Tuesday, January 26, 2016

Why Some Wills Don't Treat Children Equally

In 2010, according to this research, one third of parents with wills were planning to divide their estates unequally among their children. Fifteen years earlier, only 16 percent of parents were planning unequal distributions.

Why the trend to inequality? Mainly, the growing complexity of families as the result of widowhood or divorce. Stepchildren may get less than natural children. Children seldom seen after a divorce may receive less than children from a second marriage.

Stepchildren are wise not to expect to inherit much from a new step-parent. Their odds improve after ten years, and improve further if they produce babies for their parent and step-parent to fancy.
(A broker once told me that elderly English family members like to "baby fancy." Nice term.)

Friday, January 22, 2016

The Art (Literally!) of Investing

Sarah Meyohas, “Liberty Bancorp Inc. on January 14, 2016."
Sarah Meyohas studied finance at Wharton and fine art at Yale. The New York Times reviews her exhibit in which she combines her two interests. Daily Ms. Meyohas sits at a desk and invests, moving in and out of a thinly traded stock. Then she sketches the stock's price changes on canvas.

Before you laugh, consider that her painted charts sell for $10,000 each. 

Tuesday, January 19, 2016

Is $5 Million the New Million?

In 2015, for the first time, more than one million U.S. households had a net worth of more than $5 million. 

report from Phoenix Marketing International also estimates that the number of HNW households, those with at least $1 million in investable assets, has reached a new high of more than six million. 

Wednesday, January 13, 2016

Powerball Madness

The NYTimes weighs in here on the vital question of whether one should take the lump sum or the annuity if one wins the $1.5 billion PowerBall jackpot on Wednesday. Demonstrating the Times' usual blind faith in government fulfilling the promises it makes, the author advocates for taking the annuity.  Admittedly, if you take the lump sum you get an immediate $1 billion haircut, counting the income taxes, and that is hard to make up.  That's painful.

But the author naively ignores the effect of estate taxes.  Unless the winner is in his 20s, there is a very good chance of dying before the annuity is fully paid off.   The remaining payments may be discounted to present value, but that figure is then taxed and the tax must be paid within nine months.

Think of it this way.   Assume that the winner takes his first $50 million annuity payment and is hit by drunk driver and dies in 2106.  The taxable value of the remaining payments will be roughly $900 million, so a federal estate tax of $360 million will be immediately payable.  Where will that money come from?  Let's say the feds agree to take the $50 million annual payments until the estate tax obligation is paid off.  That delay will trigger penalties and interest, which will also have to come out of the annuity payments.

Will the heirs ever receive a dime?  Or does the federal estate tax effectively turn the prize from a term certain annuity to one that disappears at the death of the winner?

A surprising number of commenters to the Times article were aware of this issue, which the author was not. By "surprising number" I mean "any."

Sunday, January 10, 2016

UK's Oldest Bank Recalls a Refugee Crisis

Sir Richard Hoare (1648-1719)
the bank's founder
Does Hoare's Bank, where Samuel Pepys kept his money, attract wealth management business because it's old and boring, or because it now offers a mobile banking app?

In any case old can be interesting. Hoare's history yields fascinating stories. Example: When Russia invaded the Northern Caucusus, it created a 19th-century parallel to the Syrian refugee crisis.
 [B]y 1859 huge numbers of Circassians were setting out across the Black Sea for Constantinople. So many, in fact, that it proved impossible to secure sufficient transport. As a result, reported The Levant Herald: vessels are crammed to suffocation with the exiles, who endure on the voyage to the Bosphorus all the horrors of another “middle passage”. During the past stormy season in the Black Sea above a dozen wrecks of these emigrant vessels occurred, hurrying many hundreds of these miserable creatures to death.i By January 1860 up to 20,000 people had made the perilous crossing. But while willing to receive them, the Turkish authorities were unable to cope with such a sudden influx of cold, hungry, exhausted and penniless refugees. Packed into insanitary encampments on the outskirts of Constantinople, it was not long before many began succumbing to disease. 

Thursday, January 07, 2016

The More Things Change . . .

. . . the more they stay the same. Two ads from fifty years ago prove the point.

Manny Hanny urged men of wealth to consider not only their net worth but their legacy. "What will happen to your accumulated property when it becomes the inherited property of your family?"

 With the revelation of VW's "clean diesel" finagling, this headline couldn't be more timely

Tuesday, January 05, 2016

Another Tax Skirmish for Campbell's Soup Heirs

John T. Dorrance,  inventor of Campbell's condensed soup, died in 1930. As every student of estate planning learns, Dorrance had maintained a home in New Jersey and another in a classier Pennsylvania neighborhood. At his death, both New Jersey and Pennsylvania claimed him as a resident and levied tax. The U.S. Supreme Court declined to intervene.

Vintage Campbell's Soup ad
In 1995 a grandson, John "Ippy" Dorrance, made news by renouncing his citizenship for tax reasons and moving to Ireland before selling a large chunk of Campbell's stock.

Another grandson sought to  tame the estate-tax dragon with life insurance. In 1966 Bennett and Jacquelyn Dorrance bought policies from five companies with a face value of almost $88 million.

At that time the insurance companies were "mutuals." Policyholders had membership rights. When the insurers became stock companies, the Dorrances and other policyholders received shares.

When the Dorrances later sold their shares, how should they have calculated their capital gain? Were the entire sales proceeds  capital gain?  Or did they have a "cost basis," even though they had merely paid premiums, not purchased stock?

Reversing a District Court decision, the Ninth Circuit U.S. Court of Appeals says the Dorrances' cost basis is zero.

Video clip of Appeals Court panel here.