That's what I call a generation-skipping trust

Wellington R. Burt, lumber baron of Saginaw, Michigan, tied up his fortune in what we today would call a generation-skipping trust. His children received annual stipends of just $1,000 (about $12,000 in 2011 dollars).  The trust continued until 21 years after the deaths of two grandchildren, both living at the time of Burt's death in 1919.  As the last death occurred 21 years ago, the trust will be "opened" according to news accounts later this month.  Reportedly, teams of lawyers have hammered out a distribution settlement for the trust, which holds $100 million or so. By definition, the heirs will be people who never met the man, they were all born after his death.  What an odd legacy.  The smallest portion is over $2 million.

First of a four-part series on the story is here.

Interesting that the trust succeeded according to Burt's terms.  Rule against perpetuities satisfied, check.  Long before the advent of the generation-skipping transfer tax, so no federal tax revenues generation by this distribution, check. But what would have happened to Burt legacy had he shared the wealth with the next generation?  Might the Burt family be as famous as the Rockefellers or Kennedys?  Burt was, reportedly, the eighth richest American at one time.

The Global Wealth Management Market

The U.S. constitutes over 40 percent of the global wealth management market. Despite the rapid rise of wealth in China and elsewhere  – Australia could rank as a top ten market by 2020 – the U.S. will remain at over 40 percent. See Deloite's new study.

 Copyright © 2011 Deloitte Development LLC. All rights reserved

Osama Bin Laden’s Will 2.0

From SNL:

Are QTIPs Sexist?

Back when I kept up with estate planning trends, Qualified Terminable Interest Property Trusts were attractive to well-to-do men and women with children from a prior marriage. With a QTIP, one could take advantage of the marital deduction yet assure that trust assets remaining at the death of the surviving spouse would pass to one's children, not to the spouse's children or other relatives.

Haven't read Wendy Gerzog's paper, but the abstract Gerry Beyer posts at Super-charged power-of-appointment trusts asserts that QTIPs are sexist. Is it true that married women never, or almost never, use QTIPs in their estate plans?

Martin Feldstein's Stealth Income Tax Hike

Martin Feldstein

Even when he served as President Reagan's economic adviser, Martin Feldstein was known as a spoilsport (we called them deficit hawks). Is the ploy for sharply increasing the federal income tax that Feldstein describes in today's NY Times op-ed Machiavellian enough to work? Same tax rates. Same deductions. Yet income tax revenue would jump by almost 30 percent and keep on increasing.

The secret ingredient in the fiendish recipe? A cap, equal to only 2 percent of adjusted gross income, on the amount by which deductions and certain exclusions could reduce a taxpayer's tax.

With the 2 percent cap, individuals would continue to benefit [sic] from all of their current deductions, exclusions and credits. It is the total tax benefit and not any particular tax reduction that is limited. 

The net result, says, Feldstein, is that most itemizers would suffer less by settling for the standard deduction.

Osama Bin Laden's Will

H/T to the Wills, Trusts and Estates Prof for calling our attention to Bin Laden's four-page will. One page is reproduced here.

Update: Didn't have time to read the articles linked above until this evening. Appears that the "will," if genuine, is a letter to Bin Laden's family. In any case, an Islamic Will can designate beneficiaries for only one third of an estate.

“Pot Trusts” Need a Corporate Trustee

In the recent post on funding the grandchildren's college educations with pot trusts, my first instinct was to delete this plug for a family trustee. After all, the sponsor of this blog has numerous corporate trustees as clients. 

How do you choose a trustee for a trust that will outlive you? Ms. Goldsmith typically advises parents to name a family member who isn't benefiting from the trust, such as an uncle or cousin, who can then hire a professional investment adviser if necessary.

I was wrong. The more you think about Ms. Goldsmith's suggestion, the better a corporate trustee looks.

Consider: With four years at Yale costing close to $250,000 – more if you throw in the BMW convertible every trust-funded student deserves – multiple millions will be required to fund college for all one's grandchildren, present and future.

Perhaps youngest son isn't even married yet. How many grandchildren might he produce with his first wife? How many more with his trophy wife?  The pot must be big, and it may need to be managed for a long time, half a century or more.

Suppose cousin Joe is the first trustee. How often will he change investment advisers? How will the changes impact the trust's portfolio, taxes and transaction costs?  At Joe's death, will his niece Jill take over? What investment advisers will she choose? How will she get on with the last few grandchildren, all seeking four-years-at-Yale money from a rapidly dwindling trust?

A pot trust needs a trustee schooled in long-term investing, experienced in dealing with young beneficiaries and clearly impartial (no BMW for Chris if Brittany has to settle for an Elantra.) Naming a corporate trustee really does sound like a no-brainer.

Full disclosure: This blogger and his immediate family own three Hyundais and no BMWs.

Watch Your Finglish!

Real people need to hear about stocks and bonds and diversification, not equities and fixed ncome and asset allocation. So suggests an Invesco survey featured by Brett Arends in the WSJ.

Ditch the jargon, in other words. "Solution," a word overworked throughout the business world, is a dud in finance – not only stale but lacking credibility. At best, an investment strategy cannot be more than a "possible solution."

Surce: The Wall Street Journal

After the Great Depression, Americans craved financial security. Merrill Anderson's first newsletter was titled accordingly. With boom times worries about mere security faded away. What goes around comes around: the craving for security is back.

Remembering Louis Rukeyser

AP photo/Playboy Magazine

Louis Rukeyser, who attracted millions of Americans to Wall Street and investing, died five years ago this week. Though widely popular, his less-than-solemn treatment of the stock market on TV was not to every taste. See this Joe Nocera column. From my summers working on Wall Street, I recognized where Rukeyser found the program's distinctive, bantering voice. Brokers and analysts used it themselves as they tried out research recommendations and sales pitches (not mutually exclusive) on each other.

Too young to remember Wall Street Week? See the appreciation of Lou that Jonathan Hoenig offered last year. It includes a video clip where you can glimpse Lou chatting with that young hotshot, Peter Lynch.

Update: Let the record show that it was a woman, Anne Truax Darlington, who conceived the ridiculous idea that Maryland Public Broadcasting needed a program on … investing.

Pot Trusts

Paying Grandkids' College Bill in the WSJ includes a plug for "pot trusts" from estate planner Jessica Galligan Goldsmith:

… Ms. Goldsmith is seeing more grandparents turning their attention to college funding for grandchildren who are mere toddlers—or who aren't even born yet. In that case, trusts earmarked for education expenses may better meet a family's goals, she says, since the grandchildren may not reach college age until after the grandparents die. 

In families with multiple grandchildren and the potential for more, Ms. Goldsmith often recommends setting up a "pot trust," or dynasty trust, which names all of the grandchildren, including any future babies, as beneficiaries. The length of such a trust varies by state but generally can serve at least a few generations of college students.

(Yes, Boomers, your kids are lucky that God invented grandparents.)

Reaganomics vs. Obamanomics

Compare and contrast the two worst recessions since WWII.

Wealth Tax on Jumbo Trusts?

Just when we thought there was nothing left to worry about except who forged President Obama's "long-form" birth certificate! Donald Trump – who considered running for president as a Democrat in 1988 and as a Reform Party candidate in 1999 – raises a new concern for The New York Times:

"[Mr. Trump] has not said whether he still supports the idea he introduced a decade ago to impose a one-time 14.25 percent tax on the net worth of individuals and trusts worth $10 million or more."

Longer Protection for “Innocent Spouses”?

Some 50,000 taxpayers annually seek "innocent spouse" protection, claiming they did not know their husband or wife was a tax cheat. About 2,000 are turned down because the two years allowed to seek such protection has expired.

Almost 50 lawmakers, including all Democratic members of the Ways and Means Committee, seek to extend the two-year limit. In the midst of a contentious divorce, for example, it's possible that a tax cheat's spouse would not learn of the IRS tax claim for a year or two.

The Royal Wedding’s American Connection

Because of a daughter's unfortunate marriage, wealthy New Yorker Frank Work detested the British aristocracy. His estate plan showed it.

Good thing his great-great-great grandson is marrying a commoner.

Raised in Ohio by a single mom, Frank Work sought his fortune as a dry goods merchant in New York. His true passion was trotters. (Think drag racing for gentlemen.) When the Panic of 1873 threatened Work's business, he sought a bail-out from a racing buddy, Commodore Cornelius Vanderbilt. The Commodore not only obliged but also set him up as a stock trader. Work got rich, and Vanderbilt got richer.

Marketing opportunity?

LA Times: Retirement money fears now grip a record majority of working Americans.

Reportedly, 60% of current workers believe they'll get nothing from Social Security.

Don't Count Wire Houses Out

Morgan Stanley Smith Barney had a good first quarter, Investment News reports. A few stats:

Number of MSSB brokers: 17,800

Annualized revenue per broker: $767,000

Value of accounts handled by average broker: $97 million

Total held in brokerage accounts at MSSB: $1.72 trillion

Client assets held in fee-based accounts: $501 billion
(a 21% increase over the previous quarter)

Securities Fraud! Insider Trading!

Watched the 1999 film An Ideal Husband, derived from Oscar Wilde's play, last evening. What do you know? The plot involves a stock swindle, blackmail and…insider trading.

Plus ça change, plus c'est la même chose.

Need a British Empire fix before Kate and Will get hitched? With sumptuous costumes, lavish production values and a cast including Cate Blanchett, Minnie Driver and Rupert Everett, An Ideal Husband fills the bill.

This Just In . . .

What Women Want

After surveying over 3,000 women and conducting focus groups and individual interviews, Spectrem Group finds that women consider honesty, trustworthiness and openness to be key criteria for selecting financial advisers. News to you?

“Across the affluent, millionaire and Ultra High Net Worth wealth segments, women want to be comfortable that advisers are focusing on their specific, personal financial needs - not on product or profit,” said Catherine S. McBreen, Managing Director of Spectrem Group. “In fact, a frank, straightforward approach is more important to wealthy women than investment track record, depth of products offered, referrals, and even fees.”

Caution: Remember that some men also seek trustworthy advisers.

Stuff you can't make up

Via Tax Prof Blog, IRS allowed  more than $500 million in refunds to taxpayers who improperly claimed the $8,000 home buyer credit. Among them were 128 IRS employees!

Let's make the tax code even more  complicated, shall we?  There is a legitimate question whether the tax law in the U.S. already is unconstitutionally vague.

Saluting Securities Certificates

Merrill Lynch's one-column ads were a financial marketing fixture in the years when The Greatest Generation was building wealth. Few had better copy than this example from 1961. You have to love a marketing message that begins by using "cachet," "cache" and "cash" in the same sentence, proceeds to take a swipe at conspicuous consumption, then salutes the sensuous appeal of stock and bond certificates:

There's something irresistible about the crackle of their banknote paper, the comfortable conventionality of their vignettes, the way they pay regular interest and dividends.

The next sentence alone should have earned the copywriter a bonus:

Investing in sound securities has always been "the thing to do" and probably always will be, since it combines – uniquely, we believe – self-interest with the public interest, enabling the investor to profit from helping to finance the development and expansion of industry.

Alas, stock and bond certificates are largely a relic of the pre-digital age. But they still have appeal. This collectible Pixar certificate, issued the day before Disney acquired Pixar Animation Studios on May 5, 2006, carries a $395 price tag at Scripophily.com.

Do you enjoy paternity fights?

If so, here's an unusual one in the NYTimes.

The Most Inscrutable Sentence in the Tax Code

In honor of tax-return time, a blast from the past. The source: Ronald Reagan's June 7, 1986 radio address plugging tax reform.

I'd like to read to you from a very famous U.S. Government document: "For purposes of Paragraph (3), an organization described in Paragraph (2) shall be deemed to include an organization described in Section 501(c) (4), (5), or (6) which would be described in Paragraph (2) if it were an organization described in Section 509(a)(3).'' Not exactly the Declaration of Independence or Lincoln's second inaugural. No, it's the last sentence in section 509(a) of -- you guessed it -- the Internal Revenue Code.

Patent progress

Tax Notes ($) reports that the House Judiciary Committee has green-lit H.R. 1249, the America Invents Act.  The bill would finally eliminate patents on tax strategies.  I don't know why this has taken so long, the vote was 32 - 3, and the bill now goes to the full House.  The Senate passed S. 23, also called the America Invents Act, in March.

It shouldn't be this hard to enact good policy.

Inflation is really at 10%?

So says CNBC, citing the Shadow Government Statistics newsletter.  That is, if we measured inflation today using the same methodology we used before 1980, then yes, we'd be at nearly 10% annualized.

It's not only about smoothing the volatility of food and fuel prices.  A decade ago JLM steered me to a wonderful article from the Dallas Fed that showed how dramatically prices have fallen over the last century, when you measure the cost by using hours of work needed to make a purchase rather than nominal dollars.  What's more, the quality of some stuff is getting better with no attendant price increase (iPads, for example).  Apparently the Bureau of Labor Statistics has been adjusting the CPI to take such effects into account as well.

The unfortunate result is that people feel like they are experiencing much more inflation than the government claims they should experience.  Is it a problem with my high-priced locality, my spending on inflation-prone goods, or is the government just out of touch once again?

I'm curious about the cumulative effect of these changes to CPI measurement, and also the interplay with TIPS.  Is it a coincidence that, now that TIPS are generally available, the new definition of inflation gives us lower numbers than it once did?

Royal Checkbook, Seldom Used

Coutts & Co., now a unit of RBS, has long served as bankers to the British royal family. According to trivia reported in The Telegraph, the Queen's financial paperwork still travels to the bank by horse-drawn carriage.

The Queen has a Coutts checkbook, emblazoned with a crown, but seldom uses it:

"…recipients of the Queen's cheques often choose to keep them as a souvenir rather than cash them - something which makes balancing the Queen's accounts rather tricky…."

More on Coutts: The Wife of a Banker

Money, Metaphorically Speaking

We all use metaphors more than we realize, observes David Brooks in his New York Times column.

When talking about time, we often use money metaphors. But when talking about money, we rely on liquid metaphors. We dip into savings, sponge off friends or skim funds off the top. Even the job title stockbroker derives from the French word brocheur, the tavern worker who tapped the kegs of beer to get the liquidity flowing.

The psychologist Michael Morris points out that when the stock market is going up, we tend to use agent metaphors, implying the market is a living thing with clear intentions. We say the market climbs or soars or fights its way upward. When the market goes down, on the other hand, we use object metaphors, implying it is inanimate. The market falls, plummets or slides.

Who says down markets can't be animated? Sometimes, like today, the market loses confidence and slumps. Once in a while it emulates a NASCAR neophyte and crashes.

History (in 16 Slides) of British Banking

Upstairs Downstairs fans who didn't see enough of bygone days in the U.K. on PBS last evening will enjoy this slide show from the Telegraph.

Did you know the Scots introduced a mobile bank in 1946?

The most revolutionary development in British Banking? "It could be argued that the appearance of women in banks was the biggest banking revolution of the 20th century."

British banking's greatest marketing challenge over the years? "We had to explain what a credit card was - it was a massive marketing task, like nothing ever done before by a bank."

Be sure to dig the Burroughs TC500 computer, c. 1961. (It definitely wasn't dainty.)

Scrawny Taxes For Fat Cats?

For the Fat Cat set, this could be the best tax-paying season since the early 1930s, says this Bloomberg Business Week cover story. Not that recent years haven't been relatively easy on high incomes:

For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008.

(Remember, states and cities levy taxes, too. Fat Cats aren't necessarily getting off that easy.)

The Bloomberg Business Week report highlights various strategies for deferring or reducing federal tax, including transfer taxes. The description of intentionally defective grantor trusts should stir the interest of any self-respecting billionaire.

Funds: The Old Order Changeth

Investment News reports that Vanguard, after becoming No. 1 in U.S. ETF sales, now plans to offer exchange traded funds in Europe.

Data from the article:

ETFs and index funds in the U.S. have taken about a fifth of the fund market…. Their market share has risen from 8.7 percent a decade earlier, and they accounted for half of new investments in 2010.

U.S. ETFs grew 15-fold in the decade ended Dec. 31, while actively managed mutual funds increased by just two-thirds.

Individual investor sales account for as little as 10 percent of European ETF assets, compared with about 50 percent in the U.S.

Illustration via Wikimedia Commons

Learning the Art of Order

Here's a Chase Manhattan nest egg ad from the spring of 1966 that Shakespeare might have liked:

"So work with the honey bee, creatures that by a rule of nature, teach the art of order to mankind."

Post-Modern Portfolio Theory

Modern Portfolio Theory has proved to be too … theoretical. How better to approach the investment process? John Mauldin's Outside the Box offers thoughts from Neils Jensen in London: Confessions of an Investor.

Risk is not market volatility, Jensen asserts. Real risk (or tail risk) is losing your investment.

The smart guys at Welton Investment Corporation have studied the phenomenon of tail risk in depth…. In short, severe losses (defined as 20% or more) happen about 5 times more frequently than estimated by the models we (well, most of us) use.

An underestimated risk factor, Jensen says, is "birthday risk."

When you look at [the asset-performance charts included in Jensen's discussion], wouldn’t you just love to have retired in 2000? A solid 7.9% per year for the preceding 19 years turned $1 million in 1981 into $4.2 million in 2000, whereas those poor souls who retired in 1980 managed to turn $1 million into no more than $1.1 million during the previous 14 year period. And those who are retiring today aren’t much better off following an extremely volatile decade.

But maybe they are. Retiring at the top of a bull market can lead to delusions of grandeur and overspending, followed by worry and shrinking wealth. In 2009 Jonathan Clements made the point well. See What a Good Year to Retire, Really!

New York extends its tax reach

Well done!

What Investment Beginners Should Know

Your client's kid is finishing college and sallying forth into the real world. The client wants you to give the neophyte a little "Investing 101" advice. You might start with this Bret Arends column: Five Things You Should Know About Funds.

The Case for a Corporate Executor, 1916

A FEW PERTINENT OBSERVATIONS ON THE ADVANTAGES DERIVED FROM THE APPOINTMENT OF TRUST COMPANIES AS EXECUTORS OF WILLS, WHICH FIND SUPPORT IN THE DECISIONS OF THE COURTS

The cover of this pamphlet clearly is not early 20th century, but the contents, authored by John Edson Brady of the New York Bar, date from 95 years ago. Please admire the use of examples – court cases involving individual executors or administrators who proved inept, careless or crooked.