Wednesday, May 25, 2005

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.

Sunday, May 22, 2005

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.

Saturday, May 21, 2005

Live rich to get rich?

MP Dunleavey's column in today's New York Times sheds light on why the national savings rate is a disgrace while the national spending rate is out of sight. Many Americans expect to be rich. And most of those optimists seem to believe that spending will make it so. Not saving and investing. Spending.

"The danger in buying into the idea is that you're going to be rich," Dunleavey notes, " is that you'll spend accordingly - regardless of the impact on your personal financial health. "

Yup, lots of folks would rather live rich than get rich. That doesn't bode well for the future of the wealth-management business. How can you help your clients teach their children to build a little wealth instead of more debt?

By the way, I asked Google about MB Dunleavey and learned that she used to be a dark-haired young woman who wrote about single life for Lifetime. Now she's a blond married woman and a financial columnist for MSN. Check out the archive of her columns.

Friday, May 20, 2005

Tales from the 20th Century: Borrowing Trouble

Year: 1957. Scene: A carriage house on New York's Murray Hill, converted to serve as the offices of a small ad agency, The Merrill Anderson Company. The proprietor, Merrill Anderson himself, lives in an apartment on the top floor.

A young job applicant has just submitted three sample ads for Mr. Anderson's consideration.

"These two will do," he says. "Banking by mail and saving for college; we can use them."

The young applicant had hoped to bat three for three. "What's wrong with the third one?"

Mr. Anderson shook his head. "Vacation loans? We can't tell a bank to run an ad that encourages frivolous borrowing. It wouldn't be moral."

* * *

What a difference almost half a century makes! Plastic cards and home-equity loans have made credit available to anyone, usable for any reason. Since 1990, income for the median American household has risen a respectable 11% after adjusting for inflation. But median household spending has jumped 30% and now exceeds median household income. How can that be? Median household debt has leaped by 80%! Online Wall Street Journal subscribers can read more here.

Even the rich are borrowing, as noted in an earlier posting. That's why private bankers extend credit as a way to gain new wealth-management clients.

Borrowing, after all, is one way the richer get richer. Borrowing to buy more real estate. Borrowing to buy hedge funds that are already highly leveraged. Thank goodness real estate always goes up and hedge funds always produce stellar returns. Were that not the case, some affluent investors might find themselves poor again.

They might even need vacation loans.

Wednesday, May 18, 2005

As they were saying . . .

"They defend their errors as if they were defending their inheritance."--Edmund Burke

"There is no limit to what you can accomplish if you don't care who gets the credit."--Ronald Reagan

"The bottom line is, there have been a lot of nuts elected to the United States Senate."--Senator Charles Grassley

Tuesday, May 17, 2005

Tax reform resource

Tax reform efforts may prove no more successful than the President's initiatives on Social Security, but thePresident's Advisory Panel on Federal Tax Reform provides updates on their progress.

Monday, May 16, 2005

Trusts versus annuities

Buried inside this article blasting annuity sales practices is an example of someone using a living trust gambit to gain the confidence of prospect before closing an annuity sale.

How common is this practice? How can you fight back?

Questions, anyone?

Sam Heitzman will be spending this week in our Stratford offices. He's been shy about blogging, but I'm hopeful that he'll catch the bug. If anyone cares to post a question for him, perhaps that will give him the motivation he needs.

Saturday, May 14, 2005

Wealth managers: Looking for new clients?

Try calling on winners of the Nobel Prize, leading academics and other geniuses thinking deep thoughts. Said geniuses tend to be duds at investing. What's more, they may not even want to learn how to do it right.

So reports Peter G. Gosselin in his L. A. Times article (free registration required). Aside from revealing hot prospects for investment-management accounts, the article sheds light on the debate over diverting a portion of Social Security tax payments to private accounts. If even Harry M. Markowitz, the father of modern portfolio theory, couldn't think realistic thoughts about asset allocation in his younger days, where does that leave the average taxpayer?


So I was at the library checking out some videos, and because there were a couple people ahead of me in line, I went to browse the new books. I picked up Suze Orman's The Money Book for the Young, Fabulous & Broke to see what new spin is being applied to the same old financial advice. Haven't had time to take a close look.

So this morning, after putting on the coffee, I turned on the television. There's an element of channel roulette with Tivo, because in the morning the TV will be set to whatever channel might have been recorded during the night. Imagine my surprise when I saw an infomercial of Suze Orman giving a lecture about being Young, Fabulous & Broke!

Perhaps someone is trying to tell me something? I'll try to give that book some more attention.

Thursday, May 12, 2005

A trust for Spot and Puff?

Client Base Expands for Pet Estate Planning reports LawProf Gerry Beyer. No doubt pet ownership is booming, and there is a corresponding need for making arrangements in contemplation of the owners' deaths. But are any of these pet lovers showing up in trust and wealth management departments?

The rich might not be that different after all

So says Daniel Gross in The Neiman Marcus Paradox - How dumb rich people end up in debt.

Apparently a substantial amount of luxury merchandise is purchased on credit.

How big is the market for trust services?

Bigger than one might suppose. According to Walter E. Williams: Only in America:

While becoming a millionaire by age 17 is rare, eventually becoming a millionaire isn't. According to TNS Financial Services' 2004 Affluent Market Research survey, there are an estimated 8.2 million American households with assets, excluding primary residences, worth over $1 million. That's a 33 percent increase over the 6.2 million millionaire households in 2003.

Of course, having a million bucks isn't a certain marker for a trust prospects, is it?

Monday, May 09, 2005

Wealth Management: the book

What are estate planning attorneys going to do with themselves if the estate tax goes bye-bye?

On his TaxProf blog, Paul L. Caron sees an answer embodied in a new textbook:

In recent years there has been enormous political pressure to cut federal taxes, especially for taxpayers in the upper echelons of the income and wealth scale. The future of the federal estate tax remains especially controversial, as indicated by competing proposals to repeal the tax permanently or to raise the exemption substantially above the amounts provided under present law. As a result, estate planning courses may be forced to make significant changes in scope and emphasis if they are to retain their traditional importance and interest for students. By the same token, most individuals and families will confront a host of financial planning issues that are entirely independent of the existence of an estate tax or the size of an estate tax exemption. These issues relate to managing investments, protecting assets, meeting the costs of higher education, financing the purchase of a home, obtaining disability and life insurance coverage, providing for retirement security, and planning for incapacity and succession at the end of life.

The new volume, Turnier & McCouch's Materials on Family Wealth Management, covers wealth, taxes, insurance, elder law and more.

Are lawyers going to turn into private bankers and financial planners? Maybe it's only fair. Remember the days when estate planning was used so vigorously to market trusts that members of the bar complained about "the unauthorized practice of law"?

Friday, May 06, 2005

Demographics as destiny

Stock market observers may have another tricky factor to include their calculus as they project long-term trends. The baby boomers buying stocks to fund their retirement have long provided positive pressure on stock prices. But, according to a recent Wall Street Journal item (subscription required);
Not so fast, says Jeremy Siegel , the Wharton School finance professor well-known until now for recommending stocks as a long-term investment. In speeches and a new book, he is warning that a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices. He says it will take a massive investment in U.S. stocks by people in India, China and other developing countries to prevent a market meltdown.
Not all economists agree. Some argue that top wealthholders, who own the majority of shares, will not feel pressure to liquidate their holdings.

Anyone care to attack this jump ball?

Tuesday, May 03, 2005

Trusts and insurable interests

In this item from The National Underwriter Company, a spokesman for Transamerica states that the recent surprise outcome in Chawla v. Transamerica does not mean that the company will view all irrevocable life insurance trusts as suspect. It's another situation of bad facts make for bad law. Still, there is a bit of a chill in the air over the issue, until we hear the outcome of the appeal of the decision to the Fourth Circuit. For those that haven't read the case, the article also provides a good summary of the key elements.