Wednesday, September 30, 2009

Shark Tank

I visited my mentor and his bride in New Hampshire last Sunday. He mentioned how much he had enjoyed working with the trust industry in its heyday. He also said that there is more need for trust departments than ever, there are so many sharks after the money of the elderly population.

I thought of his comment when I read Chancery Court Refuses to Remove Trustee of Trust Despite Less Than Ideal Treatment of Old Lady on the Delaware Corporate Litigation blog.

Here's a very short version.

Elderly couple owns 10,000 shares of highly appreciated Exxon stock worth $840,000 in 1996. Husband becomes incompetent, Wife (age 74) succumbs to entreaties from long-time broker-advisor to create a charitable remainder trust for the money. Ostensible purpose is to avoid capital gains tax (higher in those days, of course). Merrill Lynch Trust Company will be the trustee. The unitrust payout rate is set at 10%!

Wife (Florida resident) has no lawyer, so ML helpfully has a New York lawyer draft the trust. The lawyer never speaks to Wife, and includes a variety of provision egregiously favoring ML, such as
1. Merrill Lynch Trust's unilateral ability to increase its fees;
2. No requirement that Merrill Lynch Trust seek the most cost effective brokerage service fees; instead, it could pay whatever standard fees Pierce might charge.
Alas, Wife did not have her own attorney look at the trust before executing it and tranferring her assets to it. After the value of the trust was down by 50%, she brought a lawsuit for fraud to undo the arrangement. The court seemed sympathetic, but the 3-year statute of limitations had run (decision here).

So Wife wanted to get another trustee. No dice, under the trust agreement (decision here). To add insult to injury, ML Trust got the Court to approve the payment of all its attorneys fees out of the charitable trust itself.

Cases such as these do not make the trust marketer's life easier.

Marketing to the Upper Crust

Most products and services are either good or not so good. Factual comparisons can help people distinguish which is which. Convincing people to prefer one good product or service over another is more challenging. Marketers often employ what John D. Rockefeller might have called snob appeal. For instance, here's how Rockefeller & Co. (descended from the Rockefeller family office) describes the clients it seeks:
You're driven. You're successful. And you're not done yet. Like John D. Rockefeller, you dream bigger than most.
Expensive wristwatches, no longer needed for telling time but popular as status symbols, sometimes position themselves as instant heirlooms:

You never actually own a Patek Philippe. You merely take care of it for the next generation.
A century ago, the grand masters at marketing to the upper crust were the makers of the preeminent motor car: Pierce Arrow. In this ad from September, 1930, they were still piling on the snob appeal pretty thick:

Just as GM and Chrysler have struggled to survive the Great Recession, Pierce Arrow strove to keep going during the Great Depression. They didn't make it. Take a look at this extraordinary 1933 concept car, the Pierce Arrow Silver Arrow, and think what might have been.
Snob appeal still works, as various hedge funds have demonstrated. Nothing attracts status-seeking investors like outrageously high fees.

Monday, September 28, 2009

“Mr. Bubble” and His Famous Chart

Contrary to our earlier report, Yale's endowment lost a few percent less than Harvard's. But both posted decidedly below-average returns for the twelve months ending last June. Lately, Yale's David Swensen doesn't look quite so ultra-smart.

Happily, Swensen isn't Yale's only investment egghead. Robert Shiller warned Greenspan about "irrational exuberance" in the stock market, then recognized the real-estate bubble. As David Leonhardt of The New York Times writes in a Yale Alumni Magazine cover story, Shiller is now celebrated as the creator of "The Chart … one of the signature pieces of economic research of the past generation."

"The Chart" and other Shiller charts are here. They'll help you show investors why recovery from the Great Recession probably won't be quick and easy.

Friday, September 25, 2009

RMD relief

If you or your client received a Required Minimum Distribution earlier this year, you have until November 30 (or 60 days after the distribution, if that's later) to roll the money back into an IRA. So says IRS Notice 2009-82, providing guidance on The 2008 Worker, Retiree, and Employer Recovery Act that waives required minimum distributions for 2009 for IRAs and defined contribution plans.

Thursday, September 24, 2009

The Case For Custody

Four-color ads from decades past in The New Yorker archives, printed on better paper, look OK. Black-and-white ads often look spotted (rotted? mildewed?), like this U.S. Trust ad from April, 1964:

Custody accounts, usually regarded as a loss-leader, were seldom promoted in the 1960s. Had some event prompted concern about securities "misappropriated or stolen"? This blogger knoweth not.

Should trust companies and bank trust units do more to promote custody accounts in this Age of Madoff?

Here's a four-color ad, also from April 1964. Bet Mad Men conceived it before JFK's assassination the previous November. Today the delectable photo reminds us that it was once thought the 1960s would be remembered as the new Age of Camelot, not for Vietnam.

Monday, September 21, 2009

Why Probate Courts Were Invented

Writing in The Huffington Post, trusts and estates lawyer Herbert Nass argues that the criminal trial of Tony Marshall, Brooke Astor's son, was a bad idea from the start:

Regardless of the final verdict, I believe that this case has set a dangerous and bad precedent just by the fact that it was ever commenced at all.

The probate, or surrogate’s, courts in New York, and in most states, are specialized courts that understand and address all of the intricate legal issues involving testamentary capacity, undue influence, forgery and fraud. The judges and clerks in those courts deal with all of these issues on a daily basis, although rarely involving the magnitude of the assets of Mrs. Astor. The Astor case may be an extreme case of overreaching by her only child, or it might not be, but to have made it a criminal matter at the outset is, in my opinion, the wrong way to approach what is initially a civil, family matter.

Saturday, September 19, 2009

Estate Tax Extension: Lost in the Shuffle?

The easiest way to avoid next year's scheduled repeal of the federal estate tax is to preserve the status quo. But some seek a lower exemption, as noted in the preceding post. Others, including members of the Senate, favor cutting the tax rate and raising the exemption from $3.5 million to $5 million.

The fate of the estate tax is blurred, The Wall Street Journal notes, because Congress can't think about much but health insurance. A WSJ graphic, with data drawn from a Tax Policy Center study, suggests that lowering the exemption would be mostly a political move: The bulk of estate tax is collected from large estates.

Even so, wouldn't a lower estate-tax exemption provide economic stimulus for estate planners?

Friday, September 18, 2009

Lower estate tax exemptions?

Writing at Leimberg Information Systems ($) Jeff Scroggin suggests that a need for new revenue next year, coupled with the political difficulty of raising income taxes broadly in an election year, could lead to another stalemate over estate tax reform. The conventional wisdom for 2009 is that we will see a one-year patch of the 2009 rules. For 2010, Scroggin thinks there's a 40% chance that Congress will do nothing at all, allowing the exemption to fall back to $1 million and tax rates to zoom, with a top rate of 60% for those in the $10 million to $17 million range. He also rates the chance of permanent estate tax reform with a $2 million exemption at 40%. The President's proposal to make the $3.5 million exemption permanent has only a 10% chance of being enacted, per Scroggin.

Although death taxes do not enjoy popular support, Scroggin argues persuasively that increased income taxes when the economy is still struggling would be far more unpopular. He goes on to warn estate planners that they need to be getting their clients ready for the fact that liquidity planning to meet death tax obligations could become far more important in the near future.

Wednesday, September 16, 2009

CBO misses the mark again

The initial funding for Cash for Clunkers ran out in just one week, and tripling its budget only extended the program until Labor Day. Obviously the government seriously underestimated the demand for nearly free money. Now it appears the same phenomenon has developed for the first-time home buyers tax credit, according to
As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.
These projections were made for very, very narrow programs over a very short time frame, and yet the margin of error was 100% and more. I wonder why anyone thinks the projections on the cost of overhauling health care are any more accurate, for longer time frames and far more complex systems? I sometimes wonder why they even bother with budget projections, they are so far off the mark.

As helpful as the first-time home buyer credit has been, it's not clear that a new floor has been established under home prices yet.

Tuesday, September 15, 2009

Recession ‘Is Very Likely Over at This Point’

Says Ben Bernanke.

Thank goodness. I'm saving the date that this observation was made, just in case he's wrong.

Taxing the Rich

Higher taxes … limits on bonuses …more disclosure of offshore accounts. Governmental neediness and public displeasure will combine to make life difficult for "the rich" in Britain, continental Europe and elsewhere, according to this Washington Post dispatch from London. (Most hated "rich people"? Overcompensated bankers!) Americans accustomed to multimillion-dollar incomes may rightly fear similar bad news.

Related post: Does “Tax The Rich” Have an Upside?

Monday, September 14, 2009

One's Legacy Is Not One's Estate

On the same page of the September 12, 1959 New Yorker as the Grace ad below appeared this one for the U.S. tennis championships at Forest Hills. Teenagers could get in for 50¢ the first four days.
The championships were still amateur-only in 1959. The player and promoter who did as much as anyone to open things up was Jack Kramer, who died September 12.

In pre-open days, top tennis players were compensated with expense-free living and money under the table. Kramer toured as an out-and-out professional, and in the eyes of the old guard, that made him not quite a gentleman. No matter, Kramer prevailed. When the Association of Tennis Professionals was formed, he served as the ATP's first executive director.

Kramer also changed the dress code of the game. He showed up at Wimbledon in 1947 without trousers. He played in shorts, and he won.

These days we tend to use "legacy" as a tony synonym for "estate." It's not. Jack Kramer presumably left a decent estate, but his true legacy is his immense contribution to the modern, professional game of tennis. Check out the current version later today when Roger Federer seeks to augment his legacy.

Investment Management? How Sweet!

The first old ad from Grace Bank that we showed you took bridge as a theme. This one, appearing in The New Yorker fifty years ago this month, is more puzzling. Why should an investment-management account be sweet? Was "sweet as a honeycomb" a catchphrase in 1959?

Click on thumbnail for larger image

Saturday, September 12, 2009

An Executor Most Eloquent

Born 300 years ago this month, Samuel Johnson played the words of the English language like a master organist improvising on Bach.

At the death of is his friend Henry Thrale, a wealthy brewer and Member of Parliament, Johnson became one of Thrale's executors. Johnson's particular concern, his biographers tell us, was the running of the brewery and its sale for the best possible price.

Centuries later, Johnson's sales pitch, recorded by Boswell, lives on in books of quotations:

“We are not here to sell a parcel of boilers and vats, but the potentiality of growing rich, beyond the dreams of avarice.”

Thursday, September 10, 2009

Estate Tax Repeal: Stimulating?

Estate tax repeal isn't a tax break for the rich, according to the Family Research Council. It's a stimulus package for heirs of the affluent.

Yale Beats Harvard, Sort Of

Yale's endowment lost about 30% of its market value in the 12 months ending last June 30, dropping to about $16 billion from $22.9 billion. Harvard's endowment lost "only" 27.3% over the same period, dropping to $26 billion from $36.9 billion.

Update. The Wall Street Journal declares the Yale-Harvard investment-losses game a tie. (The shrinkage in Yale's endowment presumably reflected spending as well as investment losses.)

Tuesday, September 08, 2009

Dull Subject? Go For Graphics

Paul Krugman's article in The New York Times Sunday Magazine covers the dullest of subjects, economists, at the greatest of length. Yet it looked downright inviting in print, thanks to clever illustrations by Jason Lutes and creative graphic design. (The online version, alas, can't do the print layout justice.) For marketers who must deal with topics such as Roth 401(k)s and intentionally defective trusts, that's a lesson worth heeding.

How did most economists fail to notice the real estate bubble and the coming of the Great Recession? Krugman suggests that economists left and right simply felt the everyday world was too messy and illogical, unworthy of scholarly attention.
In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.
My favorite Lutes drawing: This depiction of "freshwater" economists, who believe the markets solve everything, and "saltwater" economists, who believe we'll do better in the markets if we use shark repellent.

Friday, September 04, 2009

Top ten questions about trusts

Well over a decade ago, JLM first wrote The Top Ten Questions About Trusts for Merrill Anderson's investment and trust newsletter. It has proven to be one of our most popular headlines, our clients ask to revisit the topic almost every year. This year we publish it in October.

Would you like to know what we think the ten most important questions about trusts are, from a marketing perspective? Drop me an email at, and I'll send you a proof of the issue.

Thursday, September 03, 2009

Show Me the Certificates!

The founder of The Merrill Anderson Company was a courtly gent. Only once did I hear an edge in his voice when he addressed a client.

I think we were in Boston, probably at State Street. The client was describing the features of a custody account: "We clip coupons and otherwise collect income, watch for call dates, keep securities safe in our vault and …"

"Do you?" Merrill interrupted. "You keep the securities certificates right here in your vault?"

Yes, the client assured us. They really did.

At the time, the early 1960s, trust departments were probably starting to outsource by using depository trust companies, so the question wasn't out of line. Still, young and innocent me thought Merrill was fussing over a minor matter.

But it wasn't a minor matter during the Great Crash and Depression. My father, it occurs to me, always had his broker send him the certificate when he bought a stock.

And it's sure not minor in the age of Madoff. Yesterday's stories in The Washington Post and The New York Times should terrify investors.

Worst failure by the SEC in its 75-year history? Sure hope so. As the NYT reports, H. David Kotz, the agency's inspector general, found "incidents in which investigators seemed hopelessly out of their depth, far too credulous and perhaps just plain lazy."

If our broker didn't charge so much for the service, I'd be sorely tempted to demand, "Show me the certificates," and put them in our safe deposit box.

Repercussions? Will the Madoff debacle have a long-term effect on high-net-worth investors? Could the investment-management arms of community and regional banks benefit? In this age of electrons and pixels, how does even the most trustworthy of custodians prove its trustworthiness?

Sign of the times. Though most boomers may never have possessed a stock certificate, cancelled or deceased certificates have become popular collectibles. With every order, is right now offering a free GM!

Tuesday, September 01, 2009

Retaining Affluent Clients

Last month Tom Gerrity pointed out that unsettled times are prime times for seeking new clients. Don't overlook the equal urgency of working harder to keep clients.

Ditching one's investment adviser may not be a rational client response to the implosion of the financial economy, but it's been happening right and left. Never has it been more important to calm the unrest: Communicate! Commiserate! Educate!

Glad to see Maureen Wilke making the point in this Investment News column:
The most successful advisers send quarterly newsletters, special white papers and research reports to all clients and call to discuss these materials with their most affluent ones. In today’s market, it is critical to share knowledge with your clients.
As Mr. Gerrity might say, a word to the wise is sufficient.

“Bring out yer’ve got a tax cut!”

From Robert Frank's Wealth Report:
[Connecticut] Gov. M. Jodi Rell has offered a budget plan that increases the personal income-tax rate to 6.5% from 5% for individuals earning $500,000 a year or more and for joint filers earning $1 million or more.
* * *
To any pitchfork-wielding hedge funders, the governor offered an offset. The plan would eliminate the inheritance tax, which applies to estates valued at $2 million or more. (I can already picture Eric Idle trundling through the streets of Greenwich “Bring out yer’ve got a tax cut!”)