Tuesday, February 14, 2017

When Bombers Trumped Inheritance

From a  Bessemer Trust lawyer's notes on the recent Heckerling Institute on Estate Planning.
Estate tax repeal has been considered by various administrations. One staffer from 1986 has stated that negotiation of the momentous 1986 Tax Reform Act came down to one last item. The legislative staffers told President Reagan that he could get rid of the estate tax but he would have to give up the B-2 bomber. President Reagan replied that he would rather keep the B-2 bomber.

Thursday, February 02, 2017

Forging a Will? Don't Draft It Online

Matt, a roustabout who survived the Deepwater Horizon explosion and received a multi-million-dollar settlement for his injuries, wanted to buy a house in his home town. At a local real estate agency he was introduced to Donna, who found him a property near her own own home. Soon Matt, with Donna's encouragement, was dating her teenage daughter, Alex.

When Matt died in a crash of his Crossfire (no seat belt!)  his considerable estate presumably passed to his young son. But lo and behold, Donna soon found a copy of a will Matt had made in 2014, leaving almost everything to Alex.

Where was the original? The resourceful Donna found that, too, in front of witnesses, when she opened a safe in Matt's home. The will shortchanged Matt's son so severely that the probate court approved a settlement giving him 15% of the estate.

But the young son may do much better, if the Feds don't decide to keep Matt's assets. Someone has discovered that Matt's will was drafted online, at Formswift.com. When? Digital footprints indicate the will was created in 2015, some days after Matt died.

Donna is slated to go on trial for her alleged crimes in April. You can read the whole story here, complete with a few quotes from the Wills, Trusts and Estate Prof.

Or maybe it's not the whole story, Circumstantial evidence hints that Matt did make a will, so far unfound.

Thursday, January 26, 2017

Irrational Exuberance and the Dow

From The New Yorker, January 15, 1966

Little did Hayden Stone or the rest of Wall Street know, but the DJIA's mid 1960's high (1,000!) marked the end of the great post-World-War-II investment boom.

Stocks staggered on through the Go-Go Years, but not until 1982 did the market begin its next great advance. Hayden Stone itself did not survive the 1970's.

In the long run, of course, Hayden Stone was right. Families whose founders invested boldly in 1966 and stayed the course now enjoy the fruits of a DJIA that just hit 20,000.

Evidence that you can't get what you don't pay for

It was just over 16 years ago that the Harvard Management Company and investment chief Jack Meyers parted ways.  Meyers had quintupled Harvard's endowment, growing it from $5 billion to $25 billion.  He was paid a pittance for that performance, by Wall Street standards at the time. Nevertheless, the Harvard alumni were outraged when they learned he was paid $7 million in one year, even though his compensation was tied to beating established benchmarks.   Apparently the alumni were confident that comparable returns could be had for less cost.

It didn't work out that way.

 Today's Wall Street Journal [paywall] reports yet another major shakeup for the Harvard Management Company.  The endowment has annualized gains over the last 10 years of 5.7%, well below Yale's 8.1% and the second lowest in the Ivy League.  Four different heads have tried to meet the return targets over the last decade, with the latest starting last December.

The new plan:  Outsource almost everything, and lay off 230 employees.

The nice thing about this approach is that the alumni never need to know how much the outside managers are being paid.  If they ever get good endowment returns again, they don't have to lose sleep over whether the manager was paid too much for achieving them.

A new spirit of noncompetition at Harvard Management is revealed in the closing paragraph of the WSJ piece:

Remaining staffers will focus on Harvard’s portfolio overall instead of on specific asset classes. Mr. Narvekar plans to tie staffers’ pay to the endowment’s overall performance instead of that of their asset class starting in fiscal year 2018.
We'll be watching to see how that turns out.

Wednesday, January 11, 2017

Is Portfolio Rebalancing a Waste of Time?

Could investment advisers become even more redundant? On average, they can't pick stocks that do better than average. So they settle for allocating assets and periodically rebalancing to maintain the ideal allocation. But what if their clients would be just as well off if their portfolios remained untouched?

Source: The Wall Street Journal

Some investment professionals, the WSJ reports, now believe "rebalancing is no better or worse a strategy than buy-and-hold."

A study mentioned here confirms that belief:
Compare the path of two hypothetical portfolios constructed by T. Rowe Price. Each portfolio starts with $100,000, with 60% in a mix of stocks—including shares of large and small companies, U.S. and foreign firms—and 40% in high-quality U.S. bonds. One portfolio is rebalanced annually over the 20-year period through 2015; the other is left alone. Both portfolios deliver the same returns, with annualized gains of just a bit more than 7%.
Rebalancing did reduce volatility. In theory, lowering volatility by periodic rebalancing should enable a skittish investor to come closer to  the long-term returns enjoyed by a buy-and-hold investor. 

In practice, rebalancing requires the skittish investor to shift money from stocks just when their gains make them look like a great buy and purchase stocks when their prices are scarily depressed. Easier said than done.

Monday, January 09, 2017

The Estate Plan That Amazed Samuel Pepys

Samuel Pepys
Not long after Christmas, three and a half centuries ago, Royal Navy bureaucrat and diarist extraordinary Samuel Pepys paid a call on Lord Crew.There he heard a remarkable story of inheritance.

An old friend had left Lord Crew's brother, Mr. Nathaniel Crew, an estate paying 600-700 pounds per  annum. Surely a worthy income in those days.

But Mr. Crew's good fortune had not come by bequest or devise. The recently deceased friend had left no will.

Nathaniel Crew
Rather, the amazed Pepys reports, the friend "had, above ten years since, made over his estate to this Mr. Crew, to him and his heirs for ever, and given Mr. Crew the keeping of the deeds in his own hand all this time; by which, if he would, he might have taken present possession of the estate…."

"This is as great an act of confident friendship," writes Pepys, "as this latter age, I believe, can shew."

Oddly, in his portrait the trustworthy Nathaniel looks a bit shifty. In reality he went on to become one of the Church of England's longest serving bishops.

Sunday, January 01, 2017

“Does anyone under the age of 30 even know what a check is?”

At year's end your obedient blogger wrote a check. If he lived in Denmark, he'd never write another.

Wednesday, December 28, 2016

Will Trump be the Stock Market's New Hoover?

As the year winds down, stock investors apparently welcome the prospect of a Republican in the White House. If the Trump presidency brings bumper returns, it will defy the odds. As Cullen Roche illustrates, the stock market tends to do better –much better–under Democrat presidents. Since Herbert Hoover took office, stocks have returned an average of 1.7% annually under Republicans. Returns under Democrat presidents, 10.8%.

From The Washington Post comes this chart of stock performance.


Will the market continue to greet Trump as enthusiastically as it welcomed Herbert Hoover? There's no telling, but we probably shouldn't worry. As Roche concedes, "judging stock market performance by presidencies is silly."

Friday, December 16, 2016

Christmas Price Index 2016

PNC's long running whimsy, the annual index of what it costs to acquire the gifts named in The Twelve Days of Christmas, was virtually inflation free this year. Some prices dropped a bit, while earnings of drummers and pipers rose modestly.
The cost of twelve drummers drumming rose 2.8%

The Trustworthy Investment Manager's Twelve Days of Christmas

Poster by Xavier Romero-Frias, Wikimedia Commons
W. Scott Simon keyboarded The Twelve Days of Christmas of a Modern Prudent Fiduciary nine years ago. Then and now, there's more to investing like a true fiduciary than "putting the customer first."

Wednesday, December 14, 2016

Decline and Fall of the Fiduciary Standard

Efforts to impose a fiduciary standard on brokers handling 401(k) accounts have been losing ground. Proposed regulations have been so watered down that some brokerage firms figure they'll make more money, not less. With Republicans controlling the new Congress, even the emasculated fiduciary standard is likely to be deferred or discarded.

For a reminder of the high hopes motivating the standard's proponents in 2009, see Fiduciary Standards for Broker-Dealers.

Saturday, December 03, 2016

Lies, Damn Lies and Politicians' Tax Talk, Continued

While campaigning, President-elect Trump promised massive income tax cuts. Now his choice to serve as treasury secretary says upper-income taxpayers will receive no "absolute tax cut."

As politicians know too well, nobody pays income tax on all their income. They pay on a "tax base," representing income less exemptions and deductions, and they may pay even less thanks to tax credits. If you remove or limit enough tax breaks to expand the tax base significantly, you can cut tax rates and still increase tax revenue.

Consequently, politicians find it easy to propose lower rates, even though their tax cuts are less, than, er, "absolute."

The good news for top-bracket taxpayers: Trump's proposed rate cuts, lowering the top rate to 33% and cutting the rate on business income to 15%, are so robust that no realistic increase in the tax base could deprive them of an unqualified, unconditional tax cut.

Earlier post: Lies, Damn Lies and Politicians' Tax Talk.

Friday, December 02, 2016

The Top 400 Club's Last Hurrah

Taxpayers needed almost $127 million in 2014 income to gain entry to the Top 400 Taxpayers Club, The Wall Street Journal reports.

That elite group received 1.3% of income in 2014, paid 2.13% of income taxes (at an average rate of 23.13%, the highest since 1997) and made 6.9% of all charitable contributions.

Typically, taxpayers gain membership in the club by selling a business or otherwise realizing a humongous capital gain. Relatively few retain their membership for a second year.

The IRS says it is disbanding the Top 400 Club. In future it will issue data on a slightly less exclusive group, the 1,500 or so taxpaying  households who constitute the top 0.001% of all taxpayers.

Wednesday, November 30, 2016

Where Harried Billionaires Go to Ground

Beachfront villa, Albany, the Bahamas
This week Tiger Woods returns to competitive golf, at a resort where he owns a home – Albany in the Bahamas.

Many of Tiger's Albany neighbors are even richer than he is, but perhaps not happier. "Billionaire," Tiger suggests,  is a high-stress life style.
We have one-tenth of all the billionaires on the planet here, and that’s saying something. For them to come down here and feel safe and feel like they can be here and operate and run their businesses but also bring their families and enjoy leisure time here as well, and have that privacy, is incredible.
Those of us who can't afford Albany still can admire a resort where the marina accommodates a 300-foot yacht. Check out the web site.

Wednesday, November 16, 2016

The Year of Donor-Advised Funds?

Many charities dislike donor-advised funds – they want direct donations now, not gifts, possibly larger, in the future. Many individuals and families love them.

According to data in the WSJ,  contributions to donor-advised funds have grown by double digit rates for seven years in a row. At the end of 2015, donor-advised funds held more than $78 billion. And that was after paying out over $14 billion to charities during the year.

Could President-elect Trump's proposed income tax changes, including a large standard deduction and a cap on itemized deductions, slow the growth of donor-advised funds in years to come?

Will donors try to beat the tax changes with a surge in donations this year?

Monday, November 14, 2016

Will Trump Promote Dynastic Wealth?

Some of President-elect Trump's campaign proposals are proving perishable. (The Great Wall may look more like a fence, or perhaps a line of "No Trespassing" signs.) Abolishing the federal estate tax, a mainstream Republican goal, could have a better shelf life. Paul Sullivan in the NY Times fears "wealthy families may find it much easier to amass dynastic levels of wealth."

But dynastic wealth isn't necessarily all that great, as George Goodman, writing as Adam Smith, pointed out in his 1960's classic, The Money Game. While a fortune in appreciated stock makes a family feel rich,  they don't necessarily live rich.

Goodman used IBM, the Google-Apple-Amazon of its day, to illustrate.
Mr. Smith said to [his wife and children], "Our family owns IBM, which is the greatest growth company in the world. I invested twenty thousand dollars in IBM and that twenty thousand has made me a millionaire. If something happens to me, whatever you do, don't sell the IBM." Mr. Smith himself never sold a share of IBM. Its dividends were meager, naturally, and so Mr. Smith had to work hard at his own business to provide for his growing family. But he did create a marvelous estate. ***
Mr. Smith died; the IBM was divided among his children. The estate sold only enough IBM to pay the estate taxes. Otherwise the children—now grown, with children of their own— followed their father's dictum, and never sold a share of IBM. The IBM grew again, made up for what had been amputated to pay estate taxes, and each of the children grew as rich as Mr. Smith had been…. They had to work quite hard at their own businesses, because their families were growing and their only money was in IBM. Only one of them even borrowed on his IBM, to get the down payment for a heavily mortgaged house. And the faithful children were rewarded by seeing IBM multiply and grow. *** 
The Smiths are now in their third generation of IBM ownership, and this generation is telling the next, "Whatever you do, don't sell the IBM." And when someone dies, only enough IBM is sold to pay the estate taxes. 
In short, for three generations the Smiths have worked as hard as their friends who had no money at all, and they have lived just as if they had no money at all, even though the various branches of the Smith family all put together are very wealthy indeed. And the IBM is there, nursed and watered and fed, the Genii of the House, growing away in the early hours of the morning when everyone is asleep.

Tuesday, November 08, 2016

Collector's Corner

Octagonal Iznik-style tile, possibly from Syria, 18th/19th century, decorated with an intertwining flowerhead and leaf motif in cobalt blue, turquoise and brown glaze, diameter 10 inches. After conquering Constantinople in 1453, the Ottoman Turks launched a building boom that utilized much tiling and pottery from the town of Iznik in Turkey. The Iznik style utilized fritware with designs combining traditional Ottoman arabesque patterns and Chinese elements. Fritware was a low-fired mix, mainly of silica and glass.

Classical Iznik production declined after the 17th century, but works generically described as “Iznik”--such as this tile from Syria—continued to be produced into the modern era. This tile fetched $431 at a Skinner, Inc., Fall auction.

Sunday, November 06, 2016

David Swensen on Successful Investing

From this New York Times feature on Yale's famed investment guru:

Beware hot funds
“More assets produce more fees, but they force managers to add more positions, not just Grade A ideas,”

Don't look back
“We were talking to a manager who just had capital taken away because the fund had a bad year. The investor said, ‘Your five-year numbers are not so good, so we are firing you.’ That sounds like the stupidest thing I ever heard.

”Who cares about the trailing numbers if the fundamentals of the portfolio are good?”


7.4%
Average annual return from a 60 percent stocks, 40 percent bonds portfolio over the 20 years ending last June

12.6%
Average annual return earned by Yale's endowment over the same period

Sunday, October 30, 2016

Phi in the investment sky?

Does the investment world need another Greek letter? State Street and the CFA Institute must think so. Paul Sullivan's Wealth Matters column introduces us to their creation: Phi.

Phi's meaning is murky, but it seeks to measure something like motivation,  the presence or absence of purpose in an investment program. Investors can measure their Phi level by taking a quiz. Here's the first page:



The suggested answers are eccentric. Don't people invest to gain or preserve financial independence? Don't some hope to get rich? Phi's motivations seem to ignore wealth building or decent investment performance.

Your obedient blogger took the test and learned he suffers from low Phi. Suggested ways to improve include investing more from current income, avoiding trading, watching expenses and (whoops, forget the expense part) hiring an investment adviser.

Phi may represent the glimmer of an idea, but it needs work.

Thursday, October 27, 2016

“Psychic Phenomena and the Law”

Couldn't access the article on psychic mediums mentioned by the Wills, Trusts and Estates Prof, but the effort led me to a gem, Blewett Lee's 1921 Harvard Law Review article, Psychic Phenomena and the Law. 

Lee discusses cases involving ghosts, like the spirit of Thomas Harris. When Harris' will was questioned, endangering his children's inheritance, his ghost repeatedly pestered William Brigs and gave Brigs a message for Harris' brother, reminding him that they had discussed how the estate should be managed in the best interests of the children. The brother complied. (Why the ghost didn't speak directly to the brother is not explained.)

In the 1920's magical writing, seances and such were in vogue. Lee wrote that messages from the dead deserved respect.
In determining what legal effect is to be given to spiritualistic communications believed to be genuine by the recipient, the communications should be treated for legal purposes as if the supposed communicators had still survived, and made the communications. *** 
If, for example, a person believes that his dead mother told him to make a certain devise, the communication should be dealt with, so far as the believer is concerned, as if it had in fact been made by his mother. 
"The more importance is given to these communications," Lee explained, "the easier it will be to break wills or contracts made under their control."
Son of a Confederate general, Blewett Lee was notable in his own right. After Harvard Law School, he won appointment as clerk to a United States Supreme Court Justice. "He was the only clerk not to have attended an elite preparatory school, the only one not a graduate of Harvard College, and the only law clerk from south of the Mason-Dixon Line."

Some ghosts can fly, but that probably doesn't explain Blewett Lee's interest in early aviation law.
Blewett’s ideas and methodology concerning aerial laws, published nearly a century earlier, remain influential today. In a 2012 article referencing the legal issues posed by the popularity of drones, Dr. Timothy T. Takahashi of Arizona State University cited Blewett’s work as a viable model for current drone regulations.
The Internet has its flaws and its trolls, but I'm grateful for the introduction to Blewett Lee.

Monday, October 24, 2016

Who Gets the $7 million townhouse?


The Horatio Street townhouse 
Back around the time young Bob Zimmerman moved to New York and legally changed his surname to Dylan, Bill Cornwell and Tom Doyle moved into an apartment in a West Village townhouse on Horatio Street. Cornwell later bought the building, and there they stayed. Although gay marriage was unthinkable half a century ago, the two men became a well-known couple in the West Village.

In 2014 Cornwell died at age 88. His will left his personal possessions and his townhouse to Doyle. But the will is invalid, signed by only one witness – New York State requires two. So Cornwell died intestate. Nieces and nephews will inherit. Could Tom Doyle lose the only home he has known for over five decades?

Not without a fight, writes Attorney Arthur Z. Schwartz:
Tom has come to my office and we have come up with a plan. While New York never recognized common law marriage, Pennsylvania did until recently. Bill Cornwall and Tom Doyle vacationed there a number of times, and New York Courts will recognize common law marriages if they would be recognized in a state where a couple visited, even if the visit was brief. I have made Tom Doyle’s rightful claim to 69 Horatio Street. It is a claim born of love and the cruel refusal of New York to recognize gay marriage for so many years.
Could the plan succeed? In any event, the moral of the story is that Bill Cornwall should have shaped his estate plan sooner and better.

Wednesday, October 19, 2016

Are Actively Managed Funds Worth the Gamble?

The rise of passive investing – index funds and such – has triggered a series of Wall Street Journal articles. The rise seems unstoppable:
[F]or the last 10 years… between 71% and 93% of U.S. stock mutual funds either closed or failed to beat their closest index funds.
The Journal gives two prominent mutual fund leaders the thankless job of defending stock pickers. 

Capital Group's Tim Armour cites in-house research indicating that "active funds with low expenses and a substantial amount of the manager’s own money invested in the funds on average beat their benchmarks 89% of the time over 10-year rolling periods." 

Michael Roberge, co-CEO of MFS, refers to a study showing that bold fund managers willing and able to hold their favorite stocks for long periods do better than average. 

Both Armour and Roberge also hint that active managers may be able to limit losses by timing the market. And both point out that stock returns in the foreseeable future are expected to be below par. If so, investors who bank on index funds to provide the same growth they have enjoyed since the Great Recession will fall short of their goals. 

So why not gamble and buy active?

Saturday, October 15, 2016

Alternative Assets Blur Annual Returns

The average university endowment has about half its money in alternative assets – real estate, private equity, hedge funds, whatever. Over 70 percent of Yale's endowment is in alternatives. As this article from  the Yale Daily News points out, calculations of these endowments'  annual returns cannot be precise. Five or ten years returns are a better guide to actual performance – and over those time periods, Yale looks pretty good.

Thursday, October 13, 2016

Quiet Old Firm Launches Marketing Blitz



Brown Brothers Harriman, an old-time Wall Street partnership, shed its securities underwriting and sales units when Glass-Steagall came along. As a private bank it has gone about its business quietly – until last month. To my surprise, this ad greeted me on the last page of The New York Times news section. The following Sunday, BBH ran a two-page spread in the Times magazine. Banner ads popped up online, directing viewers to the BBH web site.

The web site, content rich, offers briefings on services, staff bios and  generous helpings of articles from three publications – for investors, business owners and women – arranged by issue and sorted by subject. Under "Wealth Management and Trusts" is this exemplary article on spousal access trusts. (The design of these trusts undoubtedly guards against the risks associated with spouses who plan to become ex-spouses. Even so, spousal access trusts must be grist for at least one financial thriller.)
From 2010 to 2015, according to Spectrem data reported in Penta, the number of households with investable assets of $20 million to $100 million grew by more than 105,000. That's a 64% increase. Over a million households now have investable assets of $5 million or more. Among those with $5 million but less than $10 million, many should cross the $10 million threshold as their business and real estate wealth gets transformed (bring on the Gatorade barrel!) by liquidity events.

As wealth managers gear up for the growing market now emerging in the top financial tiers of the nations's 124.6 million households, they may find BBH's marketing blitz worth studying. 

Tuesday, October 11, 2016

Warren Buffett's Shocking Income Tax Rate

Donald Trump defended his $916 million tax loss by suggesting other billionaires, including Warren Buffett, used the same tax-cancelling strategy.

Not so, Buffett declared. He has paid federal income tax every year since 1944. In 2015 Buffett paid tax of $1,845,557 on an income, after deductions, of $6,086,237.

That works out to a tax rate of over 30%.

Aha! He doesn't pay at a lower rate than his secretary after all. No, but he probably never did. His much-publicized calculation included payroll taxes.

Saturday, October 01, 2016

Trump's Tax Loss Was Really Yuge

Any resemblance between a $916 million tax loss and a real loss, especially in the real estate business, is purely coincidental. Still, who wouldn't enjoy 18 years of tax-free income?

Tuesday, September 27, 2016

Yale Beats Harvard, But . . .

Yale's endowment eked out an investment return of 3.4 percent for the fiscal year ending last June, handily beating Harvard, whose endowment lost 2 percent.

Many endowments suffered negative returns in fiscal 2016. Untutored amateurs who simply invested in a S&P 500 index fund did better, making about 4 percent.

Like the rest of us, university endowments are learning that we live in interesting but difficult times. After necessary expenditures, Yale's fund actually shrank during fiscal 2016.

Remember the good old days, when Yale boasted an annualized ten-year return of almost 18 percent?

Sunday, September 25, 2016

Does Inheritance Lead to Inflation?

From Breaking the Silence on the Inheritance Boom, Prudential's sponsored content on The Washington Post site:
Over the next 30 years, a wealth transfer of nearly $58 trillion is expected to change hands from baby boomers to younger generations in the form of inheritance, according to a recent study from the Boston College Center on Wealth and Philanthropy. ••• The enormous wealth transfer will give the next generation more money to spend, leading to increases in higher education tuition, insurance premiums and housing prices.
Not so long ago, it was the baby boomers who were expected to inherit incredible sums. It didn't trigger inflation.  Will the millennials' Great Expectations have greater impact?
When marketing online, content is king. Prudential is a new customer for The Washington Post's Brand Studio. Other financial types using the Post's marketing platform include Citi, Goldman Sachs, JPMorganChase and, briefly, T Rowe Price. Mostly their content highlights their good works. Prudential's offering is more akin to an online newsletter article.

Wednesday, September 21, 2016

Harvard is bringing up the rear

Today's WSJ has an interesting piece for money managers:  Harvard's Money Troubles is the headline in the print edition, slightly changed online.  Harvard comes in third worst in the Ivy League annualized return over the last 10 years, 7.6% versus Yale's 10.0%.  They can't seem to keep their investment chiefs anymore, and if you read all the way to the end of the article it turns out that raiding other schools for talent isn't working either.  MIT's endowment chief passed when he was approached about moving to Harvard, for example.

The article doesn't mention it, but the real trouble started in 2005, when many ignorant Harvard alumni were incensed that their legendary investment manager, Jack Meyer, was paid $7 million for his services one year.  By comparison, comparable private sector managers were paid $251 million at the time.  The alumni effectively forced Meyer's resignation.  JLM commented here, and I followed up four years later here.  Looks like the lesson still has not been learned.

 Fortunately for Harvard, their alumni are willing to increase their giving to make up for lackluster investment performance.  Harvard launched a $6.5 billion capital campaign in 2013. They crossed the $7 billion mark in gifts and pledges last June 30, and the campaign will continue to June 30, 2018.

That amount of charitable giving leads to a shortfall of roughly $2.8 billion in federal income tax collections, depending upon your assumptions of the donors tax situations.  (Charitable deductions plus capital gains taxes avoided by giving appreciated property.)  It also suggests that about $3 billion in federal estate and gift taxes will be avoided.  Harvard has roughly 10,000  undergrad and graduate students.  So that is a federal subsidy of $280,000 per student at Harvard, whose endowment comes to $37.6 billion.  What do you suppose the tax subsidy for the endowment is worth?  Meanwhile, one presidential candidate wants to reduce the cost of public colleges to zero.

Something is wrong with this picture.

Wednesday, September 14, 2016

One Hundred Years Old and Still Raising a Fuss

Next to establishing the national park system, the federal estate tax was our government's best idea a century ago. Or was it? According to the Tax Foundation, the estate tax may shave almost one percentage point off GNP over the next decade. 

Harvard's N. Gregory Mankiw asserts the estate tax is unfair:
Consider the story of two couples. Both start family businesses when they are young. They work hard, and their businesses prosper beyond anything they expected. When they reach retirement age, both couples sell their businesses. After paying taxes on the sale, they are each left with a sizable nest egg of, say, $20 million, which they plan to enjoy during their golden years. 
Then the stories diverge. One couple, whom I’ll call the Frugals, live modestly. Mr. and Mrs. Frugal don’t scrimp, but they watch their spending. They recognize how lucky they have been, and they want to share their success with their children, grandchildren, nephews and nieces. 
The other couple, whom I’ll call the Profligates, have a different view of their wealth. They earned it, and they want to enjoy every penny of it themselves. Mr. and Mrs. Profligate eat at top restaurants, drink rare wines, drive flashy cars and maintain several homes. They spend their time sailing the Caribbean in their opulent yacht and flying their private jet from one luxury resort to the next. 
So here’s the question: How should the tax burdens of the two couples compare? Under an income tax, the couples would pay the same, because they earned the same income. Under a consumption tax, Mr. and Mrs. Profligate would pay more because of their lavish living (though the Frugals’ descendants would also pay when they spend their inheritance). But under our current system, which combines an income tax and an estate tax, the Frugal family has the higher tax burden. To me, this does not seem right.
Almost all commenters on Mankiw's column were pro estate tax. Some considered frugality un-American. 

Teddy Roosevelt, godfather of the national parks (and a Republican), advocated a stiff, highly progressive estate tax.  The national parks were a really good idea. The estate tax? That issue is far from settled.

Below, Teddy on a visit to Yellowstone. More early national park photos here.

Wednesday, September 07, 2016

Great Moments in Financial Engineering

From The Wall Street Journal:

"Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early."

Although the "GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit" proved toxic, a lot of risk-averse investors would welcome an honest product engineered to convert, say, a volatile return on stocks averaging 7% into a CD paying a steady 3.5 or 4%. Possible?

Tuesday, August 23, 2016

A Meltdown for Family Limited Partnerships?

The family limited partnership, Wealth Management declared back in 2000, is the ice cream sundae of estate planning strategies.

By using a partnership to pass portions of a family business, real property or even a portfolio of marketable securities to family members, wealthy donors can generate substantial valuation discounts for gift or estate tax purposes.

Could the ice cream social be nearing an end? That's the threat posed by newly proposed regulations. Some observers think the regs will be finalized before we have a new president in the White House.

Last weekend Paul Sullivan in The New York Times and Laura Saunders in The Wall Street Journal offered briefings on the potential meltdown. Both columns may prove helpful to wealth managers as they urge wealthy clients to enjoy their sundaes before the feds turn up the heat.

Sunday, August 21, 2016

The Collectible Trump

certificate vignette
For $149.95, down from $189.95, you can buy a certificate for one share in Trump Hotels and Casino Resorts, issued in 2004. If Trump wins the presidency, you might make a quick buck.