Presidential Candidates on the Issues

In anticipation of General Election Day on Tuesday, November 4, 2008, The Wall Street Journal published an article, entitled "Obama vs. McCain: It's About Your Money" (10/26/08) by Shelly Banjo, who compared the positions of the two major party candidates, John McCain and Barack Obama, on "money" issues, many of which are key concerns of seniors:

• Short-Term Economic Relief
• Income Taxes
• Estate Taxes and AMT
• Health Care
• Investments
• Retirement & Social Security

As to Estate Taxes and the AMT (Alternative Minimum Tax), the article summarized the positions of the two senators seeking the Presidency:

Both candidates support extending the Alternative Minimum Tax's 2007 "patch" exemption levels and index for inflation, and changing the federal estate-tax law to make the $2 million per-person exemption ($3.5 million next year) portable or transferable from one spouse to another.

Sen. Obama wants to freeze the 2009 estate-tax structure, which taxes roughly 0.3% of estates -- those valued above $3.5 million per person -- at a top rate of 45%. According to Deloitte Tax, a $5 million estate would pay a tax of $675,000 under this plan.

Sen. McCain has proposed a 15% estate tax (down from the current 45%) on roughly 0.2% of estates, those valued at more than $5 million per person. A $5 million estate would pay nothing under this plan, Deloitte Tax notes. * * *

In "The Election Choice: Taxes" (10/25/08), also posted by the WSJ, it was noted that "[t]he difference between candidates is the widest it's been in over two decades."

"The Obama and McCain Tax Plans: How Do They Compare?" (10/15/08), by W. Beach, K. Campbell, R. Hederman, Jr. & G. Nell, posted by The Heritage Foundation, compared, in a general, summary fashion, the candidates' positions on federal taxation.

Far more detail on this topic was provided in "2008 Presidential Candidates' Tax Proposals," posted by the Tax Policy Center, of the Urban Institute and Brooks Institute, which offered the "latest analysis of the presidential candidates' tax plans (including effects on representative taxpayers and distributional tables)."

Here are some links provided by the TPC:

• Full Report (Posted 9/12/08)
• Executive Summary (Updated 9/15/08)
• The Presidential Candidates' New Tax Proposals (10/27/08)
• How to Find Tables for TPC’s Analysis of the Candidates’ Tax Plans (September 12, 2008)
• Earlier Versions of the Analysis
• Estimates of the individual and corporate income tax changes that different groups of representative families would face under each candidate’s tax plan:

Nonelderly single individuals
Nonelderly married couples
Elderly units

"Your Money: McCain vs. Obama" (updated 10/29/08), posted by CNN/Money, provided a "detailed guide to the economic issues that matter most to voters in the 2008 presidential election," including:

• Bankruptcy
• Budget Deficit
• Driving
• Economic Crisis
• Energy Security
• Foreclosures
• Free Trade
• Gas Prices
• Health Care
• Jobs and Wages
• Medicare
• Mortgage Fraud
• Mortgage Giant Rescue
• Personal Taxes
• Savings
• Small Business
• Social Security
• Taxing Business
• Taxing Wealth
• Wall Street

"Obama, McCain on the issues" (08/28/08), posted by The International Herald Tribune, summarized the candidates' positions on a different listing of issues: Abortion, Afghanistan, Cuba, Death Penalty, Education, Energy, Gay Marriage, Global Warming, Gun Control, Health Care, Housing, Immigration, Iran, Iraq, Social Security, Stem Cell Research, Taxes, and Trade.

If you wish to view any of the candidates' positions, as stated on their own websites, on the issues developed during their campaigns, see:

• McCain-Palin 2008

• Welcome to Obama for America

Research their positions to your satisfaction, then vote. Certainly, vote.

“Voting is a civic sacrament.”

-- Theodore Hesburgh

(American Clergyman, University President)

Slump's Serious Repercussions for Seniors

On October 1, 2008, the Urban Institute issued a Press Release entitled "How Is the Economic Turmoil Affecting Older Americans?" announcing a "Fact Sheet" of the same name prepared by Richard W. Johnson, Mauricio Soto, & Sheila R. Zedlewski.

In the "Fact Sheet: How Is the Economic Turmoil Affecting Older Americans?"(PDF, 12 pages), the authors examined the impact of recent economic woes on seniors, as summarized in the Report's Introduction:

The slumping stock market, falling housing prices, and weakening economy have serious repercussions for the 94 million Americans age 50 and older who are approaching retirement or already retired.

Retirement accounts lost about 18 percent of their value over the past 12 months, and between January 2007 and May 2008, housing prices fell from 4 to 20 percent depending on where seniors live.

Older Americans have little time to recoup the values of their homes, 401(k) plans, and individual retirement accounts — all important parts of their retirement nest eggs. More and more older Americans are working to bolster their retirement incomes, but the rising unemployment rate, now 6.1 percent, limits their prospects.

This fact sheet examines the impact of the ongoing economic turmoil on retirement savings, home values, and retirement decisions. * * *

The Fact Sheet noted the serious repercussions of the steep decline in stock market values that occurred during the past year, which accelerated during the past month, because most retirements accounts contain many stocks, now far lower in value:

The stock market lost 27 percent of its value between September 30, 2007 and September 30, 2008, a roughly $7 trillion drop.

The loss has reduced the retirement savings of many Americans, particularly older adults. * * *

• Forty-nine percent of households ages 50 and older own retirement accounts. Seventy-nine percent of these accounts include stock holdings.
• The typical retirement account of households ages 50 and older invests 50 percent of its assets in stocks. However, households ages 70 and older hold much less in stocks, reducing their exposure to market fluctuations. * * *
  

The authors considered aspects of the decline in investments that supported seniors' retirement plans, with statistics:

• How Much Have Retirement Accounts Fallen?
• How Are Different Age Groups Affected?
• How Much Do Households Hold in a Typical Retirement Account?

Then the authors considered how the simultaneous decline in home prices will affect seniors' retirement plans, by addressing these questions:

• Does home equity represent a large share of older adults’ wealth?
• How has housing wealth changed for older adults?
• What is the importance of home equity in retirement?
• Are reverse annuity mortgages a good way to shore up retirement incomes?

Finally, the authors turned to employment of older workers as a means of shoring up retirement plans:

The plummeting value of retirement assets –– housing, pensions, and other savings –– could force more older adults to delay retirement and remain at work and could encourage some retirees to return to work.

At the same time, contracting credit markets could weaken the labor market, limiting employment opportunities for older adults. * * *

These are their specific questions about employment:

• How will the financial crisis affect retirement decisions?
• How will the credit crunch affect jobs?
• Are older workers likely to lose their jobs?
• Will older adults find new jobs?
• How does unemployment at older ages affect retirement income security?

The Urban Institute's conclusions are reflected in personal stories reported recently by various publications, including:

• "Baby Boomers Scramble to Reassess Future: What to do when your retirement disappears before your eyes" (10/20/08), by Mark Huffman posted by Consumer Affairs.

• "Savings Hit Hard by Economic Meltdown, Elderly Wait and Worry" (10/16/08) by Rebecca Spence posted on The Jewish Daily Forward.
  

• "Seniors Hit Hard by Financial Crisis: Collapsing home prices, tight credit, dwindling investment income a lethal brew" (09/21/08) by James R. Hood posted by Consumer Affairs.

AARP, based in Philadelphia, PA, also has posted excellent articles about seniors facing an economic downturn.

• "A Matter of Life and Debt" (Oct. 2007) by Carole Fleck October 2007 posted in the AARP Bulletin Today

• "Bear Market Makes Boomers Wary as Retirement Draws Near" (07/15/08) by Gail Marks Jarvis, reposted from The Baltimore Sun
  

• "Top Questions Members Are Asking AARP About the Current Financial Crisis" (10/20/08) by Carole Fleck posted in the AARP Bulletin Today

Probably the best article that I've read on the subject appeared in The New York Times on September 22, 2008, entitled "Retirees Filling the Front Line in Market Fears" by John Leland & Louis Uchitelle, who note that "Older Americans with investments are among the hardest hit by the turmoil in the financial markets and have the least opportunity to recover."

This is pretty depressing news. It must be met with personal tenacity and a will to survive.

“Tenacity is a pretty fair substitute for bravery,
and the best form of tenacity I know
is expressed in a Danish fur trapper's principle,
'The next mile is the only one a person really has to make.'”

-- Eric Sevareid (American Journalist, 1912-1992)

FDIC's Interim Rule for Living Trust Deposits

On September 26, 2008, the Federal Deposit Insurance Corporation issued interim final regulations entitled Deposit Insurance Regulations; Living Trust Accounts, as published in the Federal Register, and as announced in FDIC's Press Release, "FDIC Simplifies Coverage Rules for Revocable Trust Accounts" (09/26/08).

The interim rules amend 12 CFR 330, and were effective immediately, pending a further sixty day comment period before finalization.

This is a summary of the changed regulations:

The FDIC is adopting an interim rule to simplify and modernize its deposit insurance rules for revocable trust accounts.

The FDIC’s main goal in implementing these revisions is to make the rules easier to understand and apply, without decreasing coverage currently available for revocable trust account owners.

The FDIC believes that the interim rule will result in faster deposit insurance determinations after depository institution closings and will help improve public confidence in the banking system.

The interim rule eliminates the concept of qualifying beneficiaries. Also, for account owners with revocable trust accounts totaling no more than $500,000, coverage will be determined without regard to the beneficial interest of each beneficiary in the trust.

Under the new rules, a trust account owner with up to five different beneficiaries named in all his or her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary.

Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) will be insured for the greater of either: $500,000 or the aggregate amount of all the beneficiaries’ interests in the trust(s), limited to $100,000 per beneficiary.

As recited in the published notice, the FDIC first attempted to clarify "living trust" coverage by an FDIC Advisory Opinion 94-32 (May 14, 1994), then by revision of 12 CFR 330.10(f) in 1998. Regulations proposed in June 2003, then adopted, after considering comments, as final regulations effective January 1, 2004, had included provisions regarding "living trust" coverage. The provisions were clarified in an Opinion Letter (12/17/03), and then in formal Advisory Opinion 94-32 (05/18/04).

The FDIC's prior rulemaking addressed a "living trust" as a depositor in a federally-insured financial institution due to the increasing use of such a legal device.

A living trust is a formal revocable trust over which the owner (also known as the grantor) retains ownership during his or her lifetime. Upon the owner's death, the trust generally becomes irrevocable.

A living trust is an increasingly popular instrument designed to achieve specific estate-planning goals. A living trust account is subject to the FDIC's insurance rules on revocable trust accounts. Section 330.10 of the FDIC's regulations (12 CFR 330.10) provides that revocable trust accounts are insured up to $100,000 per "qualifying'' beneficiary designated by the account owner.

If there are multiple owners of a living trust account, coverage is available separately for each owner.

Qualifying beneficiaries are defined as the owner's spouse, children, grandchildren, parents and siblings. 12 CFR 330.10 (a).

The most common type of revocable trust account is the "payable-on-death'' ("POD'') account, comprised simply of a signature card on which the owner designates the beneficiaries to whom the funds in the account will pass upon the owner's death.

The per-beneficiary coverage available on revocable trust accounts is separate from the insurance coverage afforded to any single-ownership accounts held by the owner or beneficiary at the same insured institution. * * *

Despite these efforts, application of the "qualifying beneficiary" requirement in the 2004 regulations still created confusion and complications for "living trust" deposit coverage.

Despite the FDIC’s efforts to simplify deposit insurance rules in recent years, there is still significant public and industry confusion about the insurance coverage of revocable trust accounts -- particularly living trust accounts, one of the two types of revocable trust accounts.

This continuing confusion about the insurance coverage of revocable trust accounts is evidenced by the tens of thousands of deposit insurance inquiries the FDIC has received following recent depository institution failures. * * *

In response, the FDIC's Board of Directors adopted these changes to simplify the rules for determining the coverage available on revocable trust accounts.

The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.

Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary.

For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary. * * *

This is the comment and the advice offered by the Chair of the FDIC to "living trust" depositors:

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair.

"We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records." * * *

Comments on the interim rule will be due no later than 60 days after its publication on September 26, 2008, in the Federal Register.

Already, on some legal listservs, practitioners are commenting on the interim rules, wondering about the effect on more complicated estate planning documents.

For example, on the listserv of the American College of Trust and Estate Counsel, Sebastian V. Grassi, Jr., Esq., of Grassi & Toering, PLC, in Troy, MI, provided some initial thoughts from a sophisticated estate planning attorney's viewpoint. I repost his comments (edited by me) with his permission:

Although the preamble to the new rules state that the FDIC is trying to align itself with 21st Century estate planning techniques, its new rules are geared to mom and pop "I love you" type revocable living trusts. These often provide a QTIP [Qualified Terminable Interest Property] interest for a surviving spouse, with remainder to children, per stirpes, with further provision (if any beneficiary has not attained a certain age) for a beneficiary's share to be held in trust until he/she attains the stated age. This is a common "simple" form of estate plan for a non-taxable estate.

In that type of trust you can ascertain the interests of the beneficiaries; and when the bank fails, you know exactly, at that moment in time, who the living beneficiaries are, ignoring the contingencies.

However, the new FDIC rules concerning revocable living trusts do not adequately deal with a sprinkle trust, such as a GST dynasty trust.

The rules attempt to clarify a situation concerning a surviving spouse's life estate with remainder over to the grantor's three children. But what if the surviving spouse was granted a testamentary limited power of appointment to any of the grantor's descendants, then what? How many remainder beneficiaries are there?

As I read the new rules, such a power would probably be treated as a contingency and therefore not be taken into consideration (i.e., the grantor's descendants would not be counted), and only the three children would be counted for the $100,000 per beneficiary limit (i.e., $300,000 of coverage - 3 kids x $100,000).

The new rules, in my opinion, generally require specifically named beneficiaries with ascertainable (i.e., statistically determinable interest, ignoring contingencies, such as the exercise of the testamentary limited power of appointment) in order to get the $100,000 FDIC coverage per beneficiary.

Thus, Sprinkle Trusts among the grantor's descendants, appear to provide only $100,000 of coverage, maximum, per trust share.

Now one way to deal with that is to have have the GST trust be divided into separate shares for the kids (a typical approach). In that case, it appears that each kid's trust share would get up to $100,000 of coverage. So, a pure credit shelter sprinkle trust (i.e., not divided among the children when the surviving spouse dies) would probably provide only $100,000 of FDIC coverage, whereas, if the trust divides per stirpes, greater coverage per trust (not per trust beneficiary since the trust is a sprinkle trust) would provide the most FDIC coverage.

The new rules took effect on September 26, 2008 for all existing and future revocable trust accounts, and for existing and future irrevocable trust accounts resulting from formal revocable trust accounts.

Update: 10/14/08:

On October 10, 2008, The International Herald Tribune published an article, entitled "FDIC approves $250,000 insurance limit" that reported a temporary increase in the FDIC coverage limits through the end of 2009:

The Federal Deposit Insurance Corp. on Friday formally approved the increased insurance limit of $250,000 per regular account that was part of the financial rescue legislation enacted last week.

The FDIC board approved the temporary increase per account in a vote at a meeting. The new limits, which extend through the end of next year, also provide for an increase in the insurance ceiling on joint deposit accounts to $200,000 per co-owner of the account from the current $100,000.

The limit for retirement accounts held in banks remains at $250,000. * * *

The "Frequently Asked Questions" on the FDIC website were updated, as follows:

What are the basic FDIC coverage limits?*

• Single Accounts (owned by one person): $250,000 per owner

• Joint Accounts (two or more persons): $250,000 per co-owner

• IRAs and other certain retirement accounts: $250,000 per owner

• Revocable trust accounts: Each owner is insured up to $250,000 for the interests of each beneficiary, subject to specific limitations and requirements

*These deposit insurance coverage limits refer to the total of all deposits that account holders have at each FDIC-insured bank. The listing above shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.

For further information about all recent changes to FDIC deposit insurance coverage through October 14, 2008, see: Changes in FDIC Deposit Insurance Coverage - September-October 2008 on the FDIC website.

"Liquid Trust" or "Living Trustworthiness"?

In the midst of the greatest economic crisis since the onset of The Great Depression, I pondered approaches, and now endorse one.

Since these problems are based in fear, which then create a lack of faith in business partners and among consumers, we need to restore trust, which can regenerate liquidity of funds and permit long-term workouts.

Could a simple solution be found in a bottle?

Liquid Trust is produced by Vero Labs. It is one of many such products based upon human pheromones, which are explained by Wikipedia:

A pheromone (from Greek φέρω phero "to bear" + ‘ορμόνη "hormone") is a chemical that triggers a natural behavioral response in another member of the same species.

There are alarm pheromones, food trail pheromones, sex pheromones, and many others that affect behavior or physiology. * * *

The vendor claims that its enhanced Liquid Trust can restore a feeling of trust, by employing, Oxytocin:

Liquid Trust is the world's first product that contains Oxytocin the hormone that controls the level of trust and security in people.

Scientists have proven that the hormone Oxytocin, is largely responsible for who we trust. If your boss, manager or employees have high levels of Oxytocin, you have a much better chance of getting a raise or promotion. * * *

When you spray Liquid Trust on yourself, you are gaining an instant competitive edge. Your manager and other co-workers will immediately feel strong bonds to you and your ideas.

This will actually help you get ahead because they will trust you and the work that you do. * * *

The original version of Liquid Trust was released in 2006, according to "Liquid Trust in a Bottle: New Oxytocin Product Has Hit the Market" (08/11/06) by Tori, posted by Associated Content.

Liquid Trust is a spray that comes in a little bottle that oddly resembles a nail polish bottle (in my opinion). * * *

According to their website, “There are different ways of increasing the Oxytocin levels in the people you interact with. Scientists say that simply touching someone who you are talking to, makes them produce Oxytocin.

When that happens, they start to form a very strong bond with you. They trust you." * * *

See also: "Human Pheromone Reviews - Liquid Trust" by Kyle Macrannell, posted on EZine Articles.

Many other marketed products contain pheromones, intending different results in human interactions. See: "Most effective 'Pheromone' Product Reviews" (07/02/08), which reviewed seven products (but not "Liquid Trust"). For accounts of users' personal experiences with various products, see: "Liquid Trust" on PheromoneTalk.

However, predictable effects of pheromones remain under research, according to "Pheromones, in context" (10/02/02), by Etienne Benson, posted by American Psychological Association Online. She interviewed knowledgeable scientists, who highlighted actual research on pheromones.

She concluded that scientific research can only suggest, but not predict, specific effects of pheromones on human behavior, and therefore cannot endorse vendors' promotional claims.

It can be concluded, however, that pheromones do have a purpose:

"In animals, [pheromones] are involved very strongly in care of offspring, in recognizing members of your social group, in recognizing family members," [Martha McClintock, PhD] says.

"In thinking about what the normal function might be, we know from the animal work that we need to think broadly in social terms and that the same compound might serve differently in different contexts." * * *

Our basic biological systems sought to protect us from threats, and to promote survival, through coded material transferred naturally and interpreted in feelings by each of us.

Now, on a grand scale, the activities of financial markets are characterized by anonymity, fungibility, separation, and complexity. No one but insiders can use the "smell test" that has preserved our race in other settings.

So, pheromones won't work to guide us through a financial crisis. Indeed, their use would mislead us and mask reality.

Instead, we must rely upon societal values that promote responsible financial behavior -- the age-old, religion-endorsed, standards of honesty and accountability, which I call "living trustworthiness."

Remember what "trust" means in social and personal contexts:

Trust is a relationship of reliance.

A trusted party is presumed to seek to fulfill policies, ethical codes, law and their previous promises.

Trust does not need to involve belief in the good character, vices, or morals of the other party. Persons engaged in a criminal activity usually trust each other to some extent. Also trust does not need to include an action that you and the other party are mutually engaged in.

Trust is a prediction of reliance on an action, based on what a party knows about the other party. Trust is a statement about what is otherwise unknown -- for example, because it is far away, cannot be verified, or is in the future. * * *

Recommitment by Americans to act with "living trustworthiness" is essential. An accompanying reworking of our laws mandating "living trustworthiness" in financial dealings will institutionalize this commitment. Such laws, with provisions for disclosure, notices, source reports, periodic revaluations, investor reviews, administrative regulation, and personal responsibility, must be a societal substitute for the pheromones that our bodies developed for the very same purposes -- feeling trust in others.

Can "living trustworthiness" on a large scale be implemented?

It could, if lawmakers, business leaders, and citizens would each act as the unnamed character in the classic poem by Edgar A. Guest, "It Couldn't Be Done."

Update: 09/22/08 @ 5:30 pm:

Of all the articles I've read about implementing reforms, this one, sent to me by an MAI-rated real estate appraiser, makes the most sense, using a nuts-and-bolts approach taught by experience.

I highly recommend reading "Restoring Confidence: Learning From the S&L Crisis To Address the Subprime Mortgage Problem" (PDF, 8 pages) by Thomas Inserra, a former Resolution Trust Corporation trustee.

In a Financial Storm, What's Safe?

In a declining investment market facing further turmoil, the article posted on Bankaholic by J. Wu entitled "6 Safe Places to Invest Your Money" seemed quite appropriate. This article was posted on September 11, 2008 -- before Lehman Brothers filed for bankruptcy (PDF, 2 pages), and before Merrill Lynch submitted to purchase by Bank of America, both announced on September 15th in press releases.

I reproduce this brief article with permission granted in an email message from Helen Anderson. Of course, the article below provides a generic overview, and does not offer financial advice, either by them, the author, or me.

6 Safe Places to Invest Your Money

With the stock market in such a volatile state these days, it’s tempting to dig a hole in your backyard and bury your savings. This way you’d at least know where your money is at all times and how it’s performing for you. Luckily, there are still some secure places you can invest your money and you won’t have to be afraid of your financial future.

Here’s a list of some places you should consider investing your money with very minimal risk:

1. Open money market / high interest savings accounts.

Money market accounts are great ways to invest money for the short-term. If you need a quick turnaround these are stable ways to secure a return on your investment. The current average yield ranges from 0.50% to high as 4.00%. The bank will reinvest your money into short-term securities with that solid interest rate as further incentive. These accounts are liquid and usually FDIC insured. The only drawback is that some money market accounts may require a minimum balance.

2. Treasuries are safe.

T-bills are issued by the U.S. government and are considered very low-risk investments. They are fully backed by the government. You can choose the maturity date when you’re investment will be fully realized. Short-term T-bills are the safest investments with maturity dates of 13 or 26 weeks.

3.Certificates of Deposit.

CDs are available through your bank or broker and are also very safe investments. They have set maturity dates and you’re locked into your interest rate at the time of your investment. If you withdraw your funds early then you incur a penalty that can be costly.

4. 401k Plans.

If your employer offers a 401k plan then you’d be wise to invest in it. This is your money that you put in on a pre-tax basis. Within your plan you can choose what funds you want to invest in. Whether you’re willing to assume risk or need stable funds you’ll find them in your overall plan.

5. Mutual funds. There are many mutual funds that are tailored for those who have little appetite for risk. The mutual fund is monitored by a fund manager that invests your money in a number of stocks or other mutual funds. One drawback is that you need to pay administrative fees for the management of your fund.

6. Savings bonds. These bonds will offer a low return but also are virtually risk-free, which is a nice thought in this financial climate.

For another viewpoint, see "Four Really Safe Investments" (09/12/08) by Marc Courtenay posted by iStockAnalyst, which recommends treasury securities, collectibles, postage stamps, and "personal happiness."

One of the comments to Mr. Wu's article raised an important limitation on the safety of bank deposits, however: "The six ideas are good. Just watch your FDIC top limits…. I’m a former IndyMac customer who didn’t and have 28K not insured…."

That comment is relevant when you review the list of failed banks since 2000, including eleven in 2008.

Consider the article "Trick to Getting FDIC Insured Over $100K" (07/12/08) also by J. Wu, posted on Bankaholic, and explore the issue of FDIC coverage at the website of the Federal Deposit Insurance Corporation, including its posted advisories "Your Insured Deposits" and "Is My Account Fully Insured?"

Update: 09/17/08:

Since Monday, the financial news this week only got worse.

National Public Radio broadcast and posted many stories, including "Are Your Investments Safe" (09/17/08) by Wendy Kaufman:

Nervous investors had a lot to worry about this week, with financial services companies declaring bankruptcy, hoisting for-sale signs and calling for federal assistance. The stock market fell steeply in response.

How can investors protect their nest eggs? [See: Q&A: Shielding Your Nest Egg From Financial Woes (09/17/08), by Joshua Brockman posted by NPR]

Other analysis, accompanied by good general advice, was offered in NPR's posted article "History's Advice During A Panic? Don't Panic" (09/17/08) by Linton Weeks:

With the collapse of Lehman Brothers, the sale of Merrill Lynch and the bailout of insurance giant AIG, long-standing financial fortresses of America are imperiled and the stock market is like a Six Flags roller coaster.

In the midst of such upheaval, are there lessons to be learned from history? * * *

"This financial crisis is a serious one, the most serious since the 1930s," says Richard Sylla, who teaches the history of financial institutions and markets at New York University.

"But in many respects it fits the typical pattern of financial crises going back three or four centuries. Such crises seem disconcerting, even terrible to many people when they are going on, but they do come to an end and life goes on as before." * * *

At the end of his analysis, considering history, psychology, politics, and economics, what is his conclusion about weathering financial storms?

History teaches us to remain calm, Gordon says.

"Speculators can be badly burned" by dramatic up-and-down days, he says. "But investors — those in the market for the long term — won't be if they hang tight."

In a panic, he adds, don't panic.

Update: 09/18/08:

The Wall Street Journal posted "Your Cash: How Safe Is Safe?" by Jane J. Kim, who addressed FDIC, PODs, CDARS, and CDs in the search by investors for safe havens during a financial crisis.

As the financial system reels from one disaster after another, financial planners, estate planners and bank officials say they've been receiving calls from panicked savers concerned about the safety of their deposits. * * *

Proposed Fed Regs on Retirement Plans

On August 21, 2008, the U.S. Department of Labor issued a Press Release entitled "U.S. Labor Department proposes rules on investment advice exemption for 401(k) plans and IRAs" that announced publication the next day of proposed regulations to govern rendering of investment advice for 401(k) and IRA plans.

The U.S. Department of Labor today announced publication of two proposed rules under the Pension Protection Act (PPA) to make investment advice more accessible for millions of Americans in 401(k) type plans and individual retirement accounts (IRAs). * * *

"These proposals would give workers greater access to investment advice so that they are better equipped to manage and monitor their 401(k) plans and Individual Retirement Accounts," said U.S. Secretary of Labor Elaine L. Chao.

The PPA amended the Employee Retirement Income Security Act (ERISA) by adding a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice.

One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased, the other is through an adviser compensated on a "level-fee" basis.

Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive. * * *

The proposed regulations were published in the Federal Register on August 22, 2008 (Volume 73, Number 164) by the Employee Benefits Security Administration as document 49896–49923 [E8–19272] entitled Investment Advice; Participants and Beneficiaries (also available in PDF format as amendments to 29 CFR Parts 2550, 29 pages).

This is the "Summary" of the proposed regulations, as contained in the published notice:

This document contains proposed regulations implementing the provisions of the statutory exemption set forth in sections 408(b)(14) and 408(g) of the Employee Retirement Income Security Act, as amended (ERISA or the Act), and parallel provisions in the Internal Revenue Code of 1986, as amended (Code), relating to the provision of investment advice described in the Act by a fiduciary adviser to participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans).

Section 408(b)(14) provides an exemption from certain prohibited transaction provisions in ERISA with respect to the provision of investment advice, the investment transaction entered into pursuant to the advice, and the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate in connection with the provision of advice or the transaction pursuant to the advice.

Section 408(g) describes the conditions under which the investment advice related transactions are exempt.

Upon adoption, the regulations will affect sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans, as well as providers of investment and investment advice-related services to such plans.

The Press Release solicited comments on the proposed regulations, which are due by October 6, 2008:

Written comments on the investment advice proposals should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U. S. Department of Labor, 200 Constitution Ave., NW, Washington, D.C. 20210, Attn: Investment Advice Regulations.

The public also may submit comments electronically by email to e-ori@dol.gov, or through the federal e-rulemaking portal at www.regulations.gov.

On September 8, 2008, Blaine F. Aikin, the President and CEO of Fiduciary 360 LP, in Sewickley, PA, expressed concerns about the proposed regulations in an article entitled "Can brokers be fiduciaries?" posted on Investment News.

He evaluated the new DOL guidelines as "a problematic development."

Judging by newly proposed regulations on investment advice, it looks as if the Department of Labor is trying hard to engineer a sharp turn from the course established by Congress. * * *

[T]he DOL simultaneously proposed a new class exemption to allow commission-based registered representatives to become fiduciary advisers and give advice to participants and beneficiaries of participant-directed retirement plans and individual retirement accounts.

The new class exemption is a very big change that the DOL contended will "increase the variety of investment advice arrangements that are available and potentially lower the cost and promote the marketing of such arrangements, to the benefit of participants." * * *

The DOL has seized on the opportunity created by the act to expand on the idea that most investors need advice. It chose to do so in two ways.

First, it would extend the regulations to address advice given to IRA account holders.

Second, it proposed to allow conflicted financial services reps to give advice in competition with the fiduciary advisers contemplated under the act. * * *

Aikin noted that the first component is consistent with Congressional intention, but the second is not. He concluded: "Whether investors will in fact benefit hinges upon whether all fiduciary advisers will be able to adapt to the new rules, and the fiduciary standard of care they are designed to promote, quickly and effectively."

For Aikin's more generic recommendations regarding a fiduciary's conduct in an investment setting, see: "A warning light for fiduciaries -- What you can do about the increasing risk of litigation from disgruntled investor" (06/09/08).

"A nickel isn't worth a dime today."

-- Yogi Berra, quoted in "Yogi Berra's 7 secrets to building wealth" (01/02/08) by Karen Datko posted on MSN Money

"Restricted Management Account" Discount Ignored

On July 21, 2008, in its Internal Revenue Bulletin 2008-29, the IRS issued Revenue Ruling 2008-35, which addressed "whether an interest in a restricted management account (RMA) will be valued for transfer tax purposes without any reduction or discount for the restrictions imposed by the RMA agreement."

The IRS answer: Yes -- that is, no discount.

On July 28, 2008, fellow practitioner Robert Wolf, Esq., of Pittsburgh, PA, drew this Ruling to the attention of the readers of his emailed P & T Hot Tips. He gave me permission to post his comments, which I have edited somewhat.

Bob puts Revenue Ruling 2008-35 into context, and speculates about its effects:

Over the years we have heard many ideas suggested by esteemed estate planners that seem a little too good to be true, such as the Family Limited Partnership, where the donor could keep control of the family business but effectively transfer most of the value out of her estate, and many others.

One of these is the restricted management account that locks the client's funds away for a number of years, partly to give the investment manager the freedom to invest long term with no worries about investor bailouts, but also to make the assets subject to a substantial discount for federal gift and estate and generation-skipping transfer tax purposes.

Well, we know what the IRS thinks of the Family Limited Partnership deals. The cases brought by the IRS and decided in its favor have made planning with them more difficult and less advantageous.

Nevertheless, esteemed estate planners such as Roy Adams and a number of others have suggested that restricted management accounts ought to work. The argument is that restrictions on liquidity and transfer make their fair market value less than the fair market value of the underlying assets.

Well the IRS doesn't think so, and has issued Revenue Ruling 2008-35 that says so. The IRS ruled that no discount is allowable to such transfers, loosely analogizing the accounts to an IRA account, and also citing Internal Revenue Code Sections 2036 and 2703 for reasons to disregard the restrictions.

The underlying tax policy is that a taxpayer should not be able to create restrictions to his or her own property, and then cite those restrictions as to why the property is less valuable for transfer tax purposes, where a motivating reason for the restrictions is to reduce the transfer tax value of the property.

I have not noticed any cases on this topic, but I guess if you are using an RMA and expect to get a discount on a transfer or for estate or GSTT tax, you will have to get the Tax Court to overturn this Revenue Ruling. You won't get any discount from the IRS without it.

Bob commented accurately about the past promotion of restricted management accounts as a device proposed to obtain a valuation discount on a federal tax return. For example, see "The Restricted Management Account – An FLP Alternative" by Andrew T. Wolfe, CPA, JD, LLM; and "Restrictive Management Accounts" by Nathaniel E. Clement, which includes examples posed by noted estate planning attorney Roy Adams, of Chicago.

Read the sections of Revenue Ruling 2008-35, per its Table of Contents, to see how the IRS dissected, then declined, the arguments claiming a valuation discount on the Form 706 (Federal Estate Tax Return) for a decedent's assets previously placed into an RMA:

• ISSUE
• FACTS
• LAW
• ANALYSIS
• HOLDINGS
• DRAFTING INFORMATION

This is the Ruling's holding:

The fair market value of an interest in an RMA for gift and estate tax purposes is determined based on the fair market value of the assets held in the RMA without any reduction or discount to reflect restrictions imposed by the RMA agreement on the transfer of any part or all of the RMA or on the use of the assets held in the RMA.

Accordingly [in the example provide in the Ruling], A’s gift to B in Year 2 is valued at $10X, the full fair market value of the assets transferred into B’s separate RMA. Similarly, the amount to be included in A’s gross estate for estate tax purposes with respect to the RMA is $55X, the full fair market value of the assets in the RMA at A’s death.

Revenue Ruling 2008-35 was the subject of an article posted online by the law firm McGuireWoods, entitled "IRS to Disallow Valuation Discounts for Restricted Management Accounts" (July 21, 2008).

Whether one agrees or disagrees with [the] Service, this Revenue Ruling makes the use of RMAs as a substitute for family limited partnerships or limited liability companies far less attractive to customers and clients because of the Service’s repudiation of RMAs as a technique to obtain valuation discounts.

Individuals who have been considering RMAs will now want to consider family limited partnerships and limited liability companies. Despite the attacks made by the Service on family limited partnerships and limited liability companies in the last several years, many family limited partnerships and limited liability companies have withstood attacks by the Service. Thus, family limited partnerships and limited liability companies continue to be viable techniques for obtaining valuation discounts if they are established and managed appropriately.

Individuals currently holding RMAs will now want to pursue other techniques. Of course, if the term of the RMA cannot be shortened, using the assets in the RMA in other techniques may be impossible before the end of the term.* * *

For a graphic display of the immediate effect of Revenue Ruling 2008-35, see "Restricted Management Account (RMA)", where the text explaining the pros and cons of this proposed wealth saving device now is greyed-out, under a heading now annotated in bold letters: "TECHNIQUE ON HOLD" [Source of graphic above].

"I knew I was going to take the wrong train, so I left early."

-- Yogi Berra, per Wikiquote

Hedge Funds as an Investment, Pt. II

Fiduciaries investigating hedge funds as an investment should read the Press Release, dated April 15, 2008, issued by the United States Treasury entitled "PWG Private-Sector Committees Release Best Practices for Hedge Fund Participants" (HP-927).

It announced release of a report, which should become "required reading" for any fiduciary contemplating hedge fund investments: the "Report of the Investors' Committee to the President's Working Group on Financial Markets" (PDF format, 205 KB, 63 pages).

I asked in yesterday's posting Hedge Funds as an Investment, Pt. I, "What should a fiduciary know about hedge funds?" This Report contains the answers.

The Press Release summarized the importance of the Report:

Two blue-ribbon private-sector committees established by the President's Working Group released separate yet complementary sets of best practices for hedge fund investors and asset managers today, in the most comprehensive public-private effort to increase accountability for participants in this industry. * * *

The Press Release (also available in PDF format here) noted the fast-paced, high-level, top-priority nature of the study that led to the Report's issuance:

The PWG tasked the committees, selected in September 2007 and comprised of well-respected asset managers and investors, with collaborating on industry issues and developing a set of best practices for their respective groups of stakeholders. Their work was based on the PWG's Principles and Guidelines Regarding Private Pools of Capital issued in February 2007, which sought to enhance investor protections and systemic risk safeguards. The best practices may be viewed at the committees' websites, www.amaicmte.org.

The PWG includes the heads of the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The best practices for the asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. * * *

During that process, on September 17, 2007, a Pennsylvanian, Blaine F. Aikin (managing partner and chief knowledge officer of fi360, of Sewickley, PA), published an article in the "international newspaper of money management", Pensions & Investments, also posted online, entitled "Hedge funds present fiduciary hurdles"?

His excellent article began with a caution to fiduciaries regarding hedge funds:

While it might be true that no investment is inherently imprudent, some start with a presumption of guilt until proven innocent.

Hedge funds fit into this category because of the inherent hurdles they present to fulfilling a fiduciary’s duties to their client. * * *

He then proposed a five-part inquiry by any fiduciary who contemplated a hedge fund investment:

1. Are you permitted to hold this type of investment?

2. Do you believe financial markets are inefficient and that such inefficiencies are exploitable?

3. Can you adequately evaluate the positions held in the hedge fund investment and the associated risks of those positions?

4. Are the fees and expenses of hedge funds fair and reasonable?

5. What recourse do you have if something goes wrong?

After explaining the risks underlying, and reasons for, each inquiry, he offered this advice:

Only after you have considered these questions and conclusively proven that your fiduciary duties are being met can you feel comfortable in selecting hedge fund investments.

Fiduciaries operate in a special relationship of trust and legal and ethical responsibility for managing the money of others. When it comes to hedge fund investing, the obligations attendant to the fiduciary role point directly to the line of inquiry presented above.

In my view, the hurdles that must be cleared to justify making hedge fund investments are too high for most fiduciaries. Those that do decide to proceed down the hedge fund path should be prepared to demonstrate that they did so properly by having a compelling case for their conduct prepared in advance.

When, on April 15, 2008, U.S. Treasury Secretary Henry M. Paulson, Jr. made remarks upon the issuance of the Report, reproduced in a Press Release, entitled "Secretary Paulson Opening Remarks at Release of Best Practice Recommendations by PWG Private Sector Committees" (HP-926), he mirrored the need for accountability regarding private pooled investments, including hedge funds:

Last September, experienced industry professionals from some of the most respected institutions agreed to serve on two new committees to address market issues and develop "best practices" for private pools of capital – one from the perspective of investors and one from the perspective of asset managers.

The President's Working Group encouraged the committees to use the PWG principles and guidelines as the foundation for their best practices, and they have done so. As we said when announcing these committees --- we want the world's highest investor protection standards; we want to guard against systemic risk and keep the United States the most competitive financial marketplace in the world. * * *

The Press Release (HP-926) noted key components of the Report:

The best practices for investors include a Fiduciary's Guide and an Investor's Guide.

The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio.

The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. * * *

Both best practices documents recommend innovative and far-reaching practices that exceed existing industry standards. The recommendations complement each other by encouraging both types of market participants to hold the other more accountable.* * *

The Executive Summary of the Report, reproduced (along with the Report's "Table of Contents") by Asiaing online, noted its importance to private investors, institutional investors, and fiduciary investors:

Thousands of institutional and individual investors meet the legal requirements to invest in hedge funds, but it is not always appropriate for them to do so.

Prudent evaluation and management of hedge fund investments may require specific knowledge of a range of investment strategies, relevant risks, legal and regulatory constraints, taxation, accounting, valuation, liquidity, and reporting considerations.

Fiduciaries must take appropriate steps to determine whether an allocation of assets to hedge funds contributes to an institution’s investment objectives, and whether internal staff or agents of the institution have sufficient resources and expertise to effectively manage a hedge fund component of an investment portfolio. * * *

Are you an investor or a fiduciary who is considering a hedge fund investment, or do you advise one about such an investment? Then you must read the Report.

Update: 07/29/08:

On July 29, 2008, The Wall Street Journal's "Wealth Report", noted in a posting entitled "Wealthy Investors Cling to Hedge Funds" that "[d]espite all the bad press about hedge-fund performance recently, a Bank of America survey found that hedge funds are still popular with the rich."

The survey, of 400 clients with $3 million or more in investible assets, found that more than half of those with hedge-fund investments were “satisfied” with the funds’ performance.

That compares with an approval rating of just 30% for traditional investments such as stocks and bonds. Other alternatives also fared better than stocks and bonds: a 41% approval rating for venture capital, 41% for real-estate, and 35% for private equity. * * *

So the poor performance of hedge funds beats the horrid performance of stocks. The survey also found that investors who had held hedge funds the longest were the most satisfied. Those who had been investing in hedge funds for 10 years or more were twice as likely as those with less experience to be “extremely satisfied” — probably because they had all those heady days of double-digit returns to factor in to their assessment.

The critical question is whether the rich will keep putting money into hedge funds. Funding for new funds is drying up: In the U.S. the number of new funds has dropped by half. It’s about the same in Europe. * * *

Update: 09/06/08:

NBC News broadcast a Dateline NBC segment by correspondent Dennis Murphy on Friday, September 5, 2008, at 10:00 p.m., entitled "Mystery of the missing millionaire."

A wealthy hedge fund manager whom the rich and powerful trusted with their fortunes suddenly disappears – and the money was gone too. Turns out, all along he'd been playing a dangerous game with very high stakes. Dennis Murphy reports.

The description of the investigative report explores "hedge funds" and their managers, and reinforces some of the concerns expressed in recent years:

This giddy era, before the market’s recent swan dive, was dubbed “the new gilded age” and some of the young men becoming as rich as any Rockefeller or Andrew Carnegie of days past were masters of something known on Wall Street as a "hedge fund."

Top hedge fund managers have been reported to make anywhere from $100 million to a billion dollars a year. They do it by making already wealthy people and institutions even richer.

Someone who wanted in on the hedge fund action in the worst way was Samuel Israel III. He was a Wall Street guy who’d worked his way up here and there in the ‘80s and ‘90s as a trader. * * *

A hedge fund, like the one Sam Israel was starting up, is like a private club for wealthy investors. It usually takes a million dollars to get in the door.

And the very best hedge fund managers are a high priesthood of brilliant traders. They place complex bets that can pay off handsomely, even when others are losing their shirts. * * *

The website for the recent broadcast segment referenced a previous helpful MSNBC commentary, "What is the deal with hedge funds?" (08/27/07), by John W. Schoen, Senior Producer.