Wednesday, December 30, 2009

Congressional Delay on Estate Tax Creates Unexpected Consequences - from today's WSJ

Rich Cling to Life to Beat Tax Man


Nothing's certain except death and taxes -- but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules.

Starting Jan. 1, the estate tax -- which can erase nearly half of a wealthy person's estate -- goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life's most trying episodes only more complex.

On Jan. 1, the one-year halt to the estate tax begins. And never before has so much money hinged on the time of death, WSJ's Laura Saunders reports in a News Hub extra.

"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"

Currently, the tax applies to about 5,500 taxpayers a year. So, on average, at least 15 people die every day whose estates would benefit from the the tax's lapse.

The macabre situation stems from 2001, when Congress raised estate-tax exemptions, culminating with the tax's disappearance next year. However, due to budget constraints, lawmakers didn't make the change permanent. So the estate tax is due to come back to life in 2011 -- at a higher rate and lower exemption.

To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. "We have done this at least a dozen times, and have gotten more calls recently," says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.

Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.

"Whenever he wakes up," says his lawyer, "He says: 'What day is it? Is it Jan. 1 yet?'"

Estate-tax experts didn't expect Congress to allow the tax to lapse, and are flabbergasted that it is actually happening. "All fall when I gave speeches, I said I was willing to bet anyone in the room $10 that we would have an estate-tax extension by the end of the year," says Thomas Ochsenschlager, head of taxes for the American Institute of CPAs. "Thank goodness I didn't have any takers," he says.

Now, all bets are off. "If Congress couldn't do it this year, why will they be able to do it next year?" says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse "congressional malpractice."

Under current laws in effect until the end of this year, the size of the exemption is $3.5 million per individual or up to $7 million per couple. The tax is slated to disappear entirely on Jan 1.

But estate planning in 2010 will be complicated by a new twist: a complex tax on capital gains, levied at death, that will affect a broader swath of taxpayers. The estate tax is scheduled to return in 2011 at a 55% rate with an exemption of slightly more than $1 million.

The looming lapse of the estate tax is presenting some families with unprecedented ethical quandaries.

"I've been practicing for more than 30 years, and never has the timing of death made such a financial difference," says Dennis Belcher, president of the American College of Trust and Estate Counsel. "People have a hard enough time talking about death and addressing estate planning without this."

Congress could pass an estate tax next year and make it retroactive to Jan. 1. Whether that would withstand a court challenge is a subject of debate in the estate-planning world. In the past, when Congress has passed retroactive laws, congressional leaders often issued formal statements of intent in advance.

That hasn't happened this time. The main statement has been a verbal one by Senator Max Baucus (D., Mont.) on the floor of the Senate, not a joint declaration by leaders from both parties.

In addition, the composition of the Supreme Court has changed, and some financial advisers believe the court might not again bless a retroactive law. "People with the means to fight against a retroactive law will die, and someone will challenge it and we might not know the answer for years," Mr. Belcher says.

As part of the changes taking effect in January, Congress also dramatically lowered the taxes on gifts to grandchildren. But all the uncertainties -- Will the law be changed? Will it be retroactive? -- are forcing family legal advisers to craft various provisional financial-planning strategies that can be undone later if the rules do change.

The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it's legal, might allow his estate to dodge the tax.

His answer: Yes.

Monday, December 28, 2009

More on the Estate Tax Law in 2010

From today's NY Times - I suspect that Congress may make some changes in 2010:

December 28, 2009

An Estate Tax Mess

For much of the last eight years, the majority Republicans pushed through tax break after tax break that mostly benefited the wealthy. Now in the majority, Democratic lawmakers have failed to stop yet another tax benefit for the richest of the rich from taking effect in 2010.

The tax in question is the estate tax, which President George W. Bush and Republicans and some Democrats in Congress were determined to cut from the day Mr. Bush took office in 2001. Even then, the tax hit only a tiny portion of Americans, but estate-tax foes sold Americans a myth about a “death tax” that prevented average people from passing on hard-earned money.

The result was a measure that made big reductions in the federal estate tax, phased in through 2009, and then repealed the tax, for one year only, in 2010. After that, the tax is to be reinstated at pre-2001 levels. Writing the law in that convoluted way helped to mask the true costs. It also created an untenable situation in which a one-year repeal is followed by reinstatement.

There was a giant catch, as well. In 2010, the one-year repeal of the estate tax is coupled with a new tax that will hit smaller estates. That tax could affect up to an estimated 70,000 estates next year, compared with the current estate tax law, which applies to about 5,500 estates annually. If that sounds wacky, it is. It would also be harmful to many small family businesses, precisely the group that estate-tax cutters say they want to help.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt, so there is no reason to reduce or repeal the tax.

In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But when the estate tax is repealed in 2010, the capital gains tax will kick in once the gains in an estate exceed $1.3 million. There’s an extra $3 million exemption for assets left to a spouse.

The bottom line is this: there will be many more losers than winners under estate-tax repeal, and the losers will be among Americans who are farther down the wealth ladder.

Earlier this month, the House voted to continue the estate tax permanently as it is this year, with its more-than-generous exemptions and no tax on the sale of inherited assets.

The Senate has failed to act. Republicans refused to consider the House bill or even a two-month delay to allow time for debate. Democrats correctly refused to consider a proposal to increase the exemption to $10 million for couples and $5 million for individuals, an unconscionable giveaway to the wealthy at a time when ordinary Americans are suffering. Compared with keeping the 2009 law, it would cost $250 billion more over 10 years.

Democratic Senate leaders have said that in 2010, they will seek to restore retroactively the 2009 estate tax rules. Fairness, progressivity and the need for revenue demand just that. But failure to act in a timely way is a disturbing display of intransigence and failed leadership. That bodes ill for the more daunting tax debates next year, when the rest of the Bush tax cuts are set to expire.

American taxpayers need — and deserve — better.

Copyright 2009 The New York Times Company

Thursday, December 24, 2009

Roth IRA Conversions - More Questions and Likely Candidates for Conversion

Other questions:
  1. Most calculations don't include the effect of state income taxes;
  2. Social security benefits could be cut. For example, beneficiaries under full retirement age have $1 in benefits deducted for each $2 earned above an annual limit. That limit in 2009 is $14,160. A large conversion to a Roth could push incomes well above the Social Security limit.
For certain investors the conversion does seem to make sense. For example, for estate planning, an IRA owner with a large balance may wish to convert to a Roth, and pay the taxes out of other funds. This reduces the taxable estate, and gives his heirs a tax-free "gift" since they would inherit a Roth IRA on which taxes have already been paid.

Another situation could be an IRA owner who has a fairly aggressive investment portfolio with concentrated positions in one or two holdings. In this case, the owner could set up two Roth IRA's, and convert. Someone who converts has until October 15, 2011, to decide whether to recharacterize their new Roth IRA's back to traditional IRA's. If one of the Roth IRA investments soar in value, and the other goes lower, the owner keeps the one Roth IRA with the appreciated asset, and switches the other one back to the traditional IRA. Of course, the owner still has to pay estimated taxes along the way, but these could be recovered when the final taxes are filed.

The Time Value of Money and Roth IRA 2010 Converstions

The more I get into this discussion with clients, attorneys and accountants, the less clear the answers become. This post doesn't provide any answers, but starts a series of posts that should help in the discussion.

Richard Savoy, one of our senior trust attorneys pointed out, this change in Roth IRA eligibility was originally proposed by the government as a way to raise revenue - not as a way to simply provide a benefit to hardworking savers and investors. True, for certain people, converting makes sense, but there is a cost.

Take for example someone who is 50 years, working, and does not plan on taking any distributions until she turns 70 1/2, i.e. she has 20 years to go before needing the money. She has a significant traditional IRA, and is considering converting.

In the media, the conversion is a "no-brainer". Pay the tax today, let the account grow for 20 years, and enjoy tax-free withdrawals for the rest of her life.

But ignored in this conversation are two factors. First, even if she takes advantage of the deferred tax proposal in the bill (taxes paid on a conversion done in 2010 are due in two installments, in tax years 2011 and 2012), she is still paying taxes using today's money, not future funds. In other words, this calculation is ignoring the time value of money.

For example, let's just say she takes the funds to pay the tax due on the conversion from her municipal bond account. If the overall yield on the portfolio is 3% (using double-tax free municipal bonds), $100 invested at 3% for 20 years grows to $180 through compound interest. Paying the taxes today ignores this.

The second feature not considered is the simple fact that even moderate inflation rates over the next 20 years reduces the "value" of the funds used to pay taxes. In other words, let's just say inflation runs at 2% pa for the next 20 years. This means that the "real" (i.e., inflation-adjusted) value of a dollar would be nearly 50% less vs. today's value.

Wednesday, December 23, 2009

More on the Fed and the Yield Curve

From this AM's Clusterstock blog (and, I promise, no more yield curve posts this week!)

Intra-Family Loans and Estate Planning

From a December 23, 2009, Bloomberg article:

Loans at 0.57% to Family Members Could Save Millions on Taxes

By Alexis Leondis and Margaret Collins

Dec. 23 (Bloomberg) -- Estate planner Richard Behrendt helped his client make $5 million loans to each of his children this year, avoiding gift taxes of 45 percent and saving the kids as much as $837,000 apiece in interest.

Rates for so-called intra-family loans have declined as much as 53 percent since 2008. “The timing of it was clearly tied to the rock bottom of these rates,” said Behrendt, who works for Robert W. Baird & Co., based in Milwaukee, Wisconsin.

The loans may be the perfect holiday gift to help relatives this year, according to Carol Kroch, head of wealth and financial planning at Wilmington, Delaware-based Wilmington Trust. For wealthy taxpayers, they can be used for estate planning purposes, since gains earned will be free of estate and gift taxes.

That’s because low interest rates and depressed asset values mean there’s a greater possibility that investments purchased with an intra-family loan, such as stock, will appreciate more than the loan’s cost, Kroch said.

The rate for an intra-family loan made in January 2010 for less than three years is 0.57 percent. The rate is 2.45 percent for a loan of three years to nine years and 4.11 percent for a loan of nine years or more, according to the Internal Revenue Service, which sets the rates monthly. That compares with an average rate of 10.55 percent for a personal bank loan in the New York metro area and 12.51 percent for a credit-union loan, based on data from

“The chances are they are going to go up, the only question is how fast or how soon,” said Bill Fleming, managing director of New York-based PricewaterhouseCoopers’s Private Company Services Group, referring to rates for intra-family loans.

Tax Savings

Behrendt’s client, who has a net worth of $100 million, loaned each of his three children $5 million for nine years. The children invested the money in a balanced portfolio seeking at least a 5 percent return, said Behrendt, a former estate tax attorney for the IRS.

Any amount above the 1.65 interest rate, which was the February rate, should pass to the client’s children free of estate and gift taxes, he said. The Standard & Poor’s 500 Index has increased 36 percent since February as of yesterday.

The borrowers also saved on interest costs because of the low rates. Each will owe $82,500 in interest annually, compared with $175,500 if the loan had been made in February 2008 when the rate was 3.51 percent.

Current federal law taxes estates exceeding $3.5 million for an individual or $7 million for a married couple at as much as 45 percent. Any gift to an individual of more than $13,000 annually may also be taxed as much as 45 percent with a $1 million lifetime exclusion per donor, according to the IRS.

Estate Tax

The estate tax is scheduled to expire for a year on Jan. 1 under the provisions of a tax-cut bill enacted in 2001. It comes back in 2011, taxing estates valued at more than $1 million as much as 55 percent. Senate Finance Committee Chairman Max Baucus, Democrat of Montana, has vowed to extend the estate tax in 2010 retroactively.

Lenders who are subject to the estate tax can use the loans to reduce the value of their estates because the appreciation of any investment made with the loan above the IRS rate accrues outside of the lender’s estate, said Larry Richman, chair of private wealth services at Neal, Gerber & Eisenberg LLP in Chicago.

Taxpayers with family businesses may also want to consider intra-family loans to help with the sale of the business to family members, according to David Kron, a partner in the Fort Lauderdale office of law firm Ruden McClosky.

Parents can loan their children money to buy the business and the children can repay using profits from the firm. The future appreciation and any income of the business beyond the loan amount are then considered part of the children’s, not the parents’, estate, Kron said.

‘Low-Tech’ Tool

Intra-family loans are a “low-tech” way to give money to family members because they’re easy to set up and are appropriate for anyone regardless of net worth, said Deborah L. Jacobs, author of “Estate Planning Smarts: A Practical, User- Friendly, Action-Oriented Guide,” which was published this month.

Family members should be aware the loans must be repaid in full with interest at the rate specified by the IRS. If the borrower doesn’t repay, it may be considered a gift subject to the gift tax, said Jacobs, who is based in New York.

Lenders should also consider the income tax they’ll owe on the interest received with repayment of the loan, said Kron.

‘Thanksgiving Firecracker’

Loaning money to family members may create relationship issues, said Dan Deighan of Melbourne, Florida-based Deighan Financial Advisors Inc.

“It’s like throwing a firecracker on the Thanksgiving dinner table when you bring money issues into the family dynamic,” Deighan said.

Borrowers can get “sloppy with repayments,” which is why setting up an automatic bank transfer for payments is recommended, said Fleming of PricewaterhouseCoopers.

Don Albritton, a 61-year-old executive in Longwood, Florida, gave his son $260,000 to buy a house through a 30-year intra-family loan four years ago. Albritton ended up taking the house back after his son was unable to sell it without taking a loss. Home prices have declined 17 percent since January 2005, according to the S&P/Case-Shiller index for 20 metropolitan areas.

“I’m not discouraged,” Albritton said. “I’m getting ready to make him another loan now.”

Last Updated: December 23, 2009 00:01 EST

Tuesday, December 22, 2009

Social Security Planning Guide

Good basic outline from Boston College's Center for Retirement Research:

Interesting Article on LinkedIn

Clock Ticks on Estate Tax

Post from FA Magazine:

December 22, 2009
Clock Ticks On Estate Tax
(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.

Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.

There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago.

Anyone who turns to a professional for help with all of this is likely to find advisers still sorting through the answers. A big question is whether Congress will enact a retroactive tax, and how it would play out.

Catherine G. Schmidt, an estate-planning attorney and partner at the law firm Patterson Belknap Webb & Tyler LLP in New York, says her firm is working in what could be a narrow window to help clients take advantage of the repeal and avoid a retroactive tax. But, she adds, strategies to this end "are not something anybody already has in their pockets."

Indeed, most advisors truly believed Congress would never let it come to this.

"The estate-planning community is astounded that we've reached this point," said Schmidt.

Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011. President Barack Obama blocked a short-term extension Wednesday, but Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try to move legislation early in 2010 that ensures there won't be a window where wealthy estate owners who die will escape the tax.

For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. The step-up values inherited assets for tax purposes at what they were worth when the person who bequeathed them died. Starting January 1, though, assets will be valued at the original cost of the asset.

So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.

Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.

If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.

As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.

Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. The high court, in fact, has been upholding retroactive tax increases since as long ago as 1874.

Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

Q&A on Roth IRA Conversions

From the December 20. 2009 Wall Street Journal

Roths: Your Questions, Our Answers

Our recent column about tax rules that are about to give more people access to a Roth individual retirement account prompted many questions from readers.

Starting Jan. 1, those with modified adjusted gross incomes of more than $100,000 will, for the first time, be allowed to move assets held in traditional IRAs to Roth IRAs.

[Encore] Marc Rosenthal

Individuals with modified adjusted gross incomes of $120,000 or more -- and couples with $176,000 or more -- will still be barred from contributing to Roths. But anyone willing to pay the income taxes due upon converting assets held in a regular IRA to a Roth will be able to funnel retirement savings into a Roth, where it can grow tax-free.

Here are answers to some reader questions:

Q: Can you convert an inherited IRA, a SEP IRA, or a 401(k) account?

A: You can't convert an inherited IRA. But you can convert a 401(k) account and a Simplified Employee Pension, or SEP, IRA, which is typically offered by small-business owners. If you are still working for the company that sponsors your 401(k), ask whether the plan allows "in service" distributions, says Ed Slott, an IRA consultant in Rockville Centre, N.Y. If so, you can convert this money to a Roth.

Q: Will Roth conversion taxes trigger the alternative minimum tax?

A: Those who get hit with the alternative minimum tax, or AMT, typically claim deductions that are high, as a percentage of their income. Since you must pay income taxes on the IRA money you convert, your taxable income goes up.

So, people already subject to the AMT may find that converting causes their income to rise by enough to get them out of paying the AMT, Mr. Slott says. (The IRS requires taxpayers to pay the higher of their regular income tax or the AMT, a parallel federal income-tax system that operates under many different rules than the regular system.)

But it can work in reverse. A small conversion, for example, might raise your taxable income enough to make you subject to the AMT. If a person is hit by the AMT, he or she might want to convert more of their IRA dollars, Mr. Slott says. That's because in the AMT, the maximum tax rate is 28%. Mr. Slott notes that, for many of his clients, that's a lower tax rate than they would pay on converted money in a year in which they aren't hit by the AMT.

Q: We have capital losses. Can we use them to offset taxes incurred upon converting?

A: Gains and losses on capital assets, which are typically stocks and bonds, can offset one another. So, if you have $30,000 of capital losses, you can use them to offset up to $30,000 in capital gains. But in a given year, you can only use up to $3,000 of capital losses to offset your ordinary income. As a result, if you convert to a Roth, you can only use capital losses to offset up to $3,000 of that income. But you can carry forward unused losses to offset income in future years -- though the $3,000 annual limit will still apply.

Q: I have been contributing the maximum to a traditional IRA on an aftertax basis. If I convert it to a Roth, will I have to pay taxes?

A: Under the "pro rata" rule, you can't convert only your nondeductible contributions. To estimate your potential tax bill, first calculate your "basis."

Expressed as a percentage, this is the ratio of two numbers: the aftertax contributions you have made to your IRAs, and the total balance in all your IRAs. For example, if you contributed $40,000 aftertax to your IRAs and have a total of $250,000 in those accounts, your basis would be 16% (or $40,000 divided by $250,000). So, if you plan to convert $100,000 to a Roth, 16% of that $100,000 (or $16,000) could be transferred tax-free.

Q: How do I determine what my pretax and aftertax contributions have been?

A: Most 401(k) plans will keep track of this for you, Mr. Slott says. But when it comes to IRAs, you're supposed to file Form 8606 in years when you make nondeductible contributions. On the form, there's a line that requires you to add the current year's nondeductible contribution to those from prior years.

If you haven't filed this form, check your brokerage or bank statements for the years you made IRA contributions. Then, look at your tax returns from those years. If you don't see an IRA deduction, then you can probably assume you made a nondeductible contribution, he says. Don't bother looking back further than 1987 since that was the first year nondeductible contributions were allowed.

Q: If I am 59½ or older, can I withdraw contributions tax- and penalty-free within five years of a Roth conversion?

A: Yes. Once you are over 59½ , the only reason you would need to wait five years is to withdraw the earnings tax-free.

Q: Could Congress decide to tax earnings that build up in Roth IRAs?

A: Yes. But the odds are greater that Congress would raise tax rates, Mr. Slott says. Of course, higher tax rates would be bad news for traditional IRA owners -- who are required, after age 70[frac12], to start withdrawing money from their IRAs and paying income taxes on the distributions.

Because Roth conversions -- and the taxes due on those conversions -- bring money into the Treasury, Mr. Slott says he believes Congress likely would be reluctant to close down that money maker.


Write to Anne Tergesen at

What's The Yield Curve Telling Us?

Not as much as you might read, I believe.

In academia, there are three theories to explain the shape of the yield curve. One is "future expectations"; for example, bond investors who expect higher inflation in the future demand higher yields for longer maturity. This is the one that the media is focused on.

A second theory is "liquidity preference". That is, investors would prefer shorter maturities to longer maturities since they might need the funds for other purposes. Yields have to be higher on longer maturity bonds, therefore, in order to induce investors to tie up their funds longer.

The third theory is "market segmentation". There are natural buyers for certain maturity segments - e.g. banks like shorter maturities, pension funds like longer maturities - and the demand from each area determines yields.

I would add a couple of more explanations. When the Treasury is issuing large amounts of debt, yields tend to back up to attract buyers. However, once the auctions are complete, other factors (see above) will drive the bond market.

The final explanation is one that, thankfully, we have not had to focus on much in this country; namely, investor concerns over defaults. Greek bond yields, for example, have soared in recent weeks as investors are concerned about the possible default or renegotiation of Greek debt. Other countries - Spain, Ireland, Italy - have also seen rising yields in the face of weak inflation pressures due to rising default risk.

The US yield curve shape - the spread in yields from 2 year Treasury notes to 10 year Treasurys - is as wide as it has been in at least 24 years. Investors are huddled in the short maturities as there is a "100% certainty" (according to a recent Merrill Lynch portfolio manager poll) that interest rates will be higher a year from now. I am not so certain about this - inflation is muted, the economic recovery is muted, and the Fed seems "on hold" until at least the middle of next year - but of course I might be missing something.

I think longer maturity rates have been rising for a couple of reasons. One is the growing unease that investors are having with huge government deficits worldwide, especially in the US (recall that Congress just raised the US debt ceiling to nearly $13 trillion). And, second, at year end there is little appetite for portfolio managers to add to interest rate risk.

I'll be keep a close eye on the bond market in the coming weeks. A couple of years ago the debt market was the first to realize the financial crisis that was brewing. Then, earlier this year, the corporate bond market rebounded before stocks started their huge rally this past March.

One final thought: If the bond market is focused on inflationary pressures, how come gold prices keep falling?

Monday, December 21, 2009

Information Tech and Medical Reform

This article, which appeared in the December 12, 2009, Wall Street Journal is good illustration of both the difficulties and opportunities of reducing medical costs through more effective use of technology.

Warren Buffett - "A Year of Investing Dangerously"

Warren Buffett, of course, is easily the best investor of our generation, if not all-time. This article - which appeared in the December 12, 2009, Wall Street Journal is a worthwhile read.

One key "takeaway" is that sometimes the best investments are the ones you don't make. Buffett avoided alot of potential disasters over the last year (e.g., Lehman Brothers) while picking up some terrific deals (e.g. Goldman Sachs) in the same industry.

Interview with Paul Volcker - November 2009

Now that I've figured out (I think!) how to post more messages on my blog, I thought I would add a few posts that I've seen over the last month or so that I found interesting.

I have respected Paul Volcker for many years. He was, in my opinion, one of the most courageous public figures in his almost single-handed campaign to bring down inflation in the early 1980's. His work - as difficult as it was at the time - set the stage for the strongest capital markets performance that we have seen as a nation since our founding.

In any event, I thought this interview from the German publication Der Spiegel is worth a read:

12/12/2009 04:25 PM

Interview with US Economic Recovery Advisory Board Chair Paul Volcker

America Must 'Reassert Stability and Leadership'

Paul Volcker, 82, is one of US President Barack Obama's leading economic advisors. SPIEGEL spoke with him about the economic challeges facing the US, whether new taxes are needed to address public debt and how America can return to a position of economic leadership.

SPIEGEL: Mr. Volcker, you grew up during the Great Depression. What sort sort of childhood memories do you have from those difficult times?

Volcker: Well, my memories are quite limited. My father had a stable job. He was a city manager at that time. We weren't wealthy, just middle class living in a growing suburb of New York, and that was not in the middle of depressed America. I know that my mother at that time did not let me take a part time job and she often said that other people needed the job more than I did.

SPIEGEL: Can the current situation be compared with the Great Depression?

Volcker: I remember there were people, beggars and tramps as we called them, who wanted to be fed. So it's true, today we also have people who are relying on food stamps and other payments but we are a long way from the Great Depression. We are in a serious, great recession. Today we have 10 percent unemployment, but at that time it was more like 20 or 25 percent. That's a big difference. You had mass unemployment.

SPIEGEL: But even though there are still more people being fired than hired, the Chairman of the Federal Reserve Ben Bernanke is saying that the recession is technically over. Do you agree with him?

Volcker: You know, people get very technical about these things. We had a quarter of increased growth but I don't think we are out of the woods.

SPIEGEL: You expect a backlash?

Volcker: The recovery is quite slow and I expect it to continue to be pretty slow and restrained for a variety of reasons and the possibility of a relapse can't be entirely discounted. I'm not predicting it but I think we have to be careful.

SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?

Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis.

SPIEGEL: As chairman of the Economic Recovery Advisory Board, you advise President Barack Obama on how to prevent such a recurrence. Is he following your guidance?

Volcker: We have various working groups that work on and make recommendations on particular problems like retirement programs and social security. We made some recommendations on financial reforms which were not accepted, but that is part of the game. The president is more eloquent than I can be on these issues. Getting it done as compared to talking about it is a problem, but we have some suggestions along that line.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

SPIEGEL: To get the recovery to the point where it is right now has cost a lot of money. National debt will probably reach $12 trillion in 2019. Just serving the debt costs $17 billion a year -- at least according to this year's forecast. That's difficult to sustain.

Volcker: You've got to deal with the deficit and you've got to deal with it in a timely way. Right now, with the unemployment rate still very high, excess capacity is still evident, and the economy is dependent on government money as we said. We are not going to successfully attack the deficit right now but we have got to prepare for attacking it.

SPIEGEL: Should Americans prepare themselves for a tax increase?

Volcker: Not at the moment, but I think we would have to think about it. The present tax system historically has transferred about 18 to 19 percent of the GNP to the government. And we are going to come out of all this with an expenditure relationship to GNP very substantially above that. We either have to cut expenditures and that means reducing entitlements and certainly defense expenditures by an amount that may not be possible. If you can do it, fine. If we can't do it, then we have to think about taxes.

SPIEGEL: What kind of taxes do you have in mind?

Volcker: Maybe we should talk about energy taxes, which could be a big revenue producer.

SPIEGEL: The Harvard Professor Niall Ferguson has written a Newsweek cover story where he essentially argues that America is in great danger due to steep debt, slow growth and high spending. Do you think it is overblown?

'We Have Gotten a Wake-Up Call'

Volcker: The challenge is real. That is the kind of threat that we want to deal with and reassert stability and leadership. I grew up in an environment in which the United States was leading, was a pole of strength.

SPIEGEL: At that time, America was the biggest exporter in the world and not the biggest importer. The America you are referring to was the biggest lender in the world and not its biggest borrower.

Volcker: That is correct. And we don't perhaps have to get all the way back there, but we have to get back in an area where there is confidence in the stability and the authority of the United States. I think we can do that but we have a challenge, we have gotten a wake-up call. There is concern in our recovery advisory group about how to rebuild the competitiveness of the United States, which inevitably means rebuilding, in part, the manufacturing sector of the economy.

SPIEGEL: What part of the manufacturing sector do you envision?

Volcker: I think there are a lot of opportunities in the so-called green economy for taking leadership. On the technical side, I mean technology development, research development, the US is doing ok, but when it comes to manufacturing some of this stuff, somehow the Germans do it all!

SPIEGEL: And a lot of Americans try to blame the Germans for this, saying that we are depending too heavily on the export industry.

Volcker: I must say, I admire Germany in this situation even with its high costs. In some ways, I think the labor cost is higher in Germany than it is in the United States but you can somehow maintain that export edge. You are dedicated to exporting, we are dedicated to financial engineering and it hasn't worked out too well. I wish we had fewer financial engineers and more mechanical engineers. Tell me the secret of how the Germans keep this going.

SPIEGEL: Maybe the reason is that the Germans don't trust the American boom and bust economy with its dedication to fast money.

Volcker: I think part of it is the psychological. The young, ambitious Germans realize that export industry and heavy engineering is the German competitive advantage. The best Americans don't even think about that. We have the Silicon Valley and that whole kind of high tech industry is still our strength but we need something broader than that too.

SPIEGEL: Outsourcing and off-shoring have been the key words of the last decades. You don't think that the times of "made in America" are over forever?

Volcker: That has been the mentality and we have to change that somehow. I think it's self-correcting in part. The glamour of going to Wall Street is not as great today as it was a few years ago.

SPIEGEL: Are you sure? The Wall Street businesses are doing well. The big bonuses are back.

Volcker: It's amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It's hard to deny that we need some forward looking financial reform.

SPIEGEL: In Germany, the government, but also the Bundesbank, is still waiting for a clear American approach toward that goal.

Volcker: I grew up in a world in which American leadership was important and, I thought, constructive. It's more difficult now because we are not as relatively strong as we used to be. If you are right in saying that somebody is waiting for our voice, I hope we can speak clearly.

SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?

Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.

SPIEGEL: Banking should become boring again?

Volcker: Banking will never be boring. Banking is a risky business. They are going to have plenty of activity. They can do underwriting. They can do securitization. They can do a lot of lending. They can do merger and acquisition advice. They can do investment management. These are all client activities. What I don't want them doing is piling on top of that risky capital market business. That also leads to conflicts of interest.

SPIEGEL: But the American government seems to have lost some eagerness in setting a tougher regime of rules and regulations to control Wall Street. Everything is being watered down. Why?

Volcker: I will do the best I can to fight any tendency to water it down. What we need is broad international consensus to make things happen.

SPIEGEL: Your old German friend, the former Chancellor Helmut Schmidt, is already on your side. He is now speaking about the current economic system as a kind of predator capitalism which must be tamed.

Volcker: I'm glad he is speaking out. I am a great admirer of Helmut Schmidt. He was very straightforward and kind of brutally outspoken in a way, to which many people reacted adversely.

SPIEGEL: Are you thinking of a particular situation?

Volcker: The famous incident happened in 1979 shortly after I became Chairman of the Federal Reserve Bank…

SPIEGEL: …and the inflation in the US had reached 12 percent.

Volcker: I was flying with the Secretary of Treasury to a meeting in Belgrade but for some reason an arrangement had been made, Helmut probably suggested it, that we stop in Hamburg on the way to Belgrade to hold a meeting. The meeting was mostly Helmut speaking for an hour about how "you Americans" have got to do something about inflation. My Secretary of Treasury was kind of taken back by the force of ot all, but it was fine with me since I had been planning the same kind of policy.

SPIEGEL: During your tenure as chairman of the Federal Reserve, the bank was always part of the solution. Today with the Fed's policy of easy money, many experts see it as part of the problem.

Volcker: Given the difficulty of the economic situation and the large amount of money being spent to support the economy, The Fed is receiving the brunt of the criticism. Some support for the economy was certainly necessary, but the mere fact that in this situation emergency measures were necessary should not dictate a liberal approach in the future.

SPIEGEL: Lawmakers on Capitol Hill are thinking about tougher controls over the Federal Reserve.

Volcker: I think the loss of independence and authority of the Federal Reserve would be a very serious matter for the United States. Not just in terms of monetary policy but in terms of our place in the world. People look to strong, credible institutions and I think the Federal Reserve has been such an institution. If that's lost or too hamstrung by legislation I think we will regret it.

SPIEGEL: But is the Fed still the same kind of institution as during your tenure as chairman? Or is it now more of a governmental instrument? The Fed is managing the TARP program and is also buying government bonds.

Volcker: In some sense the Federal Reserve is always an instrument of the government. It is a government body but it is independent within government. But you are right in the sense that part of the concern is that they have involved themselves quantitatively in entering markets and in that process, you are supporting some markets and not others. That is an area in which the Federal Reserve has never wanted to get into and one that most central banks don't want to get into. If you are going to maintain your independence you have to avoid that. To intervene in particular sectors of the market is not the proper role for the central bank over time. It could be justified only by extreme emergency.

SPIEGEL: So what do you expect in the very near future?

Volcker: As an American, I have to be an optimist. But we have got a big challenge and we have to face up to it. And as you know, there is a lot of concern about the dysfunction of the political system.

SPIEGEL: So it is becoming harder to be an optimist?

Volcker: It's a challenge.

SPIEGEL: Mr. Volcker, thank you very much for this conversation.

Interview conducted by Gabor Steingart

Roth Conversion Tools

I've been looking for different on-line solutions to figure out this whole Roth conversion decision that will face many investors next year. This page seems to offer some promise:

Roth conversion tools: Free resources

By Davis Janowski
December 15, 2009

Earlier in the year I asked a regular source of mine, H. Jude Boudreaux, director of financial planning at Bellingrath Wealth Management, to “test drive” four different free calculators available on the Internet.

A side-by-side comparison of four calculators — at (which appears to have since been taken down),,, and rothretirement .com — showed that the estimated after-tax balance following a Roth conversion can vary by as much as several hundred thousand dollars, depending on the assumptions built into each calculator.

Moreover, all four calculators were fairly limited in that they assumed a client would convert an IRA or 401(k) in one lump sum in 2010. In fact, the change in tax law allows investors the option of spreading the recognizable income from a Roth conversion over the years 2011 and 2012.

In comparing the calculators Mr. Boudreaux assumed that his fictitious client was single, 50 years old, and earned $50,000 a year.

His chief conclusion about the tools was that they can give advisers or investors at best a fast and dirty ballpark idea of whether a conversion might be right for them. Advisers will probably find the tool available at most helpful among the following list (including links), which encompasses the calculators Mr. Boudreaux examined as well as others that advisers have told us about since that story appeared in July.

Brentmark Software Inc.

With Brentmark's calculator users can manually change tax rates, among many other factors, and measure the effects of those changes on the final outcome.

Beverly Deveny, an IRA technical consultant with E. Slott & Co. LLP of Rockville Centre, N.Y., said that it is this flexibility that keeps her using the Brentmark calculator despite her feelings about the calculators in general.

“I personally have never found a Roth calculator I was 100% happy with,” she said “Just from a numerical standpoint there are so many things to take into account.”

Brentmark Roth Conversion tool

Brentmark Software Inc. mainpage. Roth IRA Savings Calculator

This calculator and others available at the site were built by KJE Computer Solutions LLC. Intended for investors, the calculator is very simple and it has just six inputs: starting balance, current age, expected rate of return, annual contribution, age of retirement, and marginal tax rate. All these inputs can be changed. There is also a check box for increasing the rate to the maximum allowable.

While using the calculator at the site is free, Dinkytown sells it and its other suite of calculators to advisers for embedding on their own websites on a yearly subscription basis as well.

Roth IRA Savings Calculator Roth IRA Calculator

This free wizard-driven tool takes an investor or adviser through multiple pages. On the first page it asks current age, inflation rate (default is 3%), filing status (four choices here).

This takes you to Page 2, where you are asked if you already have a “regular IRA” and if so its current value or all those of a household (this input changes based on filing status), followed by non-deductible contributions, and how you intend to pay taxes on the rollover (whether from the IRA itself or other funds).

Page 3 inquires whether you and your spouse (again this input changes based on filing status) are covered by a retirement plan at work, whether each of you will make the maximum contribution, and your expected rate of return (default is 9% but can be altered to whatever you like), and plans for money saved from the deductible part of tax-deductible IRA contribution (choices are “to spend it or pay down taxes” or “Invest it in a taxable account”).

Page 4 inputs include the age you plan to begin receiving IRA distributions (this is an open box with the default set to 60 years), and how many years you expect to receive distributions (again, an open entry, the default is set at 20). The fifth and final inputs page asks about current and projected income, the percent of pre-retirement income you intend to have in retirement, your year 2000 taxable income, and the marginal state and local tax rate.

You end up with a simple results page that lists your expected annual income distributions. There is a lengthy explanation of assumptions.

Roth IRA Calculator

This attractively designed and intuitive site is probably the best of the free calculators we've examined thus far. It offers tutorials and each input has a helpful pop-up explanation of the information requested.

Of the four free calculators evaluated by Mr. Boudreaux he said he liked the one available at the best because it allowed him to see how much money his fictitious client's beneficiaries would stand to inherit.

He also liked that it came with sliders that allowed him to adjust such variables as income.

Mike Book, national director of sales and marketing for Archimedes Systems, Inc., in Waltham, Mass., which helped develop the calculator at, said that the online tool is not intended to provide users with a definitive answer on whether converting to a Roth IRA makes sense. Instead, he said, it's supposed to give them a fuller view of their financial options and be something to talk about with their advisers.

“We are giving them an ‘aha' moment,” he said. “The goal is to send them back to their financial organization or adviser.”

Roth Conversion Analyzer

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