Multimillionaires don't leave "all to wife"

Back in the old century, trust marketers learned that married folks took one of two approaches to estate planning:

The untutored left everything outright to their spouses.

The tutored set aside an amount equal to the available estate-tax credit in a bypass trust (income to spouse, remainder to kids) and left the rest to their spouses.

In reality, affluent married folks have been taking a different approach, according to financial planners asked to comment on the ill-fated PETRA. As yesterday's New York Times indicates, affluent marrieds have tended to use their available estate tax credits for direct bequests to the kids (middle-aged kids, typically).

Guess that's not surprising. In a good number of cases, John and Mary raised a family but John is now married to Jessica. His second wife is not too much older than his children.

Even if no pre-nup is involved, John is wise to leave the kids an inheritance at his death. To defer any payout until Jessica's death would scarcely make the kids fonder of their stepmother.

Because of these non-tax considerations, is it really likely that John would change his estate plan and leave everything to Jessica if PETRA became law? I doubt it.

Any contrary opinions?

Estate tax relief: Is PETRA dead?

From a Bloomberg dispatch:

Senate Majority Leader Bill Frist postponed a vote on a measure to exempt most multimillionaires from federal estate taxes after conceding Republicans lack the votes to pass legislation adopted by the House last week. The delay is the third since Frist began his quest to repeal or reduce the tax last year and the second time this month his ambitions were thwarted by Democrats who say the government needs the revenue generated by the tax.

But let's not give up just yet. The tax-bill writers who named this one PETRA (Permanent Estate Tax Relief Act) must have been aware of the link to Petra, the ancient city in Jordan that flourished under Roman rule, and hence to Indiana Jones, who always comes through in the clutch.

As Indiana's fans know, Petra was where the world's greatest treasure was hidden, under the guard of a Crusader knight portrayed by a real knight, Sir Laurence Olivier: The Holy Grail.

Estate-tax relief is not in quite the same league. Still, Republicans should feel inspired to continue their quest.

Barron's weighs in also

While we're on the subject of media coverage of trust planning, Barron's ($) offers Playing it Safe, a review of the utility of bypass trusts, as well as the income tax traps that may be sprung when couples own their property jointly.

Trust planning is hot, hot, hot

The opening paragraphs of this Wall Street Journal article ($) could have been taken from one of Merrill Anderson's newsletters:

Not long ago, few Americans had access to, or even knew about, financial tools like 401(k)s, college savings plans and reverse mortgages. Today, many families turn to these products without a second thought.

Within a few years, the same might be said for trusts.

Often associated with the vast wealth of families like the Kennedys and the Rockefellers, trusts are finding a place in more Americans' estate plans, no matter what the size of their assets.

The article goes on to explore the non-tax benefits of trust planning. Is this the decade of the trust department? Seems like a record amount of trust topics in the mainstream press lately.

Good estate-planning advice (from Guam!)

In a Gannett News Service column that turned up on a web site of Guam's Pacific Daily News, Sandra Block offers these wise words:

More than one-third of Americans with investment portfolios of $10 million or more don't have wills, according to a survey by PNC Advisors.

Worrying about estate taxes when you don't have a will is like fretting about contracting African sleeping sickness while you smoke a pack of Camels.

Will the Senate let estate tax rates fall? Timber-r-r!

The House of Representatives not only passed the Permanent Estate Tax Relief Act of 2006, it also indexed the tax threshholds ($5 million for the 15%-20% rate, $25 million for the double rate) for inflation.

Will the Relief Act pass the Senate next week? It should. Congress is considering a sensible bill. (When did you last read "sensible" and "Congress" in the same sentence?) It removes the estate-tax yoke from the merely well-to-do, preserves the convenience of stepped-up basis for inherited assets, collects the equivalent of tax on unrealized capital gains (and more) from the semi-rich, and soaks the really rich at a rate high enough to encourage philanthropy as an alternative to tax payments.

My enthusiasm is not universally shared. The Washington Post rants editorially about a terrible stench:

"Like the ghoul in the horror movie that refuses to die, estate tax repeal has returned from the grave to stalk the halls of Congress."

Still, joke writers for Leno and Letterman have got to love this legislation.

The name "Permanent Estate Tax Relief Act" is an inspired comic touch. Everybody knows that "permanent," in Congress-speak, means "We won't start messing with this legislation for at least twelve months."

And the addition of a capital-gains tax cut for the timber industry, to whom certain Democratic Senators happen to be beholden, is a real thigh-slapper.

Q. What is it called when lobbiyists grant expensive favors to members of Congress in order to get certain legislation passed?

A. Criminal.

Q. What is it called when Republican members of Congress grant expensive favors to Democratic members of Congress in order to get certain legislation passed?

A. Politics as usual.

Planning a family trust? Pick your state!

With a few soak-the-rich exceptions, most states used to collect inoffensive "death taxes" covered by the state tax credit mentioned in the preceding post. In essence, these state tax payments didn't cost families anything because the IRS otherwise would have added the same amount to the federal estate tax bill.

Now, with no more state tax credit, wealthy families have reason to compare state tax climates as they plan their estates, or as they decide which state to call home. What's more, as an article (subscribers) in today's Wall Street Journal reports, wealthy families are checking out various states to see whether they encourage family trusts.

Good news for banks and trust companies in "favorable" states? The WSJ seems to think so.

A few factoids from the article:

Trust assets. In 2005 banks held about $843 billion in personal-trust assets, almost double the $471 billion or so they held in 1995.

Dynasty trusts. More than 20 states now allow the creation of trusts that last for centuries, or "forever."

Asset Protection. Affluent legal targets don't have to move assets off-shore any more. Nine states allow "asset-protection trusts."

Unitrusts. More than 20 states permit unitrusts, usually with payout rates of 3% to 5%. More than 40 states give trustees some discretion to supplement income with principal.

But wait, there's more

The new estate tax reform bill introduced in the House, H.R. 5638, the Permanent Estate Tax Relief Act of 2006, sets the estate tax rate for estates of up to $25 million equal to the rate on long-term capital gains. For most of the revenue-scoring window, that will be 20%. For amounts above $25 million, the rate doubles, to 40%. When you consider that under the new law revenue will be collected during 2010, compared to no collections under current law, the "cost" of this reform should be modest.

Another revenue raiser: Back in 2001 the credit for state death taxes was converted to a deduction, which had the practical effect of passing most of the "revenue cost" of the estate tax reductions down to the states. About half of the states no longer collect death taxes, as a result of the change. The proposed law eliminates the deduction for state taxes also, after 2009. The old credit is not restored, and IRC Sec. 2011 (which included the table for calculating the state death tax credit) is deleted as "deadwood." Also deleted as deadwood, IRC Sec. 2057, the paltry relief offered to small businesses that's already been overshadowed by larger exemption amounts.

More good news: The estate and gift taxes will be reunified. That means that beginning in 2010 the federal exemption for gift taxes jumps to $5 million, from the currently scheduled $1 million. So the tax disincentive for lifetime execution of estate planning strategies will be abolished.

Bye-Bye to Bypass Trusts?

When last heard from, Senate Republicans said it was estate tax repeal or nothing. Nothing is what they got. Now signs of flexibility are emerging.

This Washington Post story reports that House Ways and Means Committee Chairman Bill Thomas, at the request of Senate Republican leader Bill Frist, has introduced a bill that would raise the estate tax exemption to $5 million. If a married person died without using all or part of his or her exemption, the surviving spouse could claim the unused exemption along with his or her own exemption.

Does this mean bypass trusts will be history?

Of wills and war, and the world's most expensive painting

Art just keeps jumping into the news, doesn't it? As Jim Gust comments below, cosmetics magnate and former ambassador to Austria Ronald S. Lauder has purchased the painting shown here, Gustav Klimpt's 1907 portrait,"Adele Bloch-Bauer I," for a record $135 million. The painting will become "the Mona Lisa" of Lauder's Neue Galeria, a small NYC museum devoted to German and Austrian arts.

You can read all about it in this New York Times story.

Briefly, Adele Bloch-Bauer, wife of a Jewish sugar magnate, presided over a noted Vienna salon at the beginning of the 20th century. She may have been Klimpt's lover as well as admirer. His portrait suggests old, imperial Vienna rushing into a gold-flecked new century, full of promise, or perhaps full of decadence and, as we now know, full of war.

Adele's three children died in infancy, and she herself died of meningitis at age 43. Her will expressed the wish that this portrait, and four other works by Klimpt that she and her husband owned, pass to Austria at his death.

In 1938, Hitler annexed Austria into the Third Reich. Mr. Bloch-Bauer fled, leaving the family possessions behind. The Nazis sold some of the works but placed this one, and two others, in an Austrian museum.

Mr. Bloch-Bauer reached safety in Switzerland. Before he died in 1945, he revoked all previous wills and made a new one, leaving everything to his brother's three children. Maria, the only surviving child, is now 90 and lives in Los Angeles.

After the war, Maria and her remaining relatives sought to reclaim the Klimpt paintings the Nazis had looted. The Austrian authorities eventually ruled that Adele had essentially bequeathed the Klimpts to Austria. But in 1998, a Viennese journalist researching the case for the Boston Globe found various documents, including Adele's will, which showed she was merely expressing a wish, not making a binding bequest.

In January, an Austrian arbitration panel awarded Adele's portrait and four other paintings to Maria and her relatives.

Invest nest eggs in art?

"Not since [the 1980s] has so much Wall Street money flowed steadily into the art market, prompting artists to scamper from gallery to gallery in pursuit of riches and fame. "

So says an article in yesterday's New York Times. Looks like the right time to share another of Chase Manhattan's classic (and now collectible) nest-egg ads.
Notice the added snob appeal (as it would have been called in the early 1960's) of the credit-line under the photo. No photographer's set-up, this, but rather an actual shot of a Buffet being inspected at the David et Garnier gallery in Paris.

Worried that some of your clients may be investing in art not wisely but too well? Refer them to this Financial Page from The New Yorker:

So should we all dump our shares of ExxonMobil in order to own a few square inches of a Manet canvas? Not quite. . . . [T]he vast majority of paintings that people have bought in the past never make it to resale. According to one estimate, a mere 0.5 per cent of new paintings are worth anything at auction thirty years later. Relying on auction prices to calculate a return on investment for art ignores all the money people spent on the other 99.5 per cent.

The market for art, and indeed for anything tangible, heated up in the high-inflation 1970s. Citibank started an art advisory service for wealthy clients in 1979. Seems to be still going, and its site displays more advanced web design than the rest of Citibank Private Bank.

If you browse the site, admire the liberal use of slide shows to create ambience.

Six out of seven investors don't want to think about investing

From Fund Investors Don't Want To Go It Alone, Jonathan Clements' column in the WSJ:

Yes, index funds are growing rapidly, especially exchange-traded index funds. Still, the Bogle Center calculates that these index funds account for less than 16% of the money in stock funds, hardly a huge percentage.

Similarly, among folks who invest in mutual funds outside their employer's retirement plan, a mere 14% do so without any help from a financial adviser, according to the Investment Company Institute. Indeed, the Institute's Mr. Reid says there have never been large numbers of true do-it-yourself, no-load-fund investors.

That's good news if you are a financial adviser. What if you are a personal-finance columnist? I've got to tell you, it's sort of depressing.

Why wealth-management and trust marketers love the halls of Ivy

Well over 90% of U. S. households are not millionaire households.

Only perhaps 3 or 4 million Americans are millionaires in their own right, not counting their spouses' assets.

Seems like finding new HNW clients would require a lot of searching. Happily, there's a short cut. As The Wall Street Journal reported recently, Harvard estimates that more than half its 300,000-odd alumni are millionaires. Yale and Princeton alums must offer almost equally good pickings.

No wonder savvy workers in the HNW market hold the membership lists of their local Ivy alumni clubs in such high esteeem.

Nostalgia note: "Halls of Ivy" is a name that will resonate with Gramps and Granny. The popular post-WWII radio show, starring Ronald Coleman and his wife, migrated to TV for two seasons. Coleman played the president of Ivy College. You can listen to one of the radio shows here.

Ivy College alums can even sing along with the Alma Mater. All together now! "We love the halls of Ivy that surround us here today . . . "

Extra-credit trivia question: On Jack Benny's radio show, who played his next-door neighbors?

Hedge managers can play, but do their funds really work?

The Who played at Woodstock, and according to this New York Times report, they were back on the job at Hedgestock, an alternative festival for wealthy fund stars and their vassals held north of London. Bentleys may have been more numerous than VWs.

Hedge fund stars lap up luxuries despite bad press about the results they achieve. According to The Times of London, last year hedge fund returns averaged anywhere from 3% to 9% or so, depending on the index one consulted.

What's more, as Ben Stein reported in a New York Times column, "research by Burton G. Malkiel, a professor at Princeton, and Atanu Saha, a principal at the Analysis Group, found that over long periods hedge funds significantly underperform index funds, like those based on the Standard & Poor's 500-stock index."

Stein adds, "Other commentators . . . say that even these results overstate hedge fund results. For one thing, there is survivorship bias — always a problem in the back alleys of finance — because only the hedge funds that survive report at all. If you take into account the ones that fail, the results would be worse."

But what about hedge funds that do so well they close their doors to new investors and stop reporting results? According to a Mark Hulbert column, a new study suggests that hedge fund returns would look better, and more persistant, if these overachieving dropouts were taken into account.

Or maybe not. Lacking hard data on the actual returns generated by closed-door funds, the study is based on "intelligent guesses."

Death and taxes debated on national TV!

Jim Lehrer's Newshour offers a weird form of TV news. Even arcane subjects such as estate tax legislation receive minutes and minutes and minutes of coverage. On the commercial networks, only the onset of World War III will get that much notice.

Wednesday evening's Newshour coverage of death and taxes featured the Heritage Foundation's William Beach and Seattle lawyer William Gates Sr. Both did a good job of advocacy.

Two interesting twists: Beach suggested that higher income taxes would be a better way to soak the rich. Gates Sr. voiced strong support for raising the estate-tax exemption.

Two questions: Why do fans of the estate tax talk about the extremely temporary higher exemptions of the next few years, not the $1 million default exemption from 2011 onward? Why do they insist that the estate tax is "paid" by only a few dead people, not their more numerous heirs?

For streaming video of the coverage, go here.

Could the life insurance lobby thwart estate tax repeal?

The Senate may vote on estate tax repeal this week. If repeal fails, this National Review column suggests, you can blame the life insurance industry.

Stop reading this silly blog. Start a hedge fund!

You'll probably never get rich selling CRATs or rollover IRAs. But here's the good news. Anybody who can get pension fund managers or Bentley owners to hand over some money can start a hedge fund.

The rewards can be enormous. Last year, according to this New York Times report ($$$) a top 26 hedge fund manager (there was a tie at the bottom of the top-25 list) made at least $130 million. That's up from a minimum of $100 million in 2004.

The average guy in the top 26 for 2005 made $363 million!

The highest-paid? James Simon of Renaissance Technologies, at $1.5 billion.

No special training or credentials are required to manage a hedge fund, though it does help to live in or near Greenwich, CT. Most important, you have to know how to dress the part. That's why you need to pick up a copy of today's Wall Street Journal or check out Hedge Fund Chic via your online subscription.

Two rules to remember:

1. Ditch your briefcase and get a messenger bag . (This may be a NYC thing; the bags were popularized by the city's rampaging bicycle messengers.) The Adobe model shown here would be especially cool if your fund is going to focus on creative areas such as media.

2. Ditch your suits in favor of neatly pressed slacks and dress shirts. If you can afford it, look for labels like Ermenegildo Zegna, Armani Collezioni and Incotex. If you can't, go Lands' End.

The Journal's article offers no specific tips for women. Probably aren't any women among the top 25. Hedge funds are all about Alpha, and what woman wants to act like an Alpha Male?

Referral blog-a-thon

An outfit called Horsesmouth, in the business of helping financial advisors build sales, is in the midst of a month-long blog fest on the subject of referrals. Here's an interesting one from a captive broker who seeks HNW referrals from his banker colleagues!

Daily updates to the blog may be found here.

Is there a fiduciary in the house?

Two excerpts from The Five Key Rules To Heed Before Hiring a Financial Adviser in today's WSJ:

That brings me to today's fun fact. In Malaysia, to call yourself a financial planner, you must be qualified, such as earning the local equivalent of the CFP or the chartered financial consultant designation. But in the U.S., to hang out a shingle as a financial planner, all you need is a shingle and a place to hang it.

Advisers don't necessarily act in their clients' best interest. This issue has been brought into sharp relief by the heated debate over the Securities and Exchange Commission's so-called Merrill Lynch rule. Under the rule, fee-based advisers at brokerage firms often aren't considered fiduciaries, meaning they are supposed to recommend products that are best for their clients. Instead, they are held to a lower "suitability" standard, which means they are only required to recommend products that are a reasonable choice for their customers.

By the way, what ever happened to brokers called brokers? At Morgan Stanley, according to this WSJ report, they seem to have vanished entirely. The Retail Brokerage unit is now the Global Wealth Management unit. (Hey, welcome to our blog, guys!)

Estate planning tidbits

The author of this Washington Post Op-Ed piece certainly doesn't favor estate-tax repeal, but he suggests there's broad Senate support for raising the estate-tax exemption to a permanent $3.5 million ($7 million for couples). Inflation adjusted?

Wall Street Journal subscribers can read about the increasingly common problem of estate planning involving children from previous marriages and stepchildren. The trick is to defuse disputes by treating all the kids fairly. Problem: As the end of the article suggests, a lot depends on what you mean by "fairly."

Where there are a number of surviving spouses or ex-spouses, you can bet one or more will think, "How dare he leave my kids no more than he left his kids by that floozie!"

I don't know much about art, but . . .

As our salute to veterans and Memorial Day, here's the star of the Sotheby's auction mentioned in the previous post. Norman Rockwell's Homecoming Marine appeared on the cover of The Saturday Evening Post in October, 1945.

Rockwell set the scene in an actual small-town Vermont garage, near where he then lived.

Norman Rockwell wasn't a serious artist, of course, any more than Irving Berlin was a serious composer. Even so, Sotheby's hoped to see this painting sell for as much as $5 million.

Actual price, including buyer's premium: $9.2 million!

Say, you don't suppose the Art World is beginning to take Norman Rockwell seriously?

Treasures in your clients' estates?

Collectibles and stuff can be worth a lot these days. Case in point, the life-size bronze of a girl holding a sundial shown here. Five or six copies of the sculpture, created by Harriet Whitney Frishmuth, were cast by Gorham in the 1930's. The provenence is uncertain, but this one just may have decorated the grave site of my wife's Wall-Streeter grandfather, who died in 1939, before passing through the hands of various collectors.

Today at Sotheby's auction of American art, Roses of Yesterday was expected to fetch between $300,000 and $500,000. She did a bit better than that, selling for $632,000 including buyer's premium.

Some treasures aren't obvious, allowing them to be thrown out in the trash when a home is cleaned out after Grandma dies or moves to a nursing home. This Wall Street Journal article cites an instance where a son threw out the family silver.

An earlier Journal article reports on an executor who junked a collection of antique sewing machines, only to find the collection was worth over $60,000.

Sometimes even junk isn't junk. Not since eBay. See this recent post on Death and Taxes.

An unrelated endorsement

Moving off topic for just a moment, I finally saw United 93 last night with Number Three Son. If you haven't seen it yet, I urge you to do so. The film is outstanding, the subject remains vitally important.

An instructive guide to stock market bubbles

The Baker Library of the Harvard Business School offers a resource-rich web site, as I discovered when The Wall Street Journal announced that historical examples from its "Pepper...and Salt" cartoons were on view.

The Baker Library's other offerings include an extensive online exhibit relating to stock market bubbles, illustrating that The South Sea Bubble and the Dot Com Bubble were sisters under the skin. Here's a sample from the exhibit, showing early 18th-century stock jobbers, as traders then were known. (Yes, women of the day pawned their pearls and rushed to buy stocks!)

Not really news—financial advisors plan to go after the trust market

The business of managing trusts has been coveted by brokers and financial planners since, oh well, long before I arrived on the marketing scene a quarter century ago. Investment News has another "news" item on the subject this week. But I wonder just how much the advisors really want to be trustees. Note these key paragraphs from the article:

Although some trusts call for relatives to serve as trustees, others are much more complex and require an institution to serve as a corporate trustee. This requires the trustee, or the institution serving as the trustee, to assume fiduciary responsibility.

The issue is dicey for some advisers who are eager for this business but who may not be prepared to take on the responsibility of trustee. In fact, some advisers will oversee trusts only if the client agrees to be the trustee.

Yes, that term "fiduciary responsiblity" has long been scary to those outside the trust industry.

Learning from Steve Jobs, part II

Despite its popularity in the business world, mediocrity isn't all it's cracked up to be.

To reinforce that lesson, turn to the auto feature in The New York Times this morning. Just reading about the cast of Pixar's new movie, "Cars," has got to be more entertaining than sitting through the entire film of the Da Vinci Code.

Seems that John Lassater, Pixar's (and now Disney's) animation genius, is a long-time car nut. "Cars" is his labor of love. If the movie, which opens in June, lives up to the cast descriptions, it will be HUGE!

The voice cast includes Paul Newman, retired race car driver, playing Doc Hudson, retired racer. That's how Doc got blue eyes.

Filmore, the VW only a flower child could love, is voiced by George Carlin.

Like Apple, Steve Jobs' first venture, Pixar was born of the desire to make stuff that is "insanely great." Apple has stumbled from time to time (firing Jobs didn't help) but Pixar' s output has ranged all the way from very good to really great.

How does Pixar do it? Two clues that financial-services marketers might find useful:

1. According to this earlier NY Times article ($$$), all employees are encouraged to learn animation at Pixar Univerity. All employees. According to the dean of the university, an ex Flying Karamazov Brother, "We're trying to create a culture of learning, filled with lifelong learners.

"Why teach drawing to accountants? Because drawing class doesn't just teach people to draw. It teaches them to be more observant. There's no company on earth that wouldn't benefit from having people become more observant."

Arguably, knowledge of investing and financial planning is at least as necessary as knowing how to draw and animate. Does your IT guy know a derivative from a debenture? Can your receptionist participate in a discussion of disclaimers? Steve Jobs might tell you that the answers should be "yes."

2. Today's Times story says John Lasseter and his group visited design studios for the Big Three automakers and particularly hit it off with J Mays, the Ford design chief.

Mr. Mays and Mr. Lasseter bonded and exchanged studio visits. Mr. Lasseter learned how real cars are designed. Mr. Mays was impressed with Pixar's obsessive attention to detail. "They want to get things right even if no one can tell," he said. "If it was wrong, they would know."

How obsessive? The Pixar team hunted down vintage Hudson Hornet paint chips to make sure Doc Hudson is the correct shade of blue!

The Steve Jobs Code: what can marketers learn?

May 19, 2006. A day that will live in conspiracy theory:

Item: On this day, The Da Vinci Code opened in movie complexes all across the land. The film's plot circles around the Louvre Museum. At the Louvre, a contemporary addition to the former royal palace features a large glass pyramid in a courtyard.

Item: On this day, at 6. p.m. EDT, Steve Jobs opened his new flagship store on Fifth Avenue in New York City, across from the French-looking Plaza Hotel. The new store, located below street level in the contemporary courtyard of the GM building,is topped by a giant glass cube.

Coincidence? We think not. Just one more illustration of Steve Job's marketing genius. You can check out a few photos of the cube's unwrapping here.

For an informative article on the man in charge of Apple's stores and the creative thinking that goes into them, see this NY Times article.

Note, for instance, that the size of Apple's stores relates to "the size of the brand," not the sizes of iPods or macBooks.

Designing "wealth-management stores" is a different challenge, but here, too, creativity could pay off. A few banks have picked up on the coffee-shop approach suggested on this blog last year.

Note also that Apple found it unexpectedly easy to recruit expert staff and Apple Geniuses from the community of Mac lovers.

How do you build a community among your clients and prospects? You might emulate Mac User Groups like Seacoastmac.org and start a discusssion board. Theirs draws over 150 participants from as far away as Australia.

Might work like this: Your clients, after logging in to your online facility, are able to join a discussion group. The group might also include a few friendly attorneys and CPAs. The professionals could chip in on taxes and such; clients would discuss the people side of financial planning for the affluent:

"Should I have a pre-mup before remarrying?"
"At what age should a trust for my daughter end? Or should it be for life?"
"Should affluent grandparents feel obliged to shell out for private schools?
"We're thinking of making a sizable donation to such-and-such local charity. Is it as worthy as we think?"

You get the idea. Got a better one? Go for it.

May The Steve Be With You!

Fugitive hedge fund manager finally nabbed

As we noted back in March, Hedge-fund manager KIrk Wright drew money from NFL players and other wealthy investors who liked the idea of 27% returns.

Shame the returns weren't real.

After nearly three months on the lam, Wright was arrested today at a Miami-area hotel.

Really, mark your calendar

CCH offers the useful reminder, in their summary of the new tax law, that 2010, in addition to being the first year in which high-income taxpayers may convert their IRAs to Roth IRAs, will also be the last year we enjoy the lower tax rates and wider brackets from the 2001 tax law. In other words, Congress has already legislated 2011 to be the mother of all tax hike years, unless we can talk them into putting the gun down.

Mark your calendar

If you have a traditional IRA that you'd like to convert to a Roth IRA, Congress has some great news for you. The somewhat arbitrary AGI cap on who is eligible for such a conversion ($100,000 for both singles and marrieds filing jointly) will be eliminated.

It's a revenue raising measure, see, because the conversion will be a fully taxable transaction. And to ease the pain, the taxes can be paid over two years. But as it turns out, Congress also realized that the new money isn't needed right away, because today's deficit is in a tolerable range. But in 2010, boy, that's when we're really gonna need the dough. So that's the year that the income cap comes off.

I'm marking my calendar now.

What am I missing about the AMT?

The one-year "hold harmless" patch to the AMT that House has approved (Senate concurrence expected momentarily) boosts the exemption for a married couple from $45,000 to $62,550 for the 2006 tax year only. That creates the certainty that we get to enjoy a rerun of this debate a year from now, which I know we all will greet with joyous anticipation.

But given that the change takes effect only in 2006, why is it scored as a $12 billion revenue loss in 2006 and another $18 billion revenue loss in 2007? I thought these calculations were done on a tax year basis--even if the added AMT isn't paid until 2007, shouldn't it be credited to 2006, when the liability is incurred? Alternatively, if they are really accounting for cash flow and not liability, why isn't the whole cost in 2007? No one can know until the tax year is over whether any AMT will be due or not.

One additional issue: given that the cut in the tax rate on capital gains and dividends was followed by an increase in tax revenue from these categories, why is the extension of that rate scored as losing revenue? Why isn't the past prologue? I realize that the revenue increase is partly because economic growth was better than expected, and that the exact relationship between that growth and the lowered tax rates can't be quantified with precision (the old static v. dynamic scoring debate). Still, given the actual experience I think that the extension should be scored as, at worst, a neutral on revenue.

What tax rate do your clients pay on capital gains? Are you sure?

Looks like the 15% tax rate on dividends and long-term investment gains will survive for at least another two years.

But your affluent clients won't necessarily be paying that low rate. Why? This New York Times article explains:

"Because of the alternative minimum tax, more than a third of investors last year paid taxes higher than the 15 percent rate sponsored by President Bush on their long-term capital gains, a new Congressional report shows.

"These investors paid more than $7 billion in higher federal and state taxes than they would have under the regular income tax system, according to calculations by The New York Times based on the new report."

The Dilbert Portfolio

Scott Adams, the creator of the Dilbert comic strip, has a Blog. The blog is about as funny as Dilbert, which I've always enjoyed.

A few days ago, Scott asked his blog readers for some investment tips. Scott's amateur investment observations are pretty clever. When the readers suggested some trends worth investing in, Scott asked for stock recommendations. He picked four stocks that sounded reasonable, bought 500 shares of each for about $75,000.

After just two days his portfolio was up 7%. Beginners luck, or are we in a really good market right now?

Misled about risk, affluent clients win $900,000 in arbitration

In March of 2000, Suzanne Carruthers and her husband placed several million dollars in a managed-investment program overseen by Smith Barney, via Citigroup's Fiduciary Services Affiliated Managers Program.

By October, 2003, the Carruthers' portfolio showed a loss of $1.23 million. The couple went to arbitration seeking to have their loss made good, charging that they had been misled as to the riskiness of the investment mix they were sold.

According to a former SEC economist who testified on the couple's behalf, their loss would have been only $330,000 had their money been invested in a balanced fund of 60% stocks, 40% bonds.

What's more,, said economist Craig McCann: "The presentation materials I reviewed were, false and misleading is a strong term, but were very close to that, if not that. They are based on assumptions that are not just differences of opinion, but are factually wrong, and, more importantly," the analysis was "framed in such a way to lead investors to choose more risky portfolios than they otherwise would."

The three-member arbitration panel ruled that Smith Barney should pay the Carruthers $900,000 — that is, $1.23 million less the hypothetical $330,000 they would have lost anyway.

According to a press release from the law firm that represented the Carruthers, they were presented with grossly misleading asset-allocation numbers:

The Carruthers had been shown figures indicating that the asset mix recommended by the broker had a better than 75% chance of achieving their target return. According to McCann, that mix actually had less than a 38% chance of providing the retirement income the Carruthers wanted. McCann testified that the entire sales presentation appeared to be "tactically designed" to push a potential customer in the direction of a riskier portfolio

Said one of the firm's lawyers: "Citigroup claimed that our arguments had to be wrong because they and their predecessors have been doing business this way since 1973. In my opinion, this award sends a message that you aren't entitled to mislead customers, no matter how long you've followed your successful business model."

The Wall Street Journal (subscribers only) warns that the award "may lead to similar cases being brought by affluent investors who lost money in portfolios that contained more risk than they say they were led to believe."

What were the odds that a hypothetical 60-40 stock-bond mix would have met the Carruthers' retirement goals? On that question the news reports are (oddly?) silent.

Saving Boomers (and Depression Babies) from "Free Lunches"

In the good old days of the Twentieth Century, like 12 or 15 years ago, the Trust Department of The First National Bank of Portsmouth, NH, held an annual investment seminar and luncheon for clients and friends. They presented good programs (I remember Stu Varney as one guest speaker) and pretty good food.

The bank is long gone. Even the venue, Yoken's Conference Center, lost a fight with bulldozers a year or two ago.

These days, seniors who answer invitations to "seminars" with "free lunches" find themselves swimming with sharks, not chatting with trust officers. So great is the danger that the SEC, in partnership with NASAA, has announced a new program to protect senior investors.

Sobering thought from SEC Chairman Christopher Cox: "Another American baby boomer will turn 60 every eight seconds for the next 20 years."