budget Office. By Reagan's last year in office it was 32.2 percent. From 1989 to 2005 (the last year for which data are available), as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most years it remained in the low 30s, surging to 41 during Clinton's first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent.

Debtors Win; Savers and Retirees Lose

See Graham Bowley's front-pager in this morning's NY Times, Debtors Feast At the Expense Of the Frugal. Dirt cheap mortgage rates may help home refinancing, but bank deposits are falling for lack of interest. Bowley offers a clear overview of how nest eggs have moved out of banks into Treasuries, driving yields to extraordinary lows, and into junk bonds.

Rock-bottom returns on bonds and bank deposits have left many retirees with little choice but to spend down principal. About all wealth managers can do is to recommend an orderly approach – better to lose a little each year rather than reach for high yield by investing in shaky IOUs or outright scams that result in larger losses. (Adv.: One of the most helpful publications I've seen on the subject is Merrill Anderson's Managing Your Assets in Unsettled Times.)

Back in the late 1970's, retirees saw their nest eggs down-sized by double-digit inflation. (See the graph in the U.S. Trust ad below.) Now they must spend down their assets because government policy penalizes savers by giving borrowers a nearly free ride.

Weren't we all supposed to be deleveraging?

•

Graham's Bowley's name seemed vaguely familiar, but not as a financial reporter. Turns out he's the author of "No Way Down: Life and Death on K2."

When Everybody Was an “Asset Manager”

This U.S. Trust ad ran thirty years ago this month. Change "asset manager" to "wealth manager" and you could run much the same copy today.


Check out the graph to be reminded of the lousy investment climate that prevailed in the late 1970s. The S&P kept slipping sideways while inflation – and oil prices –soared.

A question on the GOP tax freeze

To counter Obama's proposal to allow the Bush tax cuts to expire for "the wealthy," while making them permanent for the not wealthy, Republican John Boehner has proposed a two year freeze on "all federal tax rates." Not that there is any chance of passage, but the language raises an important question for us.

Does he mean to freeze the federal estate tax at zero for two years also?

I haven't found an answer, and I doubt that is his intention—but I've learned to never say never. According to this item Boehner will be coming out with a "flat tax" with just two brackets. The estate tax is not mentioned.

Finally, a tax cut for businesses

The NYTimes reports Obama will propose 100% expensing for new equipment purchases for the next 15 months.  This really should have been in the original stimulus  bill—why wasn't it?

One item puzzles me.  The initial "cost" of the proposal is listed as  $100 billion for the  extra tax deductions.  However, the  ten-year cost is  only $30  billion, because the purchases would have  been fully depreciated anyway.  Why isn't the  ten-year cost then zero?  Because of the  time  value of money?  But  at  today's interest rates, the time value of money really isn't  that large, is  it?

And wouldn't the additional economic activity swamp the "cost" with new tax revenue? 

A startling trial balloon

The New York Times suggests that the Obama administration may just  give up on the housing market.  There is a school of thought that the government should stop discriminating against future homeowners, in favor of current homeowners, with all these programs designed to prop up prices.  The worry is that no one knows where the bottom really is, and the process of getting there will be very ugly.

I suspect that this is the beginning of wisdom, or it could be.  So what does it mean that it appears in the Times?

Take Your “Legacy” and . . .

Let us join Joe Queenan in saying Goodbye to the Cliches of Summer.

Sometimes Investing is Like Tennis

If a first serve doesn't go in, top male tennis players would usually rack up more points delivering another top-speed first serve, not a conventional, slower second serve.

As this NY Times story explains, players ease up on their second serve because a double fault would instantly lose the point. They're taught to "get the ball in play" and hope for the best. Problem: Many opponents seem to return a second serve faster than it arrives. Result, the server loses about half his second-serve points.

Broadly speaking, tennis players prefer to defer risk of loss, even though it is not to their long-term advantage. See any investment parallels?

And sometimes investing is like driving on a congested interstate highway. Frequent lane-changers think they're switching into a faster-moving line of traffic. A study by Dr. Donald A. Redelmeier found that drivers' perceptions are often wrong. All the lane-changers accomplish is a tripling of their risk of an accident. Know a few stock or commodity traders who fill that bill?

See Think the Answer's Clear?

What the Wealthy Want

"Easy access and personal acquaintance with senior officers." That's what the wealthy want when it comes to their banking, investment and trust needs.

Fifty years ago, nobody knew that better than The Bank of New York. Whatever particular service a BNY ad featured, invariably the ad was accompanied by a quote that carried more marketing clout than the ad copy itself:

"... there is a real place in New York for conservatively managed banks and trust companies of moderate size where customers may have easy access to and personal acquaintance with the senior officers . . . "

The Bank of New York is now part of BNYMellon. Yet even in these tough times, some relatively small bank and trust organizations are developing higher aspirations. For marketing purposes, they would do well to come up with a quote as compelling as BNY's.


Postscript: Notice the BNY offices listed in the ad. Freedomland? Wikipedia tells the now-forgotten tale of "Disneyland East."

Volcker commission report is released

Tax Notes reports that the Volcker commission report on choices for tax reform has been released. Oddly, no mention of it in the NY Times yet.  Perhaps because it's such deadly dull reading, and there are no bombshells that I discovered.  The material is far too complicated to be incorporated into the upcoming fight over extending, in whole or in part, the Bush tax cuts.

Nothing here as sweeping or inspirational as when Reagan took on the tax code and wrestled it to the ground. Nothing to suggest that the tax code might be enlisted in the fight to resurrect the economy.

Also, the estate tax was not included in the charge, and so there's no mention of transfer tax reform.

A Dynasty Trust for Dubya and Barack?

From Curtailing Dead-Hand Control: The American Law Institute Declares the Perpetual-Trust Movement Ill Advised:

If Samuel Hinckley, who died in Massachusetts in 1662, had created a perpetual or a near-perpetual trust for his descendants, the more-than-100,000 beneficiaries living in 2010 would include President Barack Obama and his descendants and former President George H.W. Bush and his descendants (including former President George W. Bush).

H/T to the Wills, Trusts and Estates Prof for calling attention to this paper.

Related post: Return of the Dead Hand

An often overlooked point

Via TaxProf blog: Business success helps society more than philanthropy.

I hope that the Gates Foundation accomplishes something important, but the biggest contribution Bill Gates made to mankind was the creation and management of Microsoft.  It would be very hard to reduce that extraordinary contribution to employment and productivity to dollar terms.  Wouldn't it have been better for the U.S. economy if, instead of giving his money away, Gates had created more companies such as Microsoft?

A Mad Man's Nest Egg?

Say, isn't that nest egg tethered to Roger Sterling, the roguish heir at Sterling Cooper Draper Pryce?

Maybe not. Time period is right, though. Chase's ad ran in The New Yorker in May, 1965, the same year we're now traversing in season four of Mad Men.

Will T-Bond Investors Go Bust?

Last month Jim Gust noted Jeremy Siegel's opinion that stocks are undervalued – way undervalued. Now, in The Great American Bond Bubble, Siegel and Jeremy Schwartz warn fixed-income investors to run for cover:

Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings.***

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. ***

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Three decades ago inflation was running rampant and Treasury bonds were considered terrible investments. (Wouldn't you like to own 12-percent T-bonds now?) Could inflation pick up and turn today's mini-yield Treasuries into disastrous investments?

Chances of a recovery strong enough to rev up inflation seem faint. In another WSJ op-ed, The End of American Optimism, Mortimer Zuckerman seems to consider the Great Recession a normal downturn but does acknowledge one structural change:

The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100%, but in 2007 the debt ratio hit 131% of income. It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%. The pre-bubble norm was 70%. To get to this ratio again, debt would have to be reduced by about $6 trillion.

Siegel and Schwartz retort that the Great Deleveraging won't be all that great a drag on the economy:

Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar.

They may have a point. Look at home-equity loans, where the delinquency rate is worse than for credit cards.

Jim Gust's skepticism that stocks are cheap seems sensible. That doesn't mean Siegel and Schwartz are wrong about a Bond Bubble.

How much would you put into 30-year Treasuries?


Related post: The Year the Stock Market Died

Trust Co's Trek to South Dakota

Time was, the State of Delaware reigned as the trust site of choice for those seeking asset protection. According to RBC, over 40 of the Forbes 400 have Delaware trusts.

Now South Dakota and other states are getting into the act, as The Wall Street Journal (subscription) noted recently.

About half a dozen states are actively vying to attract wealthy families' trusts, as well as the jobs and tax revenue that come from the companies that administer these estate-planning vehicles.

States such as Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming have modified their trust laws in recent years to make them more attractive to individuals and families, including nonresidents, looking to minimize taxes, shield assets from creditors and preserve family assets in the event of a divorce, among other things.

"Between 1985 and 2003," according to one study, "some $100 billion—about 10% of reported trust assets held by federally regulated financial institutions—moved to states that allowed long-term trusts and didn't tax trusts created by nonresidents."

More recently, the trust-company battle cry seems to be "South Dakota or Bust!" Trust Advisor points out that this "tax-friendly asset protection jurisdiction" also draws fiduciary start-ups by means of lenient capital requirements. "A new company only needs to post $200,000 for a South Dakota charter, versus up to $1 million elsewhere."

Will a handful of states end up hosting the lion's share of dynastic and asset-protection trusts?

Will Citibank's most celebrated South Dakota employee decide to switch to a new, fiduciary career?

Where the Monied Are

Seeking movers and shakers capable of putting big money into private equity or charitable remainder trusts? Try the Pebble Beach Concours d’Élégance and the assorted races, auctions and frivolities that surround it this weekend.

My favorite vehicle up for auction (Gooding & Company) is this 1933 Bugatti.

Whoops! Just changed my mind.

Look at this amazing French postwar masterpiece, the 1949 Delahaye shown below. RM Auctions expects it to fetch $4 million to $6 million.

1949 Delahaye Type 175S Roadster

Update: The Delahaye, once owned by Diana Dors, "Britain’s answer to Marilyn Monroe," sold for a bit less than hoped for. It fetched $3,300,000.

Perhaps buxom blondes prefer other types of fun these days.