Rich enough to pay taxes?

As noted earlier, I believe that the tax benefits accorded to higher education have gotten entirely out of hand. If I have to pay taxes on my inconsequential investment income, why shouldn't university endowments do the same? Please note that I don't oppose the charitable deduction for gifts to universities, I just resent the exemption for their investment income, which at times has been extraordinary.

Apparently, they have taken notice in Massachusetts, where TaxProf Blog reports that some legislators want to consider a 2.5% excise tax on college endowments greater than $1 billion. I'm not clear on why an excise tax would be better or more fair than an income tax. Nine universities would be affected, with Harvard owing a projected $840 million.

Is that too much to ask?

The middle class has been squeezed dry, it may be time to go to where the money really is for revenue.

The Art Market Revisited

Sotheby's may have been smart to slim down its spring sale of impressionist and modern art. (See Jim Gust's earlier post.)

Bloomberg reports:

Sotheby's 52-lot auction totaled $235.3 million, inside its estimated range of $203.9 million to $280.1 million. The 58 works Christie's offered on Tuesday raised $277.3 million.

* * *

Sotheby's average price per lot was $5.7 million, up from $3.5 million in November, even after U.S. stocks suffered their biggest drop in almost a month yesterday. Sotheby's said Americans bought more than two-thirds of the lots, a reversal of the Christie's sale, when U.S. buyers took home only a third.

The star of the Sotheby's sale, a work by Ferdinand Leger, went for $39.2 million. In second place was the painting below,"Girls on a Bridge," by Edvard Munch. It's a bit cheerier than his famous "Scream."


Graham Kirkham, aka Baron Kirkham of Old Cantley, bought "Girls"in 1996 for $7.7 million. Last evening at Sotheby's it fetched a record $30.8 million. Even after reducing that figure by a few million to allow for the buyer's premium, Baron Kirkham appears to have enjoyed an annualized return on his art investment of about 11%.

Not bad. And that's not counting the psychic income the Baron received along the way. Nobody ever invited guests to a country house to admire the municipals.

Will contests and multiple families

Notes from a Texas probate attorney. (I wonder how the polygamists handle this?)

The art market as economic indicator

As the economy weakens, one might expect that a luxury segment such as fine art would drop as well. And perhaps it has, Robert Franks reports in The Art Market's Stealth Correction. We haven't seen headlines trumpeting a fall in prices, according to Franks, because the big auction houses are managing the supply, cutting the spring auction offerings by 25%. Prices at the highest end of the market haven't suffered, but they have in the middle. Says Franks:

Gauging art prices based on the record-shattering prices for an Andy Warhol is a bit like gauging the stock market based on the share price of Google.

UPDATE: Compare Show Me the Monet in Barron's.

Time to Step It Up?

Wall Street’s problems create exceptional new business
opportunities for bank trust departments and trust companies.

You now have something Ford Motor Company is spending tens of millions trying to get—consideration. If you have been following Ford, you know that many people don’t even consider buying a Ford product because of past problems. Ford CEO Alan Mulally knows that before he can sell more cars, he has to get people to put Ford back on the list of cars they “consider” buying.

While headlines have trumpeted the huge financial losses of Wall Street brokerage and private equity firms, their customers have lost also. In turn, those firms are losing the confidence and trust of their clients—and that means opportunity for you.

Who are these clients? Many were successful business owners, executives and wealthy retirees who wanted to earn a good return on their money, but with moderate risk. They were convinced by good salesmen with slick presentations that their firms were the only place to get “state-of-the art” management of their investments.

Fed by a continual stream of media reports on the successes that these companies and hedge funds were reporting, it seemed as if they indeed were taking over the investment marketplace, so there was a natural desire to want to join them. Sadly, in some markets bank trust departments and trust companies were being given little if any consideration when it was time to pick investment managers.

How times have changed! Media outlets are now running stories about people who have lost lots of money in “safe” investments, and many people feel they have been outsmarted or duped. Who can blame them? Just think of the poor folks who were sold the “safe alternative” to CDs—auction-rate securities.

Here is where the opportunity for trust departments comes in. Many wealthy investors are now looking for trustworthy investment help from companies with no hidden agenda. Many prefer to get it from a local, well-established source, one where they can meet the people face-to-face. Sounds just like a trust department.

How do you take advantage of this change of tide? People are not just going to show up at your door to give you business. You need to step up your marketing and sales efforts and reach out to them. Also, marketing through centers of influences—attorneys and CPAs—can be effective because these professionals are helping their clients deal with investment losses and may be in a position to recommend your services.

Recent events have put trust departments back in the game, have reshuffled the “investment help” consideration list, so it’s a great time to rev up your marketing efforts and start securing new business relationships. Merrill Anderson is ready to help you do just that.

This Private Bank is "Members Only"

Fieldpoint Private Bank and Trust just opened in Greenwich, CT. Founded by a group of wealthy investors, including three former Merrill Lynch CEO's, Fieldpoint's announced aim is to recreate the good old days when organizations such as U.S. Trust were young and flourishing.

With one apparent difference: No uncouth rich Russian will be able to walk in and establish a relationship. Fieldpoint is described as "members only." In addition to rudimentary manners and clean fingernails, Fieldpoint members will be required to possess at least $10 million in investable assets.

For more about Fieldpoint's founders, see this Investment News story from last December.

An answer to Ben Stein

Well, perhaps not a direct answer, but economist Gary Becker has weighed in on The Greater Regulation of Financial Markets? on the Becker-Posner blog. He first notes the extensive benefits that came from deregulation in the 1970s and 1980s, then observes of the current crisis:

commercial banks are probably the most heavily regulated group in the financial sector, yet they are in much greater difficulties than say the hedge fund industry, which is one of the least regulated industries in the financial sector.

How did this happen?

One reason why extensive regulation of commercial banks did not prevent many banks from getting into trouble is that bank examiners became optimistic along with banks about the risks associated with mortgages and other bank assets because the market priced these assets as if they carried little risk. It would run counter to human nature for regulators to take a skeptical attitude toward the riskiness of various assets when the market is indicating that these assets are not so risky, and when originating and holding these assets has been quite profitable. One can expect regulators to mainly follow rather than lead the market in assessing riskiness and other asset characteristics.

Becker allows that some regulatory changes are warranted, but concludes:

The financial sector has served the economy well by managing, dividing, and pricing different types of risks in the economy. It would be a mistake if Congress and the President allow the present financial turmoil to panic them into inefficient new financial regulations.

Stock returns, tax rates are both headed up?

Investment News is reporting on a new survey of millionaire investors conducted by Fidelity Investments. Reportedly 27% of the millionaires plan to increase their equity exposure this year, while just 7% plan a decrease. Additionally, the respondents were less concerned about the economy than they were in last year's survey.

However, more than 50% expect that tax rates on income, capital gains and dividends will be higher five years from now than they are today.

Does this tell us something about their expectations of the Presidential election?

What's That Ticking Sound?

If the financial world as we know it is coming to an end (and Ben Stein's column, which Jim Gust mentions below, leads to such gloomy thoughts) at least we can have a laugh along the way.

Case in point: A watch so expensive it does not need to tell time; the $300,000 bauble merely indicates whether it is day or night. See the Wealth Report blog. Don't skip the comments appended to the post. For instance:

Give me a hammer and a Timex and I’ll sell you a watch that won’t tell time for only $200,000.

my wrist actually serves the same function. if i can see my wrist, it is daytime, if not, it is most likely night.

Speaking of bad times, the previous post on the Wealth Report notes that banks are pulling back from loans to buyers of art. Not good news for Sotheby's and Christie's.

Wonder if the loan-refusers include Citibank, a pioneer in the field?

How we got to this point

Ben Stein explains the current mess on Wall Street, which he attributes to a too cozy a relationship between the wirehouses and the SEC. He concludes:

It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.

What Next? A "Catastrophe" Catastrophe?

Subprimes. CDO's. Credit-default swaps. Auction-rate bonds and preferreds. . . .

Gosh, it's no fun waiting for the next shoe to drop when you live in the apartment below a centipede.

What should wealth managers and their clients worry about next? Catastrophe bonds and other event-linked securities. See this warning from the Financial Industry Regulatory Authority.

Try to have a nice weekend anyway.

A Friend of Liberty and His Unfaithful Executor

In Maine and Massachusetts, today is a holiday. Patriots' Day marks the anniversary of The Shot Heard Round the World in April, 1775. Eleven months later, the British evacuated Boston. A few months after that, in July, 1776, the United States proclaimed its independence. The following month, a young European, recruited in France by Silas Deane and Ben Franklin, arrived in this country.

Thaddeus Kosciusko served the American cause so well that by war's end he was a brigadier general. Our grateful nation awarded him citizenship, a grant of land and a considerable sum of money. Thaddeus clearly believed that Jefferson's words in the Declaration of Independence, "All men are created equal," were the greatest ever written. He used the money to buy freedom for slaves.

Thaddeus became a close friend of Jefferson, and together they hatched a plan to change the course of history. As recounted here, the plan involved Thaddeus's will, and the will's executor was to be Jefferson. Alas, after Thaddeus died in 1817, Jefferson refused to serve.

* * *

If Kosciusko were easier to spell, Americans would remember Thaddeus as fondly as we do the marquis de La Fayette. If you know as little about him as I did, read up on this remarkable American, Belarusian, Lithuanian, and Polish national hero.

Ask a Trust Officer

The Wealth Management Articles Library is one of Merrill Anderson's very popular marketing programs. We create three new articles each month, which our clients can post to the internet or use in their internally generated mailing programs.

In January we added a new regular element to WMAL which we call Ask A Trust Officer. This is a somewhat lighter take on the kinds of problems that trust departments can help with, modeled along the lines of Dear Abby or Ann Landers. The pieces are short (about 300 words) and suitable for publishing in the local newspaper as well as web posting. The concept has been quickly accepted, endorsed by 75% of the respondents to our recent client survey.

Here's a sample—for more information, drop me an e-mail at jbgust@merrillanderson.com.

Help me off the roller coaster!

DEAR TRUST OFFICER: I was so pleased last October, as the Dow Jones Industrial Average was setting an all-time high. I felt confident that there was nothing but smooth sailing ahead for my portfolio. Now here we are less than four months later, and everyone is worrying about a recession! The Federal Reserve Board dropped interest rates by three-quarters of a percentage point after an emergency meeting, and Congress is talking about tax rebates again. I like roller coasters as much as the next person, but this is too much! Can you help?
—WHIPLASHED INVESTOR

DEAR WHIPLASHED: I wish that I could take all the risks out of investing for you. That’s not possible, though there are proven techniques to reduce risk. Market volatility has indeed been above normal lately, and there are several theories for that. The most publicized is that problems in the housing sector may have the potential to drag the entire economy into recession. Sales of new homes fell 26% in 2007, the biggest annual decline since the Commerce Department began tracking this statistic in 1963. Coupled with the drop in home values in many parts of the country, we are in uncharted economic territory here.

To help relieve yourself of worry over your portfolio, add a dose of professional oversight. Ask us about our investment management account.

Although the economy is under stress, unemployment remains low, and not all sectors have been adversely affected. The recent drop in stock prices has brought price-earnings ratios for many issues closer to historical norms. Some stocks are selling for prices that, in a few years, will be thought to have been tremendous bargains.

The question for investors is, which stocks are those?

We generally favor the “don’t-put-all-your-eggs-in-one-basket” approach. We promote disciplined portfolio diversification through asset allocation planning. With a balanced mixture of asset classes, risk can be brought down to tolerable levels, while some upside potential for the future is retained.

Do you have a question concerning wealth management or trusts? Send your inquiry to [trustofficer@bankname.com].

Tips on Giving Without Gift Tax

See the retirement section in today's New York Times for helpful tips on how affluent Boomers can avoid gift-tax problems as they spend a little wealth on their parents, siblings or children.

Should Bank of NY Mellon Scrap Its Logo?

Andrew Cusack doesn't think much of Bank of New York Mellon's new logo. I didn't think much of BofNY's previous one. What's your opinion?

Billionaire Bling-Bling – A New Asset Class?

The Hope Diamond: Wonder what The Smithsonian wants for it?

Jewelry is a must-have for the new crop of billionaire and hectomillionaire hedge funders. That's one finding from a new Prince & Associates survey reported in the Wealth Report blog. Ninety-nine percent of those surveyed invested in jewelry last year, spending $580,000 on average. Almost all expect to spend at least as much this year.

As we noted here last summer, brokers and private banks are beginning to treat jewelry as a new asset class. Looks like they're on to something.

The Hunt is On

Cheer up, taxpayers. Things could have been worse if you hadn't paid. See this animation from The New Yorker.

Happy Blogiversary!

It's been three years since the founding of this blog. Well, a bit more, the actual anniversary was Saturday. I meant to blog then, but something came up.

My heartfelt thanks to JLM for his hundreds of persistently excellent posts.

Now if only I could figure out how to stimulate some commenting, we'd be all set.

Earned Wealth Often Buys Happiness

Folks who earn their wealth tend to be happier and less stressed than trust fund babies, according to the latest PNC Wealth and Values survey.

Three quarters (76 percent) of earners agree "My financial success lets me feel less stress and worry" as opposed to 50 percent of heirs. And 51 percent of earners agree "As I have accumulated more money in my life I have become happier" vs. 33 percent of heirs.

As noted in the WSJ Wealth Report, heirs are probably better bets when it comes to setting up trusts for their own kids. Fully two-thirds of those with earned wealth felt that “every generation should be responsible for creating its own wealth.”

A Growl from the Bear?

Auctiongoers may be bidding briskly (see preceding post) but today's Wall Street Journal reports that winning bidders have become slow pays:

Sotheby's accounts receivable -- the money owed by buyers who purchased art at auction -- more than doubled to $835 million in 2007, according to Sotheby's annual report. That is the largest total in Sotheby's history, and points to possible stress in an art world where Warhol and Rothko have become the ultimate luxury brands and the newly rich have been paying record prices for "wall power."

More than $520 million of Sotheby's increase in receivables was in the fourth quarter, following the summer's financial turmoil. The accounts-receivable number doesn't include $6 million in "doubtful accounts," or money that Sotheby's said probably won't be repaid.

Art and Antiques: Keeping the Bear at Bay

Shown here, a detail from a late 1500's Flemish tapestry– over seven feet wide – from a recent Sotheby's sale. Expected to fetch around $20,000, the tapestry sold for $55,000 including buyer's premium. Evidently there's no liquidity crisis in this sector of the auction market.

The tapestry must have been a 16th-century sportsman's version of large-screen home theater. Take a look at the enlarged image Sotheby's offers (free registration required). You'll encounter other hunters as well as creatures such as the birds at right.

Leona Helmsley's possessions also seem to be selling smartly. At Christie's, a pair of French commodes that once belonged to King George V of England and more recently graced the entrance hall at Dunellen sold for $421,000, way over the pre-sale estimate.

Is the Estate Tax Unfair?

What makes a tax "fair"? What do you mean by "fair"? Is the estate tax fair or unfair? Princeton prof Kwame Anthony Appiah explores those questions here.

Hedger Reduces Fee!

Talk about "Man Bites Dog!" Here's real news via Bloomberg. After one of its hedge funds reportedly lost about 18% this year, London Diversified Fund Management agreed to reduce its 3% fee to the "industry standard" of 2%.

The reduction is, of course, said to be temporary.

Other hedge-fund managers are taking a more conventional approach to hard times. Reuters reports they're folding their tents and moving on to seek new and greener pastures.

Top Estate Lawyers

Recently we noted that increasing numbers of women are stepping into the role of endowment manager. At Harvard, for instance.

A generation ago, women also were invisible, or nearly so, on lists of prominent trust and estate lawyers. No longer. A third of the attorneys on Portfolio's list of top estate lawyers are women.

Gone but Still Giving

"And to the DNC I hereby bequeath . . ."

Since 2001, Al Kamen reports in The Washington Post, The Democratic National Committee has received bequests totalling around $265,000.

Republicans have been less politically active in their estate planning. Bequests to the Republican National Committee over the same period total about $64,000.

Success Stories

Q. After being laid off from a part-time job, can a woman make a fortune selling insurance to owners of vintage motorbikes?

Q. Can bank wealth managers gain business by offering women entrepreneurs opportunities to network?

A. "Yes" and "Yes." See this Financial Times story.

Destined to be a classic, from The Wall Street Journal

Another "why you need a will" story

The New York Times discusses the legacy of Bill Gottlieb, who owned an enormous portfolio of Manhattan real estate, much of it dilapidated. The estate planning bits don't come in until halfway through the lengthy write-up. Although Gottlieb paid millions for his properties, and although he consulted a number of law firms about estate planning, he just wasn't willing to pay the fees to have a will drafted.

The result was that a 1972 will, drafted before his acquisition of so much real estate, was controlling. Colorful family fighting ensued.

The most interesting detail to me is that the real estate portfolio has been estimated to be worth $1 billion. The family negotiated a settlement with the IRS for federal estate taxes of just $50 million, to be paid over 15 years. That's just a 5% federal estate tax rate! The family has some damn fine negotiators on their team.

Admittedly, real estate can be hard to value, and some of the experts quoted in the article felt that new zoning and other restrictions may have caused values to deteriorate. But even if the property was worth only half a billion dollars, that is a 10% tax rate.

This Family Business Has Thrived Since 1385!

Got access to the online Wall Street Journal? Don't miss today's story on the ultimate family business:

"In 1385, Giovanni di Pietro Antinori branched out from his family's lucrative silk and wool business to join the Florentine wine-makers guild. Today, 26 generations on, the Marquis Piero Antinori heads a company that makes some of the most highly regarded wine in Italy, and has vineyards in Hungary, Chile and California's Napa Valley. In between, the Antinori family survived outbreaks of Bubonic plague, the invasion of Napoleon, two world wars, the arrival of globalization and the birth and death of the wine cooler. For more than six centuries, the Antinori family has managed one of the most delicate feats in business: passing on a company from one generation to the next."

Now overseen by the Marquis Piro Antonori, the venerable wine business might be winding down for lack of younger male Antonoris. Happily, the future looks bright. The Marquis' three daughters will keep the wine flowing.

How does a family business survive more than six centuries? Short answer: Avoid the fixation on short-term profit so prevalent among publicly-held businesses.

Timely Tales From the South Pacific

Who would have guessed that the unofficial school song for those madrassas turning out Taliban terrorists was written over half a century ago? By Rogers and Hammerstein, no less:

You've got to be taught
To hate and fear,
You've got to be taught
From year to year,
It's got to be drummed
In your dear little ear
You've got to be carefully taught.
You've got to be taught to be afraid
Of people whose eyes are oddly made,
And people whose skin is a diff'rent shade,
You've got to be carefully taught.
You've got to be taught before it's too late,
Before you are six or seven or eight,
To hate all the people your relatives hate,
You've got to be carefully taught!

If you have never read a genuine, unadulterated RAVE REVIEW of a major American musical, read Ben Brantley on Lincoln Center's recreation of "South Pacific."

The 1900s lacked 32-to-1 leverage and derivatives derived from derivatives. GIs in WWII didn't even have iPods. But maybe we can still learn something from the old century.

This is why we have estate taxes

The New York Times reports that a portion of the $1 billion art collection of Ileana Sonnabend has been sold to pay estate taxes, which come to about half the value of the estate.

I have never understood why wealthy people pay so much for art, especially art that is not particularly attractive or interesting to my undereducated eye. But if they are going to bid up the values to stratosphere, and given that there is a market for these things, I have no problem with the government imposing a toll on the transfer of these assets at death.

A case like this is powerful evidence that the estate tax should be retained.

Hedge Funds: Is That Alpha For Real?

"The secret of acting," George Burns once explained, "is sincerity.

"If you can fake that, you've got it made."

The secret of a successful hedge fund is alpha – an investment return above and beyond the beta return produced by the market as a whole. Too bad you can't fake alpha.

Or maybe you can. Knowledge at Wharton reports on a study by Dean P. Foster of The Wharton School and H. Peyton Young of the Brookings Institution:

It's easy for an unscrupulous hedge fund manager to make himself look better than he is, as Foster and Young demonstrate in their paper. "We show, in particular, that managers can mimic exceptional performance records with high probability (and thereby earn large fees) without delivering exceptional performance."

You can download the research paper, "The Hedge Fund Game: Incentives, Excess Returns, and Piggy-Backing," here.

Can Jonathan Clements Help Save Citi?

Citigroup may be down, as The New York Times details here, but it's not out. Among those riding to the rescue: Jonathan Clements, long-time author of the Getting Going column in The Wall Street Journal.

In his blog at Portfolio.com, Jeff Bercovici reports that Clements is leaving the WSJ to work at Citi:

On April 14, he'll join Citigroup as director of financial education for a new unit created to advise the "emerging affluent," investors with less than $500,000 in assets. His duties will involve creating content aimed at those investors, including blogs, columns and videos. Even though it could be construed as a form of marketing, he sees the task as very much in line with what he's been doing at the Journal: "I have no intention of sacrificing the principles I've spent the last two decades advocating, and Citigroup hasn't asked me to do so," he says.

Invest in Art?

Hugh Grant bought this Warhol print of Liz Taylor for about two million pounds and sold it six years later for around £9m. So is art a good investment?

Not really, says Janine Racanelli, head of JPMorgan Private Bank's Advice Lab (see preceding post). She told the Financial Times the art market is opaque, illiquid and unpredictable. And once you hang art on the wall, it's "cash-flow negative."

That doesn't faze some hedge fund managers. An earlier Financial Times article spotlights the Art Trading Fund.

Launched last summer, the fund hopes to hedge against art-market hiccups by shorting assets, such as Sotheby's shares, that tend to move in tandem with art. The strategy may get a robust test this year.

Freeze That Estate!

Treasury bonds yield so little that you would think we're expecting less inflation, not more.

Here's the upside: As today's Wall Street Journal points out, this is an awesome time for the wealthy to practice estate-freezing techniques like GRATs and CLATs:

Fiduciary Trust started talking internally in December about the especially good opportunities for estate-freeze strategies, says [Sharon Klein, trust counsel and director of estate advisement]. Since then, the company has been talking up the idea with clients.

The Advice Lab of JPMorgan Private Bank at J.P. Morgan Chase & Co. has also weighed in. The lab recently issued an update to clients titled "Turning Lemons Into Lemonade: Using Planning Strategies to Take Advantage of the Current Market Environment." It outlines grantor-retained annuity trusts, or GRATs; charitable lead annuity trusts, or CLATs; intrafamily loans and family partnerships, another strategy.

* * *

Using an intrafamily loan -- in a hypothetical example from JPMorgan -- a person could lend $1 million to a child, locking in the March fixed short-term AFR of 2.25%, the midterm rate of 2.97% or the long-term rate of 4.27%, depending on the period of the loan.

If the child invests the $1 million over five years at a 10% annual rate of return, she will be able to keep any returns over the mid-term AFR of 2.97%.

The child would keep about $430,000 and pay no gift tax while realizing an estate-tax savings of about $215,000, and the parent would get back the original $1 million plus a 2.97% return.

A GRAT -- in another JPMorgan example -- would allow one to transfer $5 million in stocks to a beneficiary for a given term, say five years. The GRAT returns a fixed annual payment over the term; in this case, it's designed so that the present value of payments, calculated on the 3.6% hurdle rate for this month, equals the initial $5 million.

No gift taxes are due because the assets transferred in the GRAT aren't considered a gift.

If the stock in the GRAT returns to its high at the end of the first year, and then grows at 10% each year for the remaining four years, trust assets at the end of the five years will have grown well beyond the 3.6% rate. About $2 million would be transferred to beneficiaries, such as children or a family trust.