Roth IRA Conversions: Another View

IRAs, principally rollover IRAs, contain far more retirement wealth than either defined-benefit or defined-contribution plans. More than 95 percent of that IRA wealth is in traditional IRAs. The chart above is snipped from "Should You Convert a Traditional IRA into a Roth IRA." issued this month by the Center for Retirement Research at Boston College.

Fallout from the year without estate taxes

Estate Tax Repeal Stirs Lawsuit Fears reports Dow Jones in Financial Advisor magazine. The problem is that few estate plans took into account a year without estate taxes, and beneficial interests in an estate or trust could easily be affected. Some states are trying to fill the gap, offering rules for making assumptions about testator intentions. Estate lawyers who've been hoping Congress will cure the problem are now being told that they have to alert their clients to the situation, to start creating a paper trail to protect themselves from lawsuits by unhappy beneficiaries.

Joseph A. Anderson

From a memorial note posted at the Amherst web site, we learn belatedly of the death of Joe Anderson, Merrill Anderson's older son and long-time senior vice president of the company, on January 14, 2007.

Joe was a naval aviator during World War II. At The Merrill Anderson Company his responsibilities included client contact and business development.

Though Joe did not consider himself a creative type, he came up with a key marketing insight: Trust departments at banks were virtually invisible to the naked eye of their prospective clients. And he devised a solution that remains in use today: Trust Posters.

The first posters were silkscreened. Joe was so intrigued by the process, I heard, that after he retired he set up silkscreening equipment in his Bridgehampton garage.

Joe is survived by his brother, Steve, his daughter, Helen, and two grandchildren.

The Higher the Fees, the Better the Investment Manager?

Much to the dismay of Warren Buffet, in the years before the Great Recession the wealthy seemed eager to spend bigger and bigger bucks to obtain sexy, trendy investment managers or products.

Paying several percentage points per year for investment services is no big deal as long as the annual fees and charges are subtracted from double-digit returns. But lately, writes Warren Giles for Bloomberg, fees are a big deal indeed. Consumers of high-end investment services have become cost conscious. In London, they can even hire a firm that will give their investment managers a good talking to and negotiate lower fees. (Of course, the firm itself charges a respectable fee.)

Does New Tanning Tax Discriminate Against Whites?

The TaxProf Blog asks:Does New 10% Tanning Tax Discriminate Against Whites? Obviously it does, but the real question is whether such discrimination is illegal, or ought to be.

I suspect that Congress doesn't like the idea of tanning salons, and won't be sorry to see them go. We had one here in Stratford, but I believe it already has closed.

More new tax laws

The House has passed the "Small Business and Infrastructure Jobs Tax Act of 2010."

Sounds like Congress wants to start helping small businesses?  Maybe.  The sale of stock in a small business that is issued after March 16, 2010 and through 2011 would be exempt from capital gains taxes.  That "costs" $2 billion, according to projections.

The real point of the legislation is to extend Build America Bonds into 2013.  That costs $7.5 billion and has little to do with small business.  There are many additional provisions, mostly concerned with municipal finance.

How to pay for this?  Because all tax breaks now must be offset by tax increases.  This one caught my eye:

mandate a 10-year minimum term for grantor retained annuity trusts ($4.5 billion)

Really?  How many GRATs are created in a year?  How big are they?  I'd love to see the math behind that $4.5 billion figure, and where the money is coming from.  Are they assuming that because short term GRATs won't be created, that money will now be hit by the estate tax?  At the enhanced rates scheduled for next year?

Looter of Family Office Sentenced

When John Doorly pleaded guilty to looting the family office where he worked for three decades, he faced up to 20 years in prison. Yesterday he got off with a bit less: 17 1/2 years and a $1 million fine.

Update. Here's a more detailed article on the sentencing, with details such as this:

Even as he awaited sentencing, a prosecutor said, Doorly was secretly collecting money from a corporation he had set up with Ayer family funds.

Doorly was led from the courtroom in handcuffs by a U.S. marshal as nearly three dozen descendants of Frederick Ayer watched in silence.

How Not to Rob a Bank

A couple of towns down the road from The Merrill Anderson Company, two guys tried to get on Letterman's top-ten list of ways Not to Rob a Bank. I think they'll make it. See Robbers called ahead for take-out cash.

Listen, Fiduciaries! That's Opportunity Knocking

The Senate has killed any chance of a fiduciary standard becoming part of the upcoming financial legislation, writes Evan Cooper in Investment News. And that should make fiduciaries very, very happy:

[A]dvocates of a fiduciary standard for financial advice givers shouldn't view Washington's inaction as a setback. It's actually the greatest marketing opportunity ever — if only fiduciary advisers would stop banging their heads against Wall Street and start telling investors why they're better.

HIRE Act clarification

Earlier I commented upon the requirement that only "new" employees qualify for the payroll tax forgiveness under the HIRE Act.  The law is not quite that restrictive, after all.  There are provisions to prevent "churning" employees to secure the credit, but if an employee quits or is fired for cause, the employer gets the tax benefit for the replacement.  So there doesn't have to be a net increase in the number of employees.

That helps to explain why the CBO  put such a high price tag on the tax provision. I can readily believe there will be 5 million job changers this year, even if unemployment doesn't fall. So the issue is, how many will have been unemployed for 60 days?  Could be many of them.

Also, if a closed factory is reopened, all the laid-off workers who go back to work are qualified as "new" for purposes of the payroll tax break.  I don't know that many factories are on the verge of reopening, but perhaps there are some in the auto industry.

Time to Get Out of the Middle?

James Surowiecki's column in The New Yorker is inspired by Apple and the widely anticipated iPad, but his theme could apply to wealth management organizations as well. Read Soft in the Middle and see what you think.

Sample:

For Apple… “build it and they will pay” is business as usual. But it’s not a universal business truth. On the contrary, companies like Ikea, H. & M., and the makers of the Flip video camera are flourishing not by selling products or services that are “far better” than anyone else’s but by selling things that aren’t bad and cost a lot less. These products are much better than the cheap stuff you used to buy at Woolworth, and they tend to be appealingly styled, but, unlike Apple, the companies aren’t trying to build the best mousetrap out there. Instead, they’re engaged in what Wired recently christened the “good-enough revolution.” For them, the key to success isn’t excellence. It’s well-priced adequacy.

These two strategies may look completely different, but they have one crucial thing in common: they don’t target the amorphous blob of consumers who make up the middle of the market. Paradoxically, ignoring these people has turned out to be a great way of getting lots of customers….

Are Roth IRA Conversions Overhyped?

Ric Edelman, whose radio show I happened upon yesterday, thinks so. His informative special report on Roth conversions, available online (registration required) includes a rant on the overhyping of conversions by financial advisers.

Conversion detail I hadn't thought about: According to Ric, this year's conversions will be taxed on the value of the converted IRA at year's end, not the year-end 2009 value. If investment gains increase the IRA by 10 percent this year, the tax cost of the conversion will rise accordingly.

Ric made a good point about tax projections: We can guess income tax rates for high earners will be higher in five years. But today's 50-ish IRA holder must weigh today's tax hit against taxes he or she might pay on distributions 20 and 30 years from now.

Who knows what will happen even ten years from now? Obama will be out. The Tea Party candidate may be in. What if the 2020 Congress abolishes the income tax? (You'll get used to paying VAT instead.)

My suspicion: High net worth individuals will be swayed more by psychology than intricate tax projections. We Americans don't care much for self denial or delayed gratification – look at the level of our credit card debt. Only if we're really, really rich are we likely to choose paying taxes today rather than paying taxes in the far-off future.

1958: When Trust Officers Packed the Waldorf

In February, 1958, thousands of trust officers and their bosses packed the Grand Ballroom of New York's Waldorf-Astoria for the Midwinter Trust Conference of the American Bankers Association. Both Chase (now JPMorgan) and City (now Citi) reportedly sent delegations of 100 or more.

By the following month, the troops of trust officers were back at their desks and looking for business. These ads ran in The New Yorker in March, 1958.

Is “Socialism” Bullish?

From today's Wall Street Journal (subscription):

Will the [health care reform] bill really "turn America into a socialist country"? It's easy to laugh at this notion, of course, but let's look at it from another point of view. Even if that were correct, should you really sell everything and flee?

Socialism, or social democracy, or whatever else you want to call it, doesn't seem to have hurt stockholders overseas too badly. Over the past 10 years, according to MSCI Barra, stock markets across socialized Europe have produced total returns of about 2% a year in U.S. dollar terms, according to MSCI Barra. The figure for France is just over 2% and for left-wing Britain and Holland nearer to 3%. Pinko Denmark has boomed by 10% a year.

Meanwhile, here in the land of the free, investors have made zero.

John Ringling’s Plan B

If your estate plan includes founding an art museum, don't forget your Plan B.

Like Dr. Barnes, showman John Ringling left us an awesome art collection. Though I've never visited the Barnes collection, I have fond memories of visiting the Ringling Museum of Art in Sarasota, Florida.

Ringling willed his home, Ca d'Zan, and his collection of art and antiquities to the state of Florida, along with a $1.2 million endowment, in 1936. Now the responsibility of Florida State University, the museum faces tight financial times. (Does anything in Florida, post real-estate bubble, not face tight financial times?)

Nevertheless, Florida has a strong incentive to keep the museum alive and well in its beautiful setting. John Mackey, who is expected to serve as the museum's next chairman, describes Ringling's Plan B:

"He … stipulated that the art could not be sold, nor could any portion of the facility. Otherwise, everything would revert to his heirs."

Estate Tax, Gains Tax, Take Your Choice?

After Charlie Rangel stepped down as chair of the House Ways and Means Committee, Sander Levin from Michigan stepped up. Next month, Levin announces, the Committee will start work on extending the Bush income-tax cuts for taxpayers with incomes of $200,000 or less ($250,000 for married couples) and restoring the estate tax retroactively.

One possibility: giving executors of estates of those who die this year a choice. Either pay the restored estate tax or the capital-gains tax triggered by carryover basis.

For an estate heavy with real estate that was valued at many millions a few years ago but is now worth much less, might the capital gains alternative prove attractive?

Income tax question: Most high-income married couples achieve that status because both work. If an accountant and a lawyer who are married to each other are deemed rich when their incomes total more than $250,000, how can an accountant and a lawyer who are not married to each other be considered non-rich even though their incomes add up to, say, $350,000?

The HIRE Act

I don't have the statutory language, but here is the summary of the bill the Senate is sending to the President to help create more jobs:

The tax break exempts an employer from paying the employer's share of Social Security payroll taxes for any new employee hired from February 4 through December 31, 2010, if the new worker was previously unemployed and is filling a new job rather than replacing another employee. Businesses also can earn a $1,000 tax credit in 2011 for each such employee who remains on the payroll for 52 weeks. 

I knew that the new employee had to have experienced 60 days of unemployment.  I guess the idea is to steer jobs away from new college graduates, back toward those who already have a work history.  I don't see the wisdom in that, but maybe that's just me.  

But what's this about it being a "new job"?  Say my employee quits, I need to hire a replacement, so I pick an unemployed person—I don't get the FICA waiver or the credit?  Why not?  If that's how you feel about it, I think I'll just split the work up among the remaining employees.  I call this making a poor idea even more stupid.

Here's the part I really don't understand.  Allegedly this bill will "cost" $13 billion.  How could the bill cost anything at all, if it actually creates jobs and so generates new tax revenue and eliminates unemployment payments?  I take it that, contrary to the stated purpose of the legislation, the revenue score must assume that all the jobs would have been created anyway, so we are toting up the totals of uncollected FICA and the total number of $1,000 credits that will be claimed, with zero offset for the FICA paid by the newly hired employee and zero offset for reduced expenditures on the unemployed.

If that is the case, how many jobs will be "created" by the legislation.  The answer seems easy enough, just divide the revenue lost in 2011 by $1,000.  As $2 billion will be lost, 2 million jobs will be created.  I call that unlikely, but leave that aside, because it isn't so easy.

According to the Joint Tax Committee, the $1,000 retained employee credit for 2011 loses another $2 billion in 2012, nearly $500 million in 2013, and has a ten-year cost of $5 billion.  Is that because the credit can be carried forward if it exceeds the employer tax liability?  Since the cap on the credit is still $1,000, that seems to say that 5 million "new" jobs will be created in the remainder of the year (well, since February 4, the effective date of the legislation), that they will all be filled by people who have been out of work for 60 days, and they will all stay on the job a full year.

5 million?  Really?  Great news if true, but to me this looks like an absurd overestimate of the "cost."  Why might they do that? Because it creates a larger target for justifying new taxes to pay for it, which is exactly what they did.

BofA’s Ten-Million-Dollar Bones of Contention

Would the private banking unit (PBIG) at Merrill Lynch, now a BofA brand, clash with US Trust, another BofA brand? You betcha. According to this Investment News dispatch, they're fighting over the same multimillionaires. (Pause to admire Merrill Lynch's classic "Bull in the China Shop" commercial. Investment News provides the link.)

Michael Crichton's art collection

The L. A. Times reports Christie's to auction off Michael Crichton's art collection. They expect to fetch $100 million or so.

The back story is fascinating for T & E lawyers. Crichton had what looked to be an ironclad estate plan, but there was one thing he did not foresee—fathering a child who would be born after his death. We don't know if Crichton knew his wife was pregnant at the time of his death, we only know that both his living trust and his will were silent on the possibility. The surviving spouse won an action to have the baby declared an heir, and he was awarded one third of the estate.

Crichton apparently did not contemplate the sale of his art collection, but a sale is needed to create estate liquidity and begin distributions to the heirs.

BTW, I am currently listening to Crichton's State of Fear on CD as I commute to work. It's excellent.

Do “Sophisticated Solutions” Still Have Appeal?

Watched Michael Lewis, author of "The Big Short," on Sixty Minutes Sunday evening. (if you missed him, this blog has links to the interview.) While Lewis talked of "mass delusion" among Wall Street's best and brightest, I started reading a Northern Trust ad in the NY Times Sunday Magazine. The copy invites readers to see Northern for "a plan using … sophisticated strategies and solutions."

"No Thanks!" I thought. A number of "sophisticated" hedge funds and private-equity deals have gone down in flames. And let's not even talk about offshore tax shelters. If I had $10 million or $20 million, I'd be trying to simplify my financial life, not looking for sophisticated solutions.

That's probably one reason I'm not rich. After fighting to withdraw their money from hedge funds over the past two years, I read in the WSJ, investors are now putting their cash back in.

Hope beats experience every time.

•

Speaking of Michael Lewis, don't fail to read the Harvard undergrad's thesis on CDOs that he commends in his book. From what I've read so far, it's lucid and, in places, scary. (Why anyone still pays attention to what the bond-rating firms say, after they declared sliced-and-diced toxic mortgage bundles to be triple-A bonds, is beyond me.) WSJ subscribers can read about the remarkable author here.

Compare and contrast

The number of millionaires was up 16% in 2009, the number of pentamillionaires up 17%, reports Spectrum.

And

Only 16% of workers are confident that they can have a comfortable retirement. 27% have saved less than $1,000, 54% less than $25,000 (excluding personal residence), reports EBRI.

Related thoughts from Robert Frank on why the wealthiest are recovering so quickly from the recession and the rest of the country is behind.

Michael Jackson's estate

Nine months after Michael Jackson's death, his estate has signed a contract with Sony for an upfront payment of $250 million and unspecified, but reportedly high, future royalties for his music.  The film "This Is It," created after his death, grossed another $250 million. 

I have to believe the Michael Jackson estate was worth at least $500 million, which implies a death tax of close to $250 million.  Perhaps that explains the upfront cash that the estate accepted from Sony?  Jackson's heirs surely must wish he had survived to 2010.

Women as Investors, Then and Now

1957. Earl S. MacNeill in "Making the Most of Your Estate: A Guide for the Salaried Man:"

[Trust officers] know tens of thousands of women who handle investments as cannily as any man. Yet they have seen the reverse side of the coin too often …:

Women are inclined … to be greater gamblers than men.

Or, at the opposite extreme … they "run scared" ….

In the choice of investments, as well as of investment advisers, they are motivated subjectively … they are ruled to a greater extent by prejudice.

… their vaunted feminine intuition leads to making the more mistakes and clinging the more stubbornly to them.

2010. Jeff Sommer in his NY Times article, "How Men's Overconfidence Hurts Them as Investors:"

Men and women invest differently, a growing body of research has found. And in at least one important respect, women may be better at it.

Among 2.7 million people with IRAs at Vanguard … during the financial crisis of 2008 and 2009, men were much more likely than women to sell their shares at stock market lows.

[M]en think they know what they’re doing, even when they really don’t know what they’re doing …. Women, on the other hand, appear more likely to acknowledge when they don’t know something — like the direction of the stock market or of the price of a stock or a bond.

[One study found] men traded stocks nearly 50 percent more often than women. This added trading drove up the men’s costs and lowered their returns.

…while both sexes reduced net returns through trading, men did so by 0.94 percentage points more per year.

Take both the old and new views of women as investors with a grain of salt. Professor Brad M. Barber is right: When it comes to managing securities, “The differences among women and the differences among men are much greater than the differences between men and women.”

Yet women investors, some women investors, do seem to welcome special attention. Should wealth management firms offer programs specifically for women? Why? Why not?

"Financial plans are worthless, but the process of planning is vital. "

Says Carl Richards in the New York Times. I love the illustration, which he evidently drew on a napkin.

1938: “A New Profession Comes of Age”

Why is a high net worth individual like an Egyptian Pharaoh? For the answer, read this groundbreaking 1938 ad from City Bank Farmers. (Click for larger image.)

For Some Estate Tax Foes, It's Not a Matter of Money

Most owners of small family businesses have little reason to care whether the estate tax comes or goes. As the study Spending Millions to Save Billions "reveals," the fight against the tax is led by multi-millionaire families who own all or part of big businesses.

Yup, the Waltons and the Nordstroms and other families would like to do away with estate tax. But the study misconstrues their motive. Paying estate tax would not force family members to fly economy class, much less resort to food stamps. More often than not, these families are trying to retain control or influence over their family-founded businesses. And some seem to be willing to sacrifice wealth to do so.

Take the Timkens, of roller-bearing fame. One of the Timkens was a client of my father, and perhaps that's why he bought a few shares in the company. My mother held onto the shares, and in due course they passed to me. Has Timken been a great investment? Heck, no! But I still have the shares, just because I like owning a tiny slice of a famous old American manufacturer. (Only the Great Recession, I believe, finally forced the company to close the original Timken factory in Canton, Ohio.)

I hope the Timken family manages to keep connected to the company, but judging from past performance, they would do better if they didn't. Look how Timken shares have performed over the past 40 years, compared to the S&P 500.


If the Timken family had liquidated back in 1970 and invested in a diversified portfolio, like the index fund Jack Bogle was about to introduce, they would be many times wealthier today.

Update: Timken shares may be down, relative to the market, but they're not out. TKR closed today at 27.86, up 16.5% for the year.

Restoration of tax-free IRA distributions to charity

The House and Senate have each passed a tax extenders bill.  The two versions need to go to a conference committee now, but this should not be controversial.  Both versions restore the "charitable IRA rollover" that is available to to retirees who are 70 1/2 or older.

Estate tax reform scenarios

Recent summaries of the discussions at the Heckerling Institute suggest that no one yet has a clear idea of what will happen to federal estate taxes this year.  The odds of nothing happening at all seem to be going up. 

Is it possible that death tax opponents want to set the precedent of a full year without estate taxes? 

One would think that the prospect of a return to a $1 million exemption next year would focus some minds on the problem, and that they would want to strike a bargain now to avoid that development.  But are death tax opponents starting to think that the Republicans may gain enough seats in November that they can strike a still better deal next year?

Many rich people, such as Warren Buffett and Bill Gates, advocate high estate taxes.  Of course, those men will use philanthropy to avoid such taxes on their own estates.  That is, rather than send a portion of their fortunes to Washington to contribute to general government operations, they exercise a choice over which public agencies and what purposes will be funded with their wealth. 

What is striking in the public discourse is that the focus is always on how few large estates will be subjected to the federal estate tax, which in some calculus makes such a tax more "fair."  What is absent is an analysis of the far larger number, the potential beneficiaries of those large estates.  Many people hope to be beneficiaries, which may account for the unpopularity of death taxes.

Spring and Taxes . . . and Hedgies

"It’s the time of year when a young man’s fancy lightly turns to thoughts of deductions and write-offs," writes James Surowiecki in his New Yorker column.

One select group of Americans, though, has a more pressing tax-season task on its mind: preserving a lucrative loophole in the I.R.S. code. The provision allows money managers at privately held partnerships—like hedge and private-equity funds—to treat most of the money they make as capital gains rather than as ordinary income.

What percentage of hedge fund managers would quit if their earnings were taxed as ordinary income? What alternative careers would they choose?

Dogs and Cats, Fiduciaries and Brokers

As a little kid, I was allowed to name two kittens my mother's Persian had produced. To show my precocious sophistication, I chose "Scotch and Soda."

Scotch grew up to be big, handsome and smart. To humor me, he would even obey commands. Scotch realized I was too young to know cats don't like to do doggy stuff like "Come!" and "Fetch!"

Scotch came to mind when I read Trusted Adviser or Stock Pusher? in The New York Times. Maybe attempting to impose fiduciary standards on brokers and insurance agents isn't the good idea I thought it was. Maybe the Sell Side should not and cannot be expected to act like Buy Side advisers. Like Scotch the handsome Persian, some may play along, but it's not in their nature. And it's not their job.

Congress seems to be having similar second thoughts. Are we caving in too easily?

Two Marketing Masters Named Cohen

Steven A. Cohen, the billionaire hedge fund manager, is the subject of this Bloomberg profile. His funds account for about 1 percent of all the trading on U.S. exchanges.

Steve Cohen, "the Millionaire's Magician," was featured in yesterday's New York Times.

Clearly, both Cohens have mastered the art of marketing services to the wealthy. Hoping to master the art yourself? Consider both articles required reading.

Estate Planning Deftly Defined

Just fifty years ago, Chase Manhattan greeted Spring with this nest egg ad. Take a moment to admire the copy. After offering to unburden investors from the details associated with keeping stock certificates and bearer bonds in a safe deposit box, the ad defines estate planning simply and succinctly. It's all a matter of conveying your nest egg to your heirs "with as little confusion and tax loss as possible."


The photo was taken on the Housatonic, regarded by the sponsors of this blog as "our river." Trickling down from the Berkshires, the Housatonic offers popular fishing spots as it winds through northwest Connecticut. By the time the stream reaches I-84, it's a real river, forming the Eastern boundary of Fairfield County before emptying into Long Island Sound between Stratford and Milford.

Happy Tenth Anniversary?

"It's time to celebrate -- or perhaps mourn -- the 10th anniversary of one of the epic financial events of our time: the peak of the great stock market bubble in March 2000."

In his Washington Post column, Allan Sloan recalls just how good the good times were:

For a generation -- August 1982 through March 2000 -- U.S. stocks had their greatest run ever. The S&P 500 returned almost 20 percent a year, compounded, including reinvested dividends. You doubled your money in less than four years, quadrupled it in a little more than seven. It's the kind of thing people could get used to, and over a generation, many did.

The aftermath? Ten years of volatility and market trauma.

The chart of the DJIA below is revealing for two reasons: market swings are kept in proportion thanks to a log scale, and you can compare the nominal average with the real (inflation-adjusted) version. Props to Terence Corcoran for including the chart with this Financial Post comment.

The bad news: Corcoran suggests that the stock market's "lost decade" could be the first leg of another major market downturn, like 1966-82. We haven't actually slumped that much yet, kept aloft for a while by the real-estate and financial bubbles. But the first phase of the previous slump didn't seem too bad, either: Though "story stocks" might tank, market gurus opined circa 1970, nothing could ever go wrong with Xerox, Avon and the other famous large-cap names that made up the "Nifty Fifty."

Well, almost nothing.

The good news: If we are in the midst of an eighteen or twenty year slump, we're at least half way through it. For the rest of way, Boomers (the employed ones) may be able to invest at relatively favorable levels. By the time they retire or semi-retire in 2018 or 2020 and the market turns up, they should feel pretty good financially.

Meantime, they better heed Sloan's last bit of advice: "… take care of yourself by living below your means, doing your homework, and being careful and skeptical."

Related post: The Next Stock Market Boom.

They Called This Lawyer a Dirty Dog

March 1, 1931 was a Sunday, so News from 1930 has no reports from The Wall Street Journal to synopsize. Offered instead, vintage video via YouTube, including Beatrice Lillie's rendition of Snoops the Lawyer. Snoops was smart enough to marry an 83-year-old millionairess, figuring she was about to die. She was smarter and kept on living.

Earth to Congress: Do Something!

From this report at The Hill:

The longer the fate of the estate tax remains unknown, the more it becomes a political liability for lawmakers. Staffers say phone calls are on the rise from constituents demanding action on the estate tax.