Tax Gridlock: A Two-Year Solution?

From The Hill's On the Money:

Democrats back the extension of tax cuts benefiting the middle class, as well as protecting them from the alternative minimum tax. They would also like to keep the estate tax from reverting back to pre-2001 levels, when estates worth roughly $1.2 million were slapped with a 55 percent tax.

Most tax lobbyists expect Congress to extend these measure for two years, which some congressional sources say could cost more than $250 billion.

Also, under pay-as-you-go rules, a two-year extension of these provisions does not have to be offset.

The troubles in Europe

Here's an interesting summary of the European sovereign debt crisis that is so clear there must be something wrong with it.


G-20 Fiddles; World Burns.

Sample commentary:

Meanwhile Germany and France, the two countries on whose close and strategic cooperation the entire EU system depends, have opposite views about how the current crisis should be addressed.  The French think the Germans should pay through the nose to keep the euro going while increasing the German government deficit to bolster the European economy.  The Germans think the French should shut up.

Tax gridlock?

According to this Washington Examiner piece, the report from Volcker's tax commission is now not expected until November (it was originally due last December). So important tax legislation might happen in a lame duck session?  I don't think so, especially if the Republicans gain control of either house.  That could mean the Bush tax cuts expire for everyone, not just those at the top of the income scale.

Wow. That will be the mother of all tax increases.  Contrary to media spin, the Bush tax cuts included many critical breaks for the middle class, they weren't just about "the rich."

Sounds like a great way to extend and deepen the recession.  I'm not easily surprised by politicians, but kicking this particular can down the road is breathtakingly reckless.

Financial Illiteracy

"The depth of our financial ignorance is startling," writes James Surowiecki in The New Yorker. "Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is."

"The difference between knowing a little about your finances and knowing nothing," Surowieki points out, "can amount to hundreds of thousands of dollars over a lifetime."

Think how many wealth managment accounts would be opened if we could convert No Nothings into Know Littles.

What if J. D. Salinger's Estate is Taxed?

Along with the estate of billionaire Bacon, numerous smaller fortunes could shrivel if a new, retroactive federal estate tax is enacted. Estates consisting mainly of illiquid or hard to value assets could be hit particularly hard. The estate of reclusive author J. D. Salinger, who died last January, is a case in point. See Salinger's Estate: a Tax Quandary?

From Los Angeles this month, The Telegraph reports movie-makers see new hope for gaining the film rights to "The Catcher in the Rye." Their theory: a retroactive estate tax might force Salinger's estate to sell the rights to raise cash.

Could it happen?

Bayou Boomerangs on Goldman Sachs

We first encountered Sam Israel's Bayou fund almost five years ago: Mr. Barnum, meet the hedge funders!

Sam's now serving 22 years, but Bayou continues to make news, as The Times reports:

Goldman Sachs has been ordered to pay $20.58 million to creditors of a failed hedge fund ….

The award represents the first time that a bank has been held accountable for a Ponzi scheme because of its role as a middleman.

Goldman cleared trades and lent money to the Bayou Group, a Connecticut hedge fund that collapsed in 2005, when state and federal investigators said the firm defrauded investors of hundreds of millions of dollars.

Other Wall Street firms serving as prime brokers, the Times observes, may now feel obliged to better scrutinize their hedge fund clients’ activities.

A perhaps related question, born of ignorance: As directed trusts grow in popularity, could trust companies be called upon to monitor decisions of the trusts' investment advisers more closely?

The "billionaire's surtax"

Here's TaxProf Blog reporting on a new estate tax proposal from the Democrats. It includes a 65% top tax rate (!) and, according to the Wall Street Journal, it is supposed to apply retroactively this year. Watch out, heirs of Dan Duncan!

Perhaps now the argument on estate tax reform can be joined.

Hoover on Taxing Capital Gain

From an editorial in the June 24, 1931 Wall Street Journal, as summarized at News from 1930:

Pres. Hoover's apparent recent stand against all capital gains taxes on grounds they intensify both booms and busts may be logical, but is probably too radical a change for the US tax system. Current concept of capital gains as income is so deeply ingrained in our income tax system that its elimination would require "pretty complete rewriting and reinterpretation of this complex law."

There'll Always Be an England

How can someone own something yet receive no benefit from that something? Over the centuries the English turned that eccentric notion into reality, inventing "uses" that evolved into what we know as "trusts."

Today more history was made in England. The Queen came to Wimbledon for the first time in 33 years. And American John Isner won (70-68 in the fifth set) the longest tennis match we'll ever see.

Language Abuse

Ever lost money on an "inappropriate investment"? Ever been hit with "unreasonably high fees for financial services"? Welcome to the club. Did you know you were a victim of financial abuse? Senior abuse, if you're a pre-Boomer.

The survey on which Michelle Singletary hung her recent column determined that one in five seniors were the victim of financial abuse because 20 percent answered "Yes" to

Have you or your spouse ever been taken advantage of financially in terms of an inappropriate investment, unreasonably high fees for financial services, or outright fraud?

The majority who didn't say "Yes" must have been ashamed to admit being "taken advantage of."

If I'd bothered to read the survey, I would not have bothered to call attention to Singletary's column. Jim Gust was right on in suggesting we take it with a good helping of salt.

Language abuse such as this is unfortunate because it trivializes a limited but real danger. Some seniors will suffer serious financial harm because they are no longer able to look out for themselves. And as Lawrence A. Frolik, professor of law at Pitt, points out in Watching The Watchman, designating an attorney-in-fact doesn't necessarily solve the problem.

Paying for Estate Tax Reform

Last time we tuned in, legislation to replace the stiff old federal estate tax, now scheduled to emerge from the dead next year, had foundered. Some Senators want a less onerous estate tax to be "paid for," presumably with increases in other taxes or cuts in federal spending.

New York State's two Senators, the New York Post reports, favor a different approach. They too want estate tax reform to be paid for – but with reductions in the federal income tax!

Great idea! Then the Senate could start worrying about how the income tax cuts are to be "paid for."

(With oil still spilling and with bankruptcy threatening a growing list of towns, cities and even nations, aren't you glad we have Congress for comic relief?)

HNW advertising roars back

No matter what you’ve heard, the recession is over when it comes to prospecting for millionaires.

So says The Trust Advisor Blog, in an interesting roundup of the current advertising executions by private banks and wealth managers.  I particularly appreciated the justification for the expensive ad buys:

Figure one back cover of the New York Times magazine costs around $100,000. With a $10 million account minimum and roughly a 1% management fee, if Bessemer reels in even one new account and holds it for just one year, the ad buy breaks even.     

Retiree decisionmaking

This story doesn't involve fraud,  but it does point up the difficulty that adult children may have in staying involved in the important decisions of  their  elderly parents.  Also, on the unexpected consequences of some  decisions.  Seemed like a good followup to JLM's post.

Would you like some salt with that?

I read JLM's post below, followed the link and was struck by the following paragraph in the WaPo article:

For each case of elder fraud reported to authorities, an estimated four or more go unreported, according to MetLife. Appallingly, family members and caregivers are the perpetrators in 55 percent of the cases. 

So, for each 100 elderly persons we know that there are 20 reported frauds.  For each one of these, there are four more frauds (or more), so that comes to 80 unreported frauds.  So at a minimum, 100% of all the elderly are fraud victims.

I am not trying to argue that fraud against the elderly isn't a problem, but such unexamined exaggerations are not helpful. I'm surprised that the WaPo editors let this one by (or am I?).

Are there bright lines around the "fraud" by family members or caregivers, so we know what we are talking about?  When the allegation of fraud incidence is  that high, I wonder just how the crime is  defined.

So, let's say I'm taking care of my elderly parent, and having seen all this reporting I've decided to get more aggressive, more protective.  But that's also a red flag, according to the article, and now I will be a suspect.

The professionals are encouraged to probe and pay attention to any changes in an elderly person's behavior or the presence of a caregiver who appears excessively protective or dominating. 

No easy answers.

Swindling the Elderly

Look for signs of fraud against the elderly, advises Michelle Singletary in The Washington Post.

One of five Americans over the age of 65 -- that's 7.3 million seniors -- has been victimized by a financial swindle ….

The one-in-five estimate does not include all the retired seniors forced to spend down their savings because the Feds keep interest rates at artificial lows.

Extenders blocked--what does it mean for estate tax reform?

Tax Notes reports ($) that the Senate is having trouble swallowing the extension of  expired tax provisions, which have been coupled with the extension of unemployment benefits and other spending.  Reportedly, certain centrist Senators have objected that the provisions aren't fully "paid for," suddenly they've become deficit hawks. I wonder if the real story isn't that the hedge fund managers are successfully heading off a change in the taxation of carried interests, currently treated as capital gains. That's the new provision intended to offset the lost revenue from the extenders.  (Please ignore the fact that the extenders, such as the R&D credit, create economic growth that likely make them revenue generators, not losers; those effects are beyond the capacity of our scorekeepers to measure.)

Let's take the deficit reduction argument at face value.

Like nearly all observers of transfer tax policy, I never expected to have a year without federal estate taxes. I thought it was a clever ploy for manipulating the scoring system.  If, in 2009, Congress had lifted the estate tax exemption to $5 million, the lost revenue in 2011 and later years would have been offset by the gain over having no estate tax in 2010.  That would have made the change more palatable.

Now it looks increasingly as if there will be no estate tax for 2010, no retroactive changes.  Any increase in the exemption amount above $1 million, even a restoration to 2009's $3.5 million, will be scored as a serious addition to the deficit.  One that benefits only "the rich."  I don't think it will happen.

We are preparing marketing materials based on a $1 million exemption in 2011 and later years.

BTW, once it becomes crystal clear that there will be no retroactive changes to gift tax rates, I expect a flood of taxable gifts this year to take advantage of the temporary 35% tax rate.  Good revenue news short term, but long term it's the largest family fortunes that will take advantage of the opportunity, and so estate tax collections will be reduced for decades.

Magical Moments on iPad and Screen

Efforts to avoid the iPad failed me this week. Our son-in-law let me take a test drive on his.

Does the iPad Change Everything? Yes. But not because it's a bookreader with multimedia capabilites. Steve Jobs is right. Magically, the iPad does remove a barrier between you and the Internet. I discovered as much that evening, when I revved up my old iMac. How frustrating to maneuver with keys or a mouse once you've experienced the iPad.

If the iPad – and the G4 iPhone – don't make Steve Jobs' year, Pixar's Toy Story 3 surely will. Reviewers for both the NY Times and the WSJ loved it.

Wrote A. O. Scott in the Times: "… perhaps only Pixar, a company Utopian in its faith in technological progress, artisanal in its devotion to quality and nearly unbeatable in its marketing savvy, could have engineered a sweeping capitalist narrative of such grandeur and charm as the “Toy Story” features."

Wouldn't it be a wonderful world if that devotion to quality spread around Wall Street . . . and oil drillers?

“Banks that Prey on the Bereaved”

Is 4 percent too stiff a fee for a British bank to charge to settle an estate valued at $1 million or so? That's the gist of this article from The Mail, where we also learn that the U.K. has what they call "probate brokers."

An acute challenge for the Merrill Anderson Company

The Wall Street Journal reports on the growing competition between states to be home to trusts for wealthy families. States have limited or eliminated the rule against perpetuities, and they have reduced taxation of trusts of nonresidents. Most important, the efforts have succeeded:

Between 1985 and 2003, 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, according to a study by Robert Sitkoff, a professor at Harvard Law School, and Max Schanzenbach, a professor at Northwestern University School of Law, published in the Yale Law Journal.

Most of Merrill Anderson's trust marketing material is intended for multi-state distribution, and has no state-specific observations.  Much of the material is sold into states that haven't entered the competition. Apart from emphasizing the value of local administration, how can we respond productively to this development?

Investing is the Opposite of Sex

For another dose of Scott Adams' irreverent financial commentary, see The Horoscope of Investing. Adams suspects that rebalancing to maintain a fixed asset allocation is mostly make-work for investment advisers. That dastardly thought was roundly rebutted in this comment from MattF:

The basic reasoning behind both dollar-cost-averaging and periodic rebalancing is that, when you do them both, you get a sort of automatic buy-low, sell-high strategy, and you get some medium-term protection from market volatility. In fact, simulations show that DCA actually improves your performance in volatile markets, mainly through buy-low.

Yes-- it's an imperfect, mechanical, and boring strategy …. *** Remember, your financial strategy should strive to be the opposite of sex: if it's exciting, you're doing it badly.

Scott Adams, investment guru

I missed Scott Adams hilarious essay on investing in The Wall Street Journal a week ago.  However, I discovered it tonight because it is still on the most e-mailed list.  Read the whole thing if you have an online WSJ subscription, Scott makes the funny but not entirely illogical case for investing in companies that you hate, such as BP.

What about the alternative investment approaches, such as, for example, technical analysis? I must say Scott's observations  are 100% in harmony with my feelings:

Technical analysis involves studying graphs of stock movement over time as a way to predict future moves. It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.

The $1 Million Estate Tax Exemption: R.I.P.?

The print version of What an estate Looks Like in the Times didn't reproduce this Jessica Hische illustration in color (who says skulls can't be cute?) but it did include an added subhead:

A billionaire dies, no taxes for the estate. Next year, a $1-million-plus estate gets taxed.

Could that comparison put a little pressure on Congress?

"How can you let estates of a little over a million be taxed in 2011? You didn't bother to tax a billionaire's estate in 2010!"

The Times piece supports Jim Gust's supposition: Senator Kyl's latest potential deal involves an estate tax exemption of $5 million and a tax rate on additional wealth of 35 percent.

Beware! Oil Spill Investment Scams

From Michelle Singletary's The Color of Money column in The Washington Post:

The Securities and Exchange Commission and the Financial Industry Regulatory Authority have issued an investor alert about scams designed to exploit the BP spill.

"The sad thing is people haven't heard the warnings enough, because these scams continue to happen," said John Gannon, FINRA's senior vice president for investor education. "Today, it's the BP oil spill; before, it was Hurricane Katrina. The cover story changes, but the scam is basically the same."

Pump-and-dump schemes aren't the only financial hazard. Singletary adds that donors receiving heart-rending charitable appeals for money to help clean up the spill should investigate before they donate.

Positive Thinking, Depression Style

From the news for June 11, 1931, as reported in The Wall Street Journal and reprised at News from 1930:

T. Watson, IBM pres., speaking to the Financial Advertisers Assoc., calls for more active education on current investment opportunities: "Speaking to you toward the end of this depression we are going through - and in my judgment we are near the end - things generally are showing some improvement. It would help tremendously if the financial advertising profession could devise a plan ... for placing before the public the investment opportunities which exist today."

Life settlements under attack

The Wall Street Journal reports on an interesting case in which a lawyer arranged for $56 million worth of insurance on his own life to be sold to investors for a few hundred thousand dollars.  The investors paid the premiums after the sale. 

Apparently the lawyer's wife was not privy to the deal, because she now insists that the insurance proceeds be paid to the estate, not the investors.  They didn't have an insurable interest, she argues.

However, one litigant has produced some paperwork suggesting that the wife signed off on the transfer of the policy ownership after it was in force for two years. 

Per the Journal, the life settlement industry had been hot about five years ago, but cooled with financial crash in 2008.

Jon Kyl isn't giving up

From today's Tax Notes ($), Jon Kyl has a "compromise" estate tax proposal that may garner 60 votes in the Senate.  Details not released, but it's probably similar to the $5 million exemption in 10 years that was defeated in the House last fall.  Reportedly Kyl will try to attach the measure to a bill providing new tax breaks for small businesses.

My money is on no estate tax action for the rest of this year. I hope that I am wrong.

The Remarkable Rockefellers

Tim Redmond at SFBG picked up on the same nugget I noticed in the Times story on Duncan's tax-free estate.

Back in 1937, the wealth left by John D. Rockefeller was hit by a 70% federal estate tax.

Redmond, who grew up near the Rockefeller estate in Pocantico Hills, observes that Rockefeller's kids seemed to thrive despite their tax-reduced circumstances. (New Roll Royces for their wives every year? Wow!)

How did they do it? The senior Rockefeller presumably spread a little wealth around the family before his death. And some of the kids, including banker David, did pretty well on their own.

Kykuit, the Rockefeller estate in Pocantico Hills
Photo via Wikimedia Commons

Is College Worth the Cost?

Maybe so. Data from Real Time Economics, Wealthy Are the Only Ones Spending.

May unemployment rates

College grads 4.7%

High School grads 10.9%

Less than high school 15%

Still Certain: Death and Taxes

What plans can couples make now to protect their assets? Quite a few, as Forbes' Deborah Jacobs reports in Prepare for the Return of the Estate Tax. Set up life insurance trusts, for instance.

The Duncan estate

We posted on the multi-billion dollar Duncan estate in April. The New York Times catches up today.

People are Driven to Distraction. How Can You Reach Them?

Let us sing the praises of snail mail. Yes, snail mail.

As the Times reported at length, digital gadgets are driving us to distraction. Exhibit A, the entrepreneur so distracted by an unending digital flood of instant messages, chats, posts, tweets and games that he overlooked one of the most important emails of his life. Not for a few hours or overnight. For twelve days!

Bet he would have noticed the handsome offer for his Internet startup if it had arrived by snail mail.

That's certainly how it works in our household. My wife wouldn't think of trying to read all the email offers she receives. But she browses a surprising number of catalogs delivered by our faithful snail. Likewise, often as not I neglect to follow the email link to an online pdf newsletter. But when the snail brings a newsletter, I look at it.

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The sponsor of this blog has plenty of content for wealth managers to put on the web. But Merrill Anderson's most productive marketing tools continue to be those that arrive … by snail.

A $50 Million Will Battle

"A $50 million will battle that reads like a movie script, with claims of stolen masterpieces, smuggled art, a furtive meeting in Shanghai and old grievances…." Read all about it in Siblings Two Worlds Collide in War Over Chinese Art Trove, a NY Times report on the dizzying accusations and counterclaims surrounding the estate of C. C. Wang, the famed Chinese art scholar who died in 2003 at age 96.

A work from the C. C. Wang collection,
exhibited at The Metropolitan Museum of Art in 1999-2000.

Context on the Euro crisis

I knew the essentials of when George Soros essentially robbed the Bank of England, but this blow-by-blow review reprinted in The Atlantic is fascinating.  Go for the jugular!

I wonder to what extent we can credit currency traders for the  current situation?

Hat tip to the Instapundit.

Tax Complexities for Same-Sex Couples

The Internal Revenue Service has decided same-sex couples in California (and maybe other states) should treat their income as community property, reports The Wall Street Journal: "Couples who are registered as domestic partners in California must combine their income and each report half of it on their separate tax returns."

Note the reference to separate returns. "Same-sex couples, even if they are legally married in their home states, may not file joint federal tax returns. The federal Defense of Marriage Act, passed in 1996, defines marriage as between one man and one woman and bars federal agencies from interpreting it otherwise."

Will estate lawyers and accountants have related complexities to deal with when the federal estate tax revives? Could an "all-to-spouse-or-partner will" have one tax result in California (thanks to community property) and other in Massachusetts (where everything would be taxable in the absence of a marital deduction)?

How $1 Million Could Shrink in 1960

This Hanover Bank ad ran in June 1960. Back then, $1 million was equivalent, in purchasing power, to well over $7 million today.

One million dollars isn't even worth what it used to be a decade ago. If the bad old estate tax reappears as scheduled next year, the $1-million exempt amount needs to be raised to at least $1.25 million to represent the same level of wealth as it did in the year 2000.

Double dips

Just one day before the Dow closed under 10,000, perhaps as a result of another rotten jobs report, Daniel Gross at Slate stated that there is very little  chance of a double dip recession.  Talk about a double dip springs, he argued, from the excessive of optimism of 2007.  Having been stung by that error, now there is an excess of pessimism. 

Liberals saying there's nothing to worry about in the economy?  I'd call that a sell signal.

Why Investors Need Professional Help

Just read a bullish post by Chris Damas and paused to check out his company web site, where I found this timely quote:

Wealth Management Challenge for Al and Tipper?

The Gores' announced separation won't necessarily lead to divorce. But whatever Al and Tipper decide, The Washington Post reports, they have a fortune to split or share.

The importance of centers of influence in trust marketing

A good discussion from the Trust Advisor blog.  Note the issue of the double edged sword.

A Fate Worse than Wealth?

Spotted a striking juxtaposition in the print edition of the Times the other day. Right next to an article on Teaching Values to Children of Wealth ran a report on Students Buried in Debt. The median debt run up by students who borrow to attend private colleges exceeds $20,000. Some owe more than $40,000. One young woman profiled by the Times carries a student-loan load of $97,000. Presumably, she could tell those children of wealth something about the value of a dollar.

Now there's an idea – she might pay down her debt by going to work as a life coach at one of those organizations capitalizing on the trend to "teaching values."

US Trust, for instance. That unit of BofA now offers not wealth management but Worth Management.

Related post: What Children of Wealth Should Know.