Friday, July 30, 2010

Mansion for Sale – and Dig That “Open House”

In the 1940s Vincent Astor moved from his Hudson River mansion to Astor Courts, a sporting complex on the estate (tennis and squash courts, swimming pool, etc.) which he had converted to a home. After his marriage to Brooke Astor, presumably they lived there from time to time.

Tomorrow, Astor Courts hosts Chelsea Clinton's wedding. The place is for sale, and perhaps the lavish "open house" staged by the Clintons will entice a buyer.

Wednesday, July 28, 2010

Taxwise, It's Beginning to Look a Lot Like Christmas

Conventional wisdom says the Democrats will wait until shortly before Election Day to extend the Bush tax cuts for couples making less than $250,000. Raising income-tax rates for other taxpayers will attract votes, the theory goes, because voters want to "soak the rich."

As for the estate tax, Senator Judd Gregg offers a decidedly minority opinion: "It’s my understanding they are close to an agreement which I hope we can obtain before we leave for [August] recess…."

More likely, estate tax arguments will drag on into November or December.

Will Republicans offer to support extension of the 2009 version of the estate tax if the Bush income-tax cuts are extended to all brackets?

If thwarted, will Republicans let the bad old estate tax reappear, hoping to repeal it after retaking control of Congress?

IRS is studying what to do about 2010

Issues for IRS include how to report and monitor basis step-ups for property inherited in 2010, according to a Tax Notes report of a recent AICPA conference.  Said one presenter, the fact that the IRS is giving this such attention now means Treasury no longer expects retroactive estate tax reform this year.

Benefactor with a Checkered Past

You may already know the story of Mandi Schwartz:

[A] Yale hockey player stricken with leukemia, she needs a stem-cell transplant to survive, and her family and friends are searching everywhere to find her one.

Now, we read in the NY Times, there are Questions About Yale Cancer Patient's Benefactor:
Spearheading the effort has been Tedd Collins IV, who founded two charities to help leukemia patients after his 26-year-old daughter died last summer while battling the disease. By all accounts, Collins has been an untiring advocate for Schwartz, whose transplant is scheduled for next month.

But as Schwartz’s teammates and Yale officials suggested that people lend support directly through Collins’s charities, what they did not know was that he has spent the better part of a decade entangled in lawsuits and fraud accusations, according to court records and interviews.
In 2005, after a failed Internet venture, Collins founded Trust Management Associates. Allegations against Collins include:
  • Offering a 35 percent return in little more than a year to a South Carolinian whose investment then vanished.
  • Taking nearly $200,000 from a Florida paramedic to set aside in a trust for the paramedic's daughter. This fund also went missing.
At this writing Collins has not been charged with a crime. Federal prosecutors, the IRS and the Secret Service are continuing their investigation.

Postscript: Collins was a middleman linked to the collapse of Sam Israel's Bayou funds, the Times reports. Small world, isn't it?

What effect did the homebuyer's tax credit have?

Not much, according to Casey Mulligan in the New York Times.  He argues that the value of the housing stock, $14 trillion, overwhelms the value of tax credits claimed, $19 billion, so the effect on total pricing is negligible.  Although the credit may have accelerated some transactions and building projects, it did not create them out of thin air.

So what are we to  make of the  unexpected collapse in the housing market since the credit expired?

Monday, July 26, 2010

The New New Rich

Helping a Chinese client find a suitable home to buy? Beware the number four. For other tips on dealing with the hordes of Chinese now able and eager to live luxuriously, see the Telegraph's Year of the Dragon.

Data to ponder:
Last year the People’s Republic overtook the United States to become the second biggest market for the luxury sector; and by 2015 it will have overtaken Japan, with a market projected to be worth £11 billion annually.
• • •
The country’s middle class is expected to reach 315 million by 2015, greater than the population of the United States. There are now 875,000 dollar millionaires in the communist paradise, sporting an average age of just 39. They own an average of three cars and 4.4 luxury watches….

Friday, July 23, 2010

Merrill Anderson's Own Mad Man

Mad Men returns for its fourth season this Sunday. At first Mad Men looked phony to me, especially the efforts at casual smoking. Now that we've watched all three seasons, I'm hooked.

The ad men I knew in the 1950s and 1960s were seldom as dapper as Don Draper. The only man who made him look like a comparative slob was John Northcross, the illustrator who worked on Merrill Anderson's U.S. Trust ads as well as campaigns for State Street and (R.I.P.) National Bank of Detroit.

John looked nothing like TV's idea of an arty type. Dark haired and handsome, he invariably turned up in Merrill Anderson's offices looking ready for a photo shoot: beautifully tailored dark blue suit, newly shined black shoes, repp tie impeccably knotted. He actually did do some modeling, I believe. When creating illustrations for U.S. Trust, he often modeled for himself.

John was our go-to art guy because he worked quickly, always understood what was wanted, and knew how affluent families of the time were supposed to dress and look.

Far as I can learn on the Web, John Northcross never became particularly well known as an illustrator. But I did find one piece of art he did for a story. I can imagine it inspiring a Mad Men episode:

In a half-vacant antique showroom, Betty Draper has a rendezvous with a handsome stranger….

Thursday, July 22, 2010

Donor-Advised Funds

Even the much-maligned financial services industry comes up with a good idea once in a while. Simplified philanthropy, for instance, made possible by donor-advised funds.

A couple of years ago, before the Great Recession, assets in donor-advised funds were estimated at $28 billion or more. The current figure is probably a bit lower, but Schwab and others report new donations are flowing freely.

Last year the WSJ reported that donors are closing down their private charitable foundations and moving the assets into donor-advised funds. Advantages: less regulatory hassle, less paperwork, lower annual running costs.

Will higher tax rates on income and capital gain help donor-advised funds attract even more philanthropists next year?

Wednesday, July 21, 2010

The end of 12(b)-1 fees?

That is the SEC's plan, according to InvestmentNews.  However, ongoing marketing fees will still be allowed, but renamed.

Setback for estate tax reform

Contrary to my earlier post, Tax Notes today reports that the Kyl-Lincoln estate tax amendment won't be voted on in connection with the legislation for tax breaks for small business, H.R. 5297.  Majority Leader Reid is against it. Kyl is reportedly looking for other ways to get the bipartisan compromise to the Senate floor.

Tuesday, July 20, 2010

Monday, July 19, 2010

Dubious Donations, Continued

If your Ponzi scheme is sputtering or your overleveraged business is tottering, your self-esteeem needs a boost. Solution? Garner gratitude with a big donation to a big-name institution. Jim Gust pointed out one example. The Yale Alumni Magazine spotlights others, such as $5 million in Ponzi loot returned by Miami University of Ohio.

One of Yale's own problem donors is John Mazzuto. He gave the university shares of Industrial Enterprises of America. Now he's accused of looting the company, which is bankrupt. Yale sold the shares (presumably to a willing, maybe even eager, buyer) before they lost value. Should Yale now have to return the sales proceeds?

Another of Yale's problem donors is Bearingpoint. Like Industrial Enterprises, Bearingpoint is now bankrupt; you can pick up shares for $.04 or so. Yet a few years ago, the giant consulting firm seemed anything but fly-by-night. Should Yale return the $8 million in Bearingpoint donations that it has devoted to an endowed professorship and an executive training program?

Another article in the YAM shows that corporate grants can cause problems even when they are legit. PepsiCo has a research lab in New Haven, so both town and gown have reason to make nice to the company. Even so, is Pepsi a cool sponsor for a fellowship in … nutritional science?

Boy, am I glad I'm not a university president.

Sunday, July 18, 2010

Scoundrels and Scandals

Bernie Madoff's golf tees, an Enron stock certificate and reminders of earlier financial scandals, dating all the way back to the 18th century, are featured in an exhibition at the Museum of American Finance in New York. Check out the NY Times slide show.

Thursday, July 15, 2010

Water and Wealth

Water and oil don't mix, as the Gulf Coast disaster demonstrates anew. Water and wealth, on the other hand, have a longstanding affinity.

Last Spring we showed you a 1931 Dodge Boat ad, promoting commuting by water as a classy way to dodge city traffic. A generation later, in 1960, here is how Chase Manhattan picked up on the same theme:

Kyl-Lincoln proposal moving ahead

According to Tax Notes, Jon Kyl and Blanche Lincoln will submit their estate tax proposal (10-year phase-in to $5 million exemption and 35% tax rate) as an amendment to HR 5297, a pending bill with tax breaks for small business.

Apparently, their bill would be retroactive to the first of this year, but affected taxpayers would be given the option to choose carryover basis instead, thus eliminating the constitutional challenge.

Although this represents a sensible middle ground to the alternative of complete estate tax repeal, it can be demagogued as a giveaway to the rich at a time of crushing deficits.  I don't expect sanity.

Should charities have a preferred status in this situation?

The New York Times reports that U.S. Wants Recipients to Return Nemazee’s Donations. Nemazee pleaded guilty to running a $300 million Ponzi scheme, and those who received the fruits of the scheme must return the money. Two charities argue that they didn't know about the fraud, and they already spent the money (even though they have plenty of cash on hand to make good), so they should be excused.

Private parties could make the same argument, but apparent lack the nerve to do so. I don't see why the charities should get special treatment. Stolen property doesn't stop being stolen because it is donated to a nonprofit.

But political campaigns do get special treatment, because they are temporary. The government has given up on collecting some $376,600 that was given to Edwards for President, Gephardt for President and the Gore-Lieberman Recount Committee, because those entities no longer exist.

UPDATE:  JLM properly notes in the comments that most of the affected charities have agreed to return the money, these two are the exception and not the rule.   I should have given credit where credit is due.

Wednesday, July 14, 2010

Bear Markets are Like . . . Gravity?

From A Scientist Takes On Gravity:
“For me gravity doesn’t exist,” said Dr. [Eric Verlinde, professor of physics at the University of Amsterdam] ….

… Dr. Verlinde is among a number of physicists who say that science has been looking at gravity the wrong way and that there is something more basic, from which gravity “emerges,” the way stock markets emerge from the collective behavior of individual investors ….

Tuesday, July 13, 2010

Another constitutional challenge to health care reform

Tax Notes ($) reports a fascinating challenge to the constitutionality of the penalty tax portions of the health care reform.  The paper is authored by a law professor Steven J. Willis and recent law grad Nakku Chungand , and is a bit tedious even for lawyers. But I loved this summary at the beginning:

The healthcare act is unconstitutional, at least to the extent of its tax provisions.3 We focus on Article I, section 9 of the U.S. Constitution, which provides:
    No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census4 or56 Enumeration herein before directed to be taken.

We demonstrate the following:

  • The act's penalty provision is styled as a tax. Congress arguably did this to finesse commerce clause problems. We assume it is a tax and therefore focus on the consequences of its being a tax -- what we call the lack-of-health-insurance tax.
  • It is not an excise, which need merely be uniform.7
  • If it is an excise tax, it is not uniform.
  • It is not and cannot be a new kind of unenumerated tax, heretofore undetected.
  • It is not an income tax.
  • If it is an income tax, it is not a tax on derived income, as required by the 16th Amendment.
  • If it is a tax, it is a capitation or other direct tax.
  • It is not apportioned.
  • The apportionment requirement for capitation taxes is alive and well.
  • The constitutional objection to the unapportioned capitation tax will be ripe, and taxpayers will have standing to assert it, by April 1, 2014, if not earlier.8

How does this relate to wealth management marketing?  We've already published articles on the portfolio management implications of the income tax surtaxes included in health care reform.  If the bill falls on constitutional grounds, those advisories will need amendment.

Another Billionaire Departs Tax Free

George Steinbrenner, the revered (by some) and reviled (by many others) boss of the New York Yankees, died of a heart attack in Florida this morning. Already bloggers are noting that he's the third billionaire to make a timely – that is, estate-tax free – departure this year.

A better approach to progressivity

Tax Notes has published an interesting letter in opposition to the estate tax ($) from James Riordan.  In addition to arguments that haven't gained much traction, such as the estate tax is double taxation and is biased against savings, he makes the novel point that the federal estate tax favors the mega rich over the merely wealthy.

That's because the mega wealthy use private foundations to shield unrealized gains from any sort of taxation, whether income or transfer taxes.  Cases in point:  Bill Gates and Warren Buffett. 

The big argument that those on the left make for the estate tax is that it adds progressivity to the tax system. I dispute that as a legitimate goal, but assuming it is, Riordan suggests a far more effective approach to reaching it:

All inter vivos gifts and transfers at death of appreciated assets should be treated as income tax realization events. Income taxes should be paid. All personal expenditures like charitable deductions and residential mortgage interest should not be deductible in computing income tax liability. Personal expenditures should be made after tax. 

I most especially agree with that last sentiment.  If the charitable deduction for income and transfer taxes isn't repealed, it ought at least to be curtailed.  Note that Riordan isn't calling for a gift or bequest to be counted as income (alas, that's what I thought on my first quick reading) but rather, that the capital gains be recognized and taxed at the moment of transfer, presumably paid by the donor or the estate.

Any chance that this Congress could do something this sensible?  No, it would offend far too many entrenched interests.

Monday, July 12, 2010

Should Wealth be Perpetual?

In 19th-century New England, the secret of perpetual wealth was to live way, way below your means. The 21st-century secret of perpetual wealth is a dynasty trust. These trusts, designed to preserve family wealth in perpetuity, pose a "pernicious problem," writes Ray D. Madoff in America Builds an Aristocracy.

Related posts:
Return of the Dead Hand
The Secret of Perpetual Wealth

Prechter and Perilous Predictions

Robert Prechter is still predicting disaster, Jim Gust reminded us. Prechter foresees the Dow plunging down under 1,000 in this decade. Wow!

The prediction that won Prechter his original fame, made in 1983, was bullish. It sounds tame now: A DJIA of over 3,600 by 1987 or '88. But recall the historical context:

After hitting 1,000 in the mid 1960s, the Dow could not regain that level until the fall of 1982. Even then the Dow needed a lot of help from the declining value of the dollar. Who on earth could expect the Dow to soar above 3,600 in a mere handful of years?

By 1987 the Dow had indeed soared, not to 3,600 but to 2,600. To many investors that height was terrifying. On October 5th, Prechter himself flinched. "Sell," he told his clients, "sell!"

Two weeks later, the stock market was a shambles. Had Prechter made a great call? Or had he yelled "fire" in a crowded theater?

George Soros leaned toward the latter view, according to The New York Times:

''I was stunned by his comments, just as everyone else was,'' Mr. Soros said. [Robert] Prechter had predicted for years that the Dow Jones industrial average would crest next year at 3,686. In his view, investors would pour into the stock market the same way they had into all sorts of markets periodically for thousands of years, indulging in a buying frenzy that would ignore underlying values in the belief that tomorrow would bring a bigger fool willing to pay even more than the ridiculous price of today.

''Mr. Prechter's reversal proved to be the crack that started the avalanche,'' Mr. Soros said yesterday.

Even Warren Buffett sees more lean years ahead for stock investors. But the Dow plunging to below 1,000? Don't bet on it.

If the worst does happen, at least we have Mr. Prechter to shoulder the blame.

Critique of the financial reform bill

From Becker and Posner. They find the bill to be a political exercise substantially disconnected from the actual  causes of  the financial panic.   Their most important point is that regulatory bodies had all the power they needed to intervene to avert the crisis, but they declined to act.  Giving them new powers to not use won't change that equation.  Becker concludes:
Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.
I have a simple test. Is Glass-Steagall resurrected?  That is, has interstate banking been outlawed, and the commingling of investment and commercial banking forbidden?  Glass-Steagall rescued the banking industry in the Great Depression and kept it safe for more than half a century.  We had more imaginative legislators in those  days.

Thursday, July 08, 2010

Could this be contributing to the slowness of the recovery?

Financial regulation bill dictates ethnic, gender quotas.

Is this really appropriate?

Review of the scheduled tax increases

Earlier I mentioned that the outlook for any tax reform this year is very cloudy.  Here, via Yahoo and SmartMoney, is a list of the tax increases for 2011 that are already on the books, increases that will hit almost all taxpayers.

Ironically, I believe that these changes will reduce the progressivity of the income tax if they are allowed to take effect.  Yes, there will be higher top rates, but the return of marriage penalties mean that more actual revenue will be coming from the middle class.

How to Turn a Tough Prospect into a Soft Touch

Mrs. Gotrocks could become your wealthiest client. But she's known as a Holy Terror when it comes to negotiating fees.

What to do? Offer her an easy chair.

Really. The sense of touch matters more than we realize.

Wednesday, July 07, 2010

Two Ads from the Sorry 'Seventies

Sensing discontent with our unsettled times, designers have gone nostalgic, The New York Times tells us, reviving styles from World War II, the 1950s and even the 1970s.

Bad idea. World War II was not fun and games. As for the 1970s … yuck! The decade was born in war and war protest and went downhill from there. Ridiculous hairdos. Watergate. Polyester clothes. Long lines at gas stations. Double-digit inflation. The worst stock-market slump since the Great Depression.

Did we mention the smog? That unwelcome phenomenon prompted many a 1970s jest, like

How to murder your husband in two easy steps
1. "Darling, let's move to L.A."
2. "Everything's unpacked, Dear. Why don't you go jogging? The air will do you good."

When life hands affluent investors lemons, savvy marketers encourage them to make lemonade. Here are two examples from 1970.

Merrill Lynch tackles the breathability issue head on:

U.S. Trust evokes a whole handful of worries confronting the 1970 investor. (Anyone know why "communication" was cause for concern?)

For today's fiduciary wealth managers, our unsettled times also offer marketing opportunities. Worried investors who have gotten along without professional guidance become more willing to seek it. Investors who have lost confidence in their old advisers look for new sources of expertise.

Tuesday, July 06, 2010

Bulls vs. Bears II

The two articles Jim Gust cites below aren't the only evidence of hand-to-hand combat between bulls and bears. Here's what I just snipped from Seeking Alpha's daily email list of articles:

Monday, July 05, 2010

Two views for Independence Day 2010

For the bulls.  I'd like to believe.

For the bears.  I'm afraid this is closer to reality, though I have not moved my own portfolio to cash.  I probably should.

For a brief few moments back in the 80s, I was a bit of a Robert Prechter fan.  The notion that one can decode "hidden mathematics" behind market movements is one I find seductive. 

However, when I learned from the Times article that Prechter is channeling Hari Seldon and is trying to really create Isaac Asimov's psychohistory, renamed socionomics, well, I think my growing skepticism is vindicated.

Saturday, July 03, 2010

Breath (Wasted) and Taxes

So far this year, all the talk of urgent tax legislation to restore the estate tax and preserve Bush tax cuts has been wasted breath. And the outlook for the second half of 2010 is no better.

From Up in the Air: Your Taxes in The Wall Street Journal:
"I've never seen so many tax issues that need to be addressed in so little time," says Lindy Paull, a former top congressional tax staffer now with PricewaterhouseCoopers.

If lawmakers don't act, estate taxes will rise, the alternative minimum tax will hit millions more taxpayers, and many useful benefits will expire. Tax rates also will rise for all, and for investors the top rate on dividends will jump to nearly 40% from 15%.

Congress has fewer than 40 working days left before the November election, with no lame-duck session scheduled.
Ms. Paull shares Jim Gust's instinct that we won't see estate-tax legislation until 2011.

Have a nice Fourth of July anyway.

Thursday, July 01, 2010

The new tanning tax now applies

To help fund health care reform, Congress first thought to tax certain cosmetic surgery procedures.  The idea came to be known as the "bo-tax." However, there was enough organized resistance to kill the concept.

Not so for the 10% tax on indoor tanning, which bean counters estimated would raise $2.7 billion. I think they should read this item in The Wall Street Journal on the rocky start the tax is having. If the Feds collect even $1 million before repealing this dumb idea, I will be very surprised.

Remember the "luxury tax" on yachts? It didn't raise much revenue, but it did successfully injure the boat-building business in the U.S. and throw thousands of non-rich out of work.

Not being a tanning aficionado, I learned a lot from the article.  For example, the tax applies to tans from UV light, but not to spray-on tans.  Also, there's an exemption for health clubs or gyms that have tanning salons.  That's going to put the stand-alones out of business, and it won't raise any money.

What if a standalone tanning business adds some workout equipment to get around the tax?  Apparently new IRS regs. already have nixed that strategy.

The article mentions that some video stores added tanning booths, and they have cross promotions.  What is the tax when a tanning session comes free with four video rentals?  No one knows.  Why should we have to waste our time answering such stupid questions? No one knows.

There is a significant cohort of people who think that tanning salons are unhealthy, and that belief motivated them to support this tax.  If tanning salons go out of business, if Americans stop exposing themselves to UV rays, so much the better, seems to be their rationale.

On the other hand, new research has shown that aversion to the sun has led to widespread vitamin D deficiencies.  Maybe not such a healthy idea after all.

Whisky Galore

Happen to know of a pension plan, public or corporate, that's not underfunded? Give the remarkable rarity an encouraging hug.

In the U.K., the WSJ reports, such companies as Sainsbury and Marks & Spencer are resorting to "property assets" to plump up their pension funds. Diageo, the world's largest whisky producer, is using millions of barrels of maturing whisky.

The Financial Times hails Diageo's clever move:
Like the 1940s film Whisky Galore – in which Scottish islanders find a treasure of whisky from a shipwreck, helping to improve the mood on their remote island – Diageo has also discovered that its own whisky assets can ease the corporate anxiety of yawning pension hole.
If you have never seen that classic Ealing comedy, check it out. In this country the film was retitled "Tight Little Island."