Friday, September 29, 2006

Trust Departments Redux

Messed up by mergers and sullied by "sales culture" consultants, corporate trustees haven't exactly been on a roll. Yet the need for educated stewardship and impartial investment management persists and grows. If corporate trustees didn't exist, we'd have to invent them.

So reinvent them we do, in the form of new banks, new trust departments. If you're on I-95 north of NYC tomorrow, take the Darien, CT exit and drop in at the Grand Opening of the Darien Rowayton Bank.

Yes, the Darien Rowayton Bank comes complete with Trust Department, though that's a work in progress. For the next year or so, trust service will be provided by the good people at Tompkins Trust Company in Ithaca, NY.

It's official

The tax extenders won't be enacted until after the election, ($) if they are enacted at all. Both sides appear confident that the extenders will pass in the lame duck session, and regret the inconvenience this will cause the IRS. However, many Republicans continue to insist that the extenders won't be divorced from estate tax reform. And unless Republicans achieve the unthinkable and actually pick up seats in November, estate tax reform seems unlikely this year.

Might some Republicans let the work opportunity and welfare-to-work tax credits die just to punish the Democrats for their intransigence this year?

Thursday, September 28, 2006

Retirement:Only the Little People Sell Their Stocks

Remember the theory that the stock market would tank as Boomers began to retire and sell their stocks? Seems pretty silly these days, as the Dow flirts with new highs.

In a recent Wall Street Journal column, Michael Milken explains why the theory had more leaks than HP:
Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.

The Federal Reserve reports that the wealthiest 5% of American households own about 60% of the nation's assets. Ninety percent of all stock is owned by 10% of investors. Debate continues about how this concentration of wealth affects our society, but what seems irrefutable is that the owners of most wealth will have no urgent need to raise cash. A retiree with a $10 million net worth doesn't sell stocks to buy groceries or pay the mortgage. He can easily live on dividends and interest while preserving assets for his grandchildren or a favorite charity. And if wealthy retirees don't sell their assets, they won't put pressure on valuations.

In other words, only the little people (the same people who paid taxes so Leona Helmsley could skip hers) need to sell their stocks. The need arises from the fact that they'll be spending their modest nest eggs fairly quickly, on travel or perhaps a retirement business.

According to another WSJ story, Pitching 401(k)s To Generation Y, it is true that stock and bond investments held in 401(k) plans are being liquidated:
Investors are now taking more money out of retirement plans than they are putting in, according to Cerulli Associates, a Boston-based financial research and advisory firm. Using its own analysis and trends identified by the Department of Labor, Cerulli estimates that in 2005, investors made $5 billion in net withdrawals from these plans and the outflow will increase to $39 billion in 2010.

But, of course, most of that outflow belongs to Big People and is simply being rolled over into new investments.

Marketing note: As you can see, “retirement investing” comes in two very different forms:

The Little People need to be in stable investments when they reach their retirement date, so they can cash out at short notice.

The Big People, the HNWs, need an investment program heavily weighted toward equities, so that their capital will generate an income that grows with inflation for another quarter century or more.

Wednesday, September 27, 2006

Brooke Astor has a lot of company

Evidently abuse of the elderly is a growing phenomenon around the country. Is it because crooks go where the money is, and the elderly control 70% of the nations wealth (per the article)?

Tuesday, September 26, 2006

All wealth managers need to know about the world

Like the preceding post, this comes from The Wall Street Journal. No wonder it remains our finest daily paper.

From today's In the Fray column by Roger Scruton, a Brit:

"The world is full of people who wish to think ill of America. And most of them would like to be Americans."

I can hear you now

From Jared Sandburg's Cubicle Culture column in The Wall Street Journal:

"If Bill Gates invented the telephone and Alexander Graham Bell invented email," notes Dennis Fluegel, a retired senior project manager, "we would all be saying, 'You should get one of these telephones, you can actually talk to someone, hear what they are saying, and you don't have to use a keyboard!' "

Saturday, September 23, 2006

“Wealth, Inheritance and the Estate Tax”

The National Center for Policy Analysis, a Texas-based think tank devoted to shrinking government, has announced a new study of wealth and the estate tax.

The study confirms what trust and wealth-management marketers already know: most wealth isn't inherited.

The study also suggests that rich families don't usually stay rich: “More than three-fourths [the] children in the [wealthiest] 5 percent of households are no longer in the top 5 percent when they retire.”

Friday, September 22, 2006

Sulcata Tortoise seeks good home, with trust provisions

Estate planning for pet owners is more demanding than you might think. Case in point, an abandoned sulcata tortoise.

She needs a good home and thoughtful estate planning, according to the Portsmouth Herald.

These African tortoises have been known to live over half a century in capitivity. This one's new owner will have to do some special estate planning to assure the tortoise's continuing care and welfare.

Thursday, September 21, 2006

Hedge Funds: Thought For the Day

"Considerable controversy has surrounded the rapid growth of hedge funds in recent years. Some commentators, assuming that hedge funds will maintain their current prominence, are calling for increased regulation of these private investment partnerships. This assumption is questionable. The hedge-fund boom was propelled by a set of temporary circumstances -- namely, the deflation of the stock market bubble and the ensuing period of very low interest rates. Under more normal market conditions, hedge-fund managers will struggle to justify their excessive fees and disappointed investors will start to withdraw funds. Further regulation is unnecessary: The hedge-fund boom is coming to an end and market forces will force the industry to contract. "

— Edward Chancellor in The Wall Street Journal, August 24, 2005

Wednesday, September 20, 2006

Grassley and I think alike

What I said a week ago in Trifecta vote might be delayed until after the election?:

The thinking seems to be that Democrats then will be more willing to buck the party line and Harry Reid's passsionate opposition to estate tax reform.

What Senate Finance Committee Chair Charles Grassley said yesterday to Tax Notes:

"We're hearing from Democrats' staff that . . . the Democrats aren't going to let us have any victories between now and September 30 because they obviously know that it enhances our opportunity for maintaining control of Congress," Grassley said.

That stance could lead to consideration of either the original trifecta bill or a revised version when Congress returns in November for a lame-duck session. That strategy has been pushed by Senate Budget Committee Chair Judd Gregg, R-N.H., who previously said that Democrats would be more willing to vote for the bill -- and against the wishes of Democratic leadership -- after the election season.

Tuesday, September 19, 2006

Additional detail on Amaranth

The Amaranth losses were worse than reported in the Times, at least that's all one can conclude from this Wall Street Journal report ($).
The fund, based in Connecticut, told investors in a letter yesterday that it ran into a nasty patch in September, with its energy-trading desk losing $5 billion in about a week. Its assets under management have dropped to $4.5 billion, from $9 billion at the start of September.
The peak to trough loss this year was 57%, and the firm could be forced to unwind positions in other markets as well. On the other hand, several hedge funds have handsome returns in the same markets that burned Amaranth, according to the report.

Are hedge funds the real culprit behind oil price volatility?

After all the talk about demand from India and China driving oil prices to $70/barrel and beyond, this item points a finger at hedge funds chasing higher returns from commodities. Evidently there was a widespread expectation that the hurricane season would be as bad or worse than last year, further disrupting supplies. The funds bid up the prices ahead of problem weather that, as we all know, didn't materialize. Now they are all rushing to the exits.

How low might prices go? Conventional wisdom now sees a $50/barrel floor, but “There is always the possibility of a sell-off that could put a fund in trouble,” according to one trader.

Does everyone remember Long-Term Capital Management? Just how bad were the bets made by hedge funds, do you suppose?

Very bad indeed at Amaranth Advisors, which yesterday announced a $3 billion loss from its natural gas positions. Unfortunately, they may have underestimated their problem, according to someone who had a confidential look at their books. Can anyone stop these dominoes from falling?

Look for much greater regulatory scrutiny of hedge funds after the next election. That might take some of the shine off of their slick marketing presentations.

Sunday, September 17, 2006

This looks very exciting

Oddly enough, I can still remember discussing with Jim Macdonald the invention of flash ram, well over a decade ago. We had no idea what products it might spark, but we knew it felt really important. Digital photography, iPods (the nano and the shuffle), "thumb" drives--I guess our instinct was good.

Now here comes A Chip That Can Transfer Data Using Laser Light. Once again, I can't envision the applications, but they will no doubt be extraordinary. From the article:
. . . the laser-silicon chips — composed of a spider’s web of laser light in addition to metal wires — portend a vastly more powerful and less expensive national computing infrastructure. For a few dollars apiece, such chips could transmit data at 100 times the speed of laser-based communications equipment, called optical transceivers, that typically cost several thousand dollars.

Currently fiber optic networks are used to transmit data to individual neighborhoods in cities where the data is then distributed by slower conventional wire-based communications gear. The laser chips will make it possible to send avalanches of data to and from individual homes at far less cost.
We live in interesting times.

Wealthy or just rich? George Foreman explains the difference

The New York Times article Jim Gust links below could have been just another story about rich celebs past and present — you know: easy come, quick go — were it not for the estimable George Foreman.

We've quoted George before. Here, he explains why turning a temporarily rich person into a wealthy one would take more than a trust officer (or a business manager) pleading in vain for the celeb to put something aside instead of spending it all.

“A lot of people just don’t grow up,” George says. “I mean, 65-year-old men. They just don’t grow up."

When you meet a truly wealthy person, George asserts, you can tell:
“I’ve seen guys who work on a ship channel and they get to a certain point and they’re confident. You can look in their faces, they’re longshoremen, and they have this confidence about them.”

He says he can spot a longshoreman who has enough equity in his home and enough money in the bank to feel secure, and that some people, no matter how much money they have, never get there.

“I’ve seen a lot of guys with millions and they don’t have any confidence,” he says. “So they’re not wealthy.”

Does George himself have that confidence? No, he says, After going bust, “I will never feel secure again, I’ve got to earn, earn, earn, earn.”

Postscript: After reading this article, the Senior Assistant Blogger headed into the village to the annual old car show. Look at this 1951 Ford. By golly, there's a confident car, made by a confident company.

Not only were U.S. made Fords worth buying in those days, the smaller English-made Fords were reknowned for durability. Became so popular they were imported for sale here.

Like George Foreman, Ford may never get its confidence back, and that bodes ill for the company. Granted, Ford and GM bear around $1,400 in per-car costs, such as retiree benefits, that Toyota and Hyundai don't. But it's hard to imagine today's Ford 500 or Buick LaCrosse being a runaway bestseller even if you knocked $1,400 off the price.

Speaking of Buick, this 1948 Roadmaster convertible looked pretty confident, too!

Fortune’s Fools: Why the Rich Go Broke

Is it because they don't have trust officers?

Thursday, September 14, 2006

The Trust Game: Welcome to Neuroeconomics

For a good introduction to neuroeconomics, which seeks to understand oddities of human behavior by scanning brain activity, see John Cassidy's current New Yorker article, Mind Games.

You probably remember one experimental finding: People with brain damage that limits their ability to process emotion tend to make better investment decisions.

The Trust Game? Oddy enough, it seems to be something of a love match:

In the simplest version of the trust game, one player gives some money to another player, who invests it on his behalf and then decides how much to return to him and how much to keep. The more the first player invests, the more he stands to gain, but the more he has to trust the second player. If the players trust each other, both will do well. If they don’t, neither will end up with much money.

Fehr and his collaborators divided a group of student volunteers into two groups. The members of one group were each given six puffs of the nasal spray Syntocinon, which contains oxytocin, a hormone that the brain produces during breast-feeding, sexual intercourse, and other intimate types of social bonding. The members of the other group were given a placebo spray.

Scientists believe that oxytocin is connected to stress reduction, enhanced sociability, and, possibly, falling in love. The researchers hypothesized that oxytocin would make people more trusting, and their results appear to support this claim. Of the twenty-nine students who were given oxytocin, thirteen invested the maximum money allowed, compared with just six out of twenty-nine in the control group.

Wednesday, September 13, 2006

Brooke Astor's Revised Will: “There Appear to be Improprieties"

The plot thickens! From today's New York Times:
Beginning in late 2003, the last will and testament of the socialite and philanthropist Brooke Astor was amended by a series of documents that redirected millions of dollars to her son, Anthony D. Marshall, and made him sole executor of her estate.

Now the propriety of those documents is being challenged by Mrs. Astor’s legal guardians. They question whether Mrs. Astor, now 104, was mentally competent to understand the changes to her will that she signed. In court papers, they also say that they intend to hire handwriting experts to determine if the signature on the documents is really Mrs. Astor’s.

The papers — and the suggestion that Mrs. Astor’s signature was either forged or procured through deception — indicate a new level of bitterness in the developing legal battle between Anthony Marshall and his son Philip, who has accused his father of neglecting Mrs. Astor’s care while enriching himself.
Mrs. Astor’s court-appointed lawyer, the Times reports, is “asking a judge to order the socialite’s last law firm to turn over the originals of her latest will, the three codicils that amended it and another document that gave Mr. Marshall, 82, the authority to handle her affairs.”

Trifecta vote might be delayed until after the election?

Tax Notes Today ($) reports that the Senators charged with getting more Democrats on board for the "trifecta bill" are already raising the possibility of a post-election vote on the bill. The thinking seems to be that Democrats then will be more willing to buck the party line and Harry Reid's passsionate opposition to estate tax reform.

The flaw in that theory is that the IRS 2006 tax forms go to the printers on November 1. So if the extenders portion of the bill passes after that date, the forms will be, well, inaccurate. That might be cured with supplemental forms, but that's not good practice. And late amendments to the tax law can also be problematic for the writers of tax preparation software.

Tuesday, September 12, 2006

Does UK inheritance tax violate human rights?

The British version of the marital deduction applies also to partners in civil unions. Here's a new twist, as reported by The Guardian Online:

Joyce and Sybil Burden, aged 88 and 80, have lived in the home they inherited from their parents since birth. They jointly own the house and land, and with other properties their estate is valued at £875,000. Each sister has made a will leaving all her property to the other.

Under current law, when a married person dies the surviving spouse is exempt from inheritance tax. The same rules have applied to same-sex couples in civil partnerships since 2004.

However, there is no such provision for siblings and the sisters fear that when one of them dies the other will have to sell their home to pay the inheritance tax bill, levied at 40% of the value of the estate over a threshold of £285,000.

The Burden sisters are now seeking a European court of human rights ruling that their exposure to inheritance tax breaches their human rights. A hearing will be held in Strasbourg today to decide on the "merits and admissibility" of their legal action.

Monday, September 11, 2006

Our Congressman is “Very Wealthy.” But Probably Not Rich.

The Senior Assistant Blogger's Congressman, Jeb Bradley (R-NH), faces a primary challenge tomorrow. He's expected to win handily and seek another term in November, despite some unkind words from Ken Silverstein at Harper's online.

With investable assets over $5 million, writes Silverstein, "Bradley is a very wealthy man." Silverstein believes the Congressman should have put his great wealth in blind trust before taking office and voting on matters that might line his own pocket.

Example: When he came to Capitol Hill, Bradley kept 231 shares of Halliburton, then bought 72 more and eventually sold them all for a profit of (brace yourself!) $2,791.08.

* * *

Like Ken Silverstein, I once punched keyboards for a living, and back then five or six million dollars did sound like a lot of money.

These days, it won't even qualify you for entry-level service at Bessemer Trust, minimum $10 million. According to Wall Street wealth rankings we noted earlier this year, you need $7 million to $10 million to be "kinda rich" and $20 million to be actually rich.

(Maria Sharapova, the new U.S. Open women's tennis champion, is reported to have built her investment portfolio up to almost that level, $19 million and counting. You go, girl!)

But $20 million is a long way from being very wealthy. The average top-25 hedge fund manager reportedly makes over $20 million per month. Even after taxes and yacht maintenance, said manager should be able to put aside $5 million a month. If his job lasts a year, that gives him a net worth of $60 million, competitive with Brooke Astor and other society swells.

Now that's wealthy. But not very wealthy, much less "wildly wealthy," as Silverstein terms Bradley in a later posting.

The very wealthy are America's garden-variety billionaires. There are hundreds of them, juding from the Forbes listings.

The wildly wealthy are Bill Gates and Warren Buffet, who are giving away billions by the barrelful but still have plenty more where that came from.

Jim Gust recently mentioned the Brooke Astor case. Anthony Marshall, Astor's son, has been forced to step aside while JPMorganChase and the court look into charges that he has skimped on his mother's care and paid himself too handsomely from Astor assets. I doubt that Marshall thinks of himself as "very wealthy." Yet the papers report that his annual income is in the millions. What's more, his current hobby is producing plays, an avocation that makes yacht maintenance look cheap. Mightn't his investable assets be well above Bradley's $5 million or $6 million?

Bottom line: Everything is relative. "Wealth" is a state of mind. You can't be too thin or too rich. That's good news for owners of exclusive spas, and it bodes well for the future of wealth management.

Estate Planning for Pet Owners

Whenever we at the Merrill Anderson Company have a question about trust planning for pets, we turn to Professor Gerry W. Berry for authoritative comment. Professor Beyer has just updated his materials for attorney and lay audiences in this surprisingly popular area of estate planning.

Did you know that 38 states now allow trusts for pets?

Friday, September 08, 2006

Is the trifecta bill just a bad joke?

In the latest twist on last-minute tax legislation,Tax Notes ($) reports that the idea of making permanent such popular ideas as the 10% rate bracket, marriage penalty relief and the child tax credit. Each of these tax breaks had to be left temporary back in 2001 in order to avoid a Senatorial point of order and a potential filibuster.

Everyone expects these items to be made permanent, the question is, what else can we get with them? Maybe some estate tax reform?

Says the report:
Despite the trifecta bill's failure on a 56-42 procedural vote, GOP senators have not yet shelved it, and Frist has left the door open for bringing the bill back to the floor in the near future. Frist on September 7 met with a group of senators that included Finance Committee Chair Chuck Grassley, R-Iowa, taxwriter Jon Kyl, R- Ariz., and Budget Committee Chair Judd Gregg, R-N.H., to discuss the next step for the legislation.

When asked whether provisions to make the increased child tax credit and other tax cuts permanent could be added to the trifecta bill, as some have suggested, Frist responded, "Everything's on the table, but not just that. Lots of things are being considered."

Frist then quickly flashed a paper to reporters that he said listed 20 options for things that could be added to the trifecta bill to make it more appealing to Democrats and to win more support for the overall package.
Interestingly, Ways and Means Chair Thomas does not consider the extenders bill a must-pass before the election, in contrast to many other legislators. Thomas hates extenders, and believe that if the provisions aren't worth making permanent they aren't worth having at all.

Who Says Trust Fund Babies Can't Rap?

For proof to the contrary, see Tea Partay.

Thursday, September 07, 2006

Followup on Brooke Astor

Last July Jim Macdonald called to our attention the controversy over whether Brooke Astor's son had been taking proper care of his 104-year-old mother. J. P. Morgan Chase was appointed the temporary guardian of Ms. Astor, and they have uncovered what looks like some very questionable financial transactions. Details are reported by the New York Times in Mrs. Astor’s Son Is Accused of Mishandling Millions.

As to introducing a corporate fiduciary into Ms. Astor's financial life, better late than never?

Twilight of the Trust Departments?

For bank trust departments, Marketwatch reports in this article, the year 1999 remains the good old days:
A recent report, published by the Spectrem Group, Chicago, shows that, ironically, just as the baby boomers need trust services more trust money is leaving banks. Personal trust assets held by U.S. banks fell 10% to $986.2 billion in 2005 from a peak of $1.1 trillion in 1999, it says.
And that's not the worst of it, according to another story on the Spectrem study from
The managed-trust assets at banks totaled $704.3 billion at the end of 2005, down 25.6% from their 1999 peak of $946,391, according to the study. Meanwhile, non-managed-trust assets at banks climbed 89% to $281.8 billion from 1999 to 2005.

"It appears while individuals still need a trustee/custodian, they did not want a bank to manage assets," the report stated.
The Spectrem report also indicated "the number of personal-trust accounts held by banks dropped more than 23% to 719,658 in 2005, from a peak of 940,961 in 2002."

Unlike Andy Roddick at the U.S. Open, seems like bank trust departments just can't get their mojo back.

How can trust departments best reach Boomers?

Do smaller regional and community departments have a better chance than departments at the megabanks?

Should bank trust departments follow Roddick's lead and seek guidance from tennis guru Jimmy "Jimbo" Conners?

While you ponder those questions, take consolation from this comment by MarketWatch editor Steve Kerch:
The baby boomers most likely to use estate-planning services today may not respond to the stodgy image of a bank and trust. But they probably don't mind the stodgy way that their inheritances have been preserved there.

Should kids be paid to take care of their parents?

This Wall Street Journal item ($) notes the growing practice of drawing up formal contracts between seniors and the children who are helping them with their daily tasks. When a child is making career sacrifices to make such a contribution, a contract makes a lot of sense.

Another big potential benefit, if the contract is commercially reasonable, is that it won't run afoul of the Medicaid rules.

Could contracts also help to deter instances of elder abuse, which JLM has been noting lately?

Tuesday, September 05, 2006

Trifecta bill to be resurrected?

Tax Analysts ($) reports that some observers are speculating that the Senate could return its attention to the trifecta bill during the short, 19-day session in September session. Congress will adjourn in October for the balance of the election season.

Democrats would like to see the tax extenders portion of the trifecta bill stripped away, perhaps attached to a technical corrections bill that is expected to the Pension Reform Act. If the extenders aren't taken care of before the election, they might be addressed during a lame duck session in November.

The current state of the estate tax reform package gets a favorable write-up from CCH's Estate Planning Review, which lauds the reunification of the estate and gift tax and the restoration of progressivity to the transfer tax. Also, as one might expect, CHH suggests that no one wants to try carryover basis again, a complex scheme that had to be retroactively repealed the last time it was tried.

Perhaps estate tax reform will be less contentious in November, when its enactment can't help Republicans in the elections?