Monday, June 30, 2008

Avoiding probate as a reason to use a trust

A post on one of the blogs I read, Estate Planning as a Career, gives another reason besides avoiding estate taxes to use a trust; avoiding probate:

Probate is expensive. In Florida, the law requires that the personal representative (or executor in other states) hire an attorney to help administer the probate estate. This same law suggests that a reasonable fee for that attorney is three percent of the total gross value of the property passing through probate. Add to that another three percent for the personal representative’s fee and you can begin to see how expensive probate can be.

If you own a $400,000 home and have $200,000 in investments, the six percent of fees can total $36,000. That’s money that your loved ones and heirs will not receive.

Very informative. I don't live in Florida, but I'll be researching the probate process in my own state.

Sunday, June 29, 2008

Taxes for the mass affluent to increase

How's that for a headline? This outcome is predicated on the fact that Barack Obama wins the Presidency. The CNN story delves into how Obama's tax plan defines wealthy:

Indeed, under Obama's tax plan, married couples with at least $250,000 in gross income are likely to see their taxes go up if Obama is elected president.

But what about single filers? The line for them would likely be about $200,000, according to an Obama adviser.

The purpose of this post isn't to talk about whom to vote for, but to lay out facts. Are higher taxes on the wealthy good or bad? I have my opinions, but won't go into them here. The mechanism for the increase is simple:

Obama would restore the top two income tax rates to their pre-2001 levels of 36% and 39.6%. Currently they're 33% and 35%.

Impact of the proposed plan on taxes

From what I've read, McCain would keep the rates as is, if not lower them. The latest issue of Fortune has a story with a comparison chart prepared by the Urban-Brookings Tax Policy Center of how taxes would change for the various income levels (unfortunately, the story isn't online. It's the one titled The Evolution of John McCain.) For the $112,000-$161,000 level, McCain's plan decreases taxes by $2,614, and Obama's plan by $2,204. At the $161,000-$227,000 level, McCain's plan decreases taxes by $4,380, and Obama's plan decreases taxes by $2,789. And at the $227,000-$603,000 level, McCain's plan decreases taxes by $7,871 and Obama's plan increases taxes by $12. Obama's plan really starts to increase taxes at the $227,000 and above income levels.

Does Obama's plan really just soak the 'rich'?

The 'not-so-rich' rich that these changes would impact are of course not happy.

Such rhetoric leaves Hammer steaming. "I don't mind paying my fair share, but people act like they're just talking about Bill Gates," he says. "We would definitely feel a hit if our taxes went up." Although a year ago he would not have considered voting Republican in November, now he's not so sure: "Do you vote your heart, or do you vote your wallet?"


Like Hammer, many facing higher taxes don't consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.

But many also live in high-cost areas with expenses to match—and feel burned by talk of "taxing the rich" that doesn't recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. "There is a huge difference between what politicians define as rich and what many Americans would call middle class," says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.

I understand the point of the family profiled in the story, things are getting tougher for the mass affluent, especially in high cost areas like the coasts. Times are getting tougher for every other American. What isn't seen in the online version of the article, but is in the print version in BusinessWeek, is that the family is posing for a picture in their hot tub, with their pool in the background. If they are looking to get a little sympathy, that isn't the scene they should have painted. I'm sure that the photographic editor had a lot to do with the setup, but still.

Thursday, June 26, 2008

Big Brother device lets drivers cut auto insurance bill

Progressive Corp. and GMAC Insurance are testing devices that track driving habits, and offering discounts on auto insurance for measured good driving.

Drivers who participate in these plans have devices installed in their cars that, depending on the technology used, can track the number of miles driven, the speed at which cars are driven and even how often and how hard the brakes are used. By allowing their habits behind the wheel to be monitored, drivers get lower insurance rates -- or pay higher premiums if they're lead-footed road hogs.

Usage-based insurance pricing would mean an estimated two-thirds of households would pay less in premiums than they do now, according to a report by the Hamilton Project at the Brookings Institution, a think tank. Researchers Jason Bordoff and Pascal Noel calculated average savings at about $270 per car, per year. Some analysts and insurers believe that after a slow start, usage-based insurance could take off now that higher gas prices are forcing consumers to drive less anyway.

So, there's a chance that using the device can backfire on a driver, increasing his or her premiums. I can imagine the arguments among family members using a shared car when the insurance company reports bad driving based on the device and ups the insurance premiums.

Friday, June 20, 2008

Vacation (and home) spots threatened by global warming

SmartMoney has a story on six vacation spots threatened by global warming. The one on the list I want to visit one day is Mount Kilimanjaro. However:

If you want to see the storied snowy peak, you had better go before it melts. Since 1912, 82% of the ice fields have disappeared. And they could all be gone between 2015 and 2020 if the ice continues to recede at its current pace, according to Lonnie Thompson, professor of geological sciences at Ohio State University.
It is the highest peak in Africa. It is one of the Seven Summits, and I believe it's the only one that doesn't require technical climbing to scale, meaning you can hike up it.

There other critical sites in SmartMoney's list, like the Maldives, which isn't just a vacation destination. These islands are being threatened with going underwater, which would displace tens of thousands of people.

Saturday, June 14, 2008

How one family found a financial planner

Here's the story of how one family found a financial planner they could trust.

More families, it seems, are seeking similar help. In 2006 the average revenue per financial advisory firm was $1.6 million, up from $632,000 in 2000, according to consulting firm Moss Adams. The Pierponts' experience shows how important it is to find the right fit. Like many couples, they relied on referrals and word of mouth to find a financial pro. But their first forays with money managers fell flat. A stockbroker friend of the family put them into some mutual funds, but their accounts were relatively small and they didn't get much attention from the broker. Gary blames himself as well: "I didn't have much of a game plan," he concedes.


Nor did he like the fact that some financial advisors are paid to push their company's products and services, which made Gary wonder whether they truly had his best interests at heart. Meanwhile, his mortgage business was starting to take off (this was around 2003, when the real estate bubble had begun to bulge), so issues like estate planning and capital gains were weighing on his mind.

Around that time he got another referral from a woman who worked at a title company that did a lot of business with Gary's firm. She told Gary about Kim Anderson at Baltimore-Washington Financial Advisors (BWFA), a fee-only advisory firm where all the counselors are certified financial planners or in the process of getting CFP certification, which takes about two years to complete.

Now, I disagree that using a financial planner is necessary, except for the most complex financial challenges, like trusts and estates. However, I'm happy to see in this case that the family chose a fee-only planner. That's my mantra on using a planner, he or she has to be fee-only.

Active vs. passive fund management

The current issue of Fortune is its investor's/retirement issue, and has several good stories. The obligatory Buffett story is particularly good this time, as it covers a bet between Buffett and a hedge fund as to whether the hedge fund can beat the S&P 500 over 10 years. The basics are:

Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

Will 2 and 20 doom Protégé to lose?

The hedge fund selections have a big obstacle to overcome, fees:

A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)

So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones "bought" by Buffett in the bet.

On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the "helpers" that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.

The summation is pretty obvious. For Protégé to win this bet, the five funds of funds it has picked must do much, much better than the S&P.

Personally, I think that individuals can beat the market over an extended period of time (I hear the Bogleheads screaming at me already). However, I don't think that typical hedge fund performance justifies anywhere near their typical fees. In losing years, the hedge funds are still taking their standard 2% management fee, to which I say, thanks for nothing.

Long Bets

Don't miss the part of the story that describes the long bet mechanism that made this bet possible in the first place. It's a cool innovation.

Thursday, June 12, 2008

Are hybrid cars worth their premiums?

The Journal, using data from, analyzed whether the premium price on a hybrid was worth it based on gasoline savings (free WSJ Digg link). The answer is yes, as long as you own the car long enough.

It's the Toyota Prius -- but only if the buyer keeps the car for longer than three years, according to, a Web site with resources for car buyers. In the Prius vs. Camry example, it takes three years for the hybrid's fuel savings to pay back the premium paid to buy the Prius instead of a comparable gas-powered car.
The analysis used $4.02 for the price of a gallon of gas, and included the $3,000 tax credit for buying a hybrid. Not all hybrids will pay for themselves. The analysis of the Lexus LS600H showed it would take almost 100 years to pay it back, assuming the car is driven 15,000 miles a year. I think we'll all be 'driving' these by then.

Monday, June 9, 2008

Checking out your broker

Here's something I ran across while listening to the SEC's investor education podcasts. It's the FINRA site to check out investment professionals. The description of what the tool allows you to do from its Web site:

FINRA BrokerCheck is a free online tool to help investors check the professional background of current and former FINRA-registered securities firms and brokers. It should be the first resource investors turn to when choosing whether to do business with a particular broker or brokerage firm.

Saturday, June 7, 2008

New York 529 plan changes

There have been some recent changes in New York's 529 college savings plan rules.

Governor David A. Paterson has signed a bill into law that eases restrictions to the New York College Choice Tuition Savings Program, allowing relatives, employers and others to contribute to State-sponsored college savings accounts.
Now other relatives (or friends) will be able to contribute funds into the 529 plan that I have open for my child. I'll still be the only one that can get the New York State tax credit, but this is still of benefit because I can manage the money through the 529 account, instead of having to burden other relatives with opening their own accounts if they want to help save for my child's education.

One set of grandparents live in Florida, which doesn't have a state income tax, and therefore the Florida 529 plan doesn't give them any tax incentives. They'd lose nothing by using the New York plan I set up to help save for college. If they lived in a state where they would get tax benefits, it would make more sense for them to use that state's 529 plan, unless it was a truly terrible plan.

Previously rejected funds
In the past five years, more than 20,000 checks, valued at over $57 million, were rejected from these college savings accounts because they were submitted by someone other than the account owner.
That's a big chunk of change that could have been put to good use for college.

Scholarship funds can now donate

These changes also open up opportunities for scholarships, like this neat program:
Richard Stopol, President of New York City Outward Bound, said: “All of us at New York City Outward Bound are thrilled by the passage of this bill. It will enable one of our network schools, the Washington Heights Expeditionary Learning School, to put in place an innovative Work Study/College Preparation program that we hope will eventually become a model for other schools. As part of this program, students will spend a day a week in paid internships and the money earned through those internships will be deposited into College Savings Accounts that will be set up for each student. This will help make college more accessible and affordable for the students, almost of all whom will be first-generation college students.”

Thursday, June 5, 2008

How does your garden grow?

More Americans are growing their own vegetables (free WSJ Digg link).

As consumers balk at the rising cost of groceries, homeowners increasingly are cutting out sections of lawn and retiring flower beds to grow their own food. They're building raised vegetable beds, turning their spare time over to gardening, and doing battle with insect pests.

At Al's Garden Center in Portland, Ore., sales of vegetable plants this season have jumped an unprecedented 43% from a year earlier, and sales of fruit-producing trees and shrubs are up 17%. Sales of flower perennials, on the other hand, are down 16%. It's much the same story at Williams Nursery, Westfield, N.J., where total sales are down 4.6% even as herb and vegetable-plant sales have risen 16%. And in Austin, Texas, Great Outdoors reports sales of flowers slightly down, while sales of vegetables have risen 20% over last year.

One of the people profiled in the story devoted almost 1/4 of her yard to a garden. That is commitment.

I wonder if there are any home owner association rules against large gardens. Some associations have rules against solar arrays on roofs, and rules against windmills in yards, so rules against large gardens could be another hurdle to overcome.

When I was a child, a neighbor had a very large garden in their backyard. The produce and vegetables it produced tasted much better than the store bought stuff. Of course, the better taste still didn't make me want to eat vegetables.

The article offers tips to starting a garden, including soil testing and optimal placement of it in a yard.

Monday, June 2, 2008

130/30 mutual funds sucking wind

I still haven't pulled the trigger on a 130/30 fund yet, and maybe that's a good thing (free WSJ Digg link). Most 130/30 funds are trailing their benchmarks, and the article blames managers who aren't good at going both long and short.

Some are run by managers with relatively little short-selling experience. Take Fidelity 130/30 Large Cap Fund, introduced in April and ahead of the broader market since then. Skipper Keith Quinton is a stock-picking pro; his Fidelity Tax-Managed Stock fund is in the top 10% of Morningstar Inc.'s U.S. "large blend" category for the past three years. But his shorting experience? Thirteen years ago, he ran a trust fund that made bearish bets. Fidelity says its trading desk has long experience with short sales.

Other funds are run by skippers who may have experience shorting stocks but lackluster stock-picking records. The managers of RiverSource 130/30 U.S. Equity Fund, which so far this year trails the broader market, have been in the bottom half in recent years at stock funds they've run. RiverSource declined to comment on its managers' performance.

My search for good hedge fund-like investments for the mass affluent continues.

Starwood and Delta offer

I received a postcard for a double miles offer from Starwood and Delta. I can earn double airlines on every eligible stay at a Starwoods hotel between June 1 and August 31, 2008. Registration at closes July 15, 2008.

Sunday, June 1, 2008

Tax advantages of being a landlord

Did you know there are benefits to being a landlord beyond having to fix a tenant's plumbing at 3A.M.? There sure are. Landlords can receive numerous tax benefits including:

  • Deducting the mortgage and real estate taxes on a rental property
  • Deducting all operating expenses on a rental property
  • Depreciating a rental property over 27.5 years
There is a nice gotcha in the tax laws for landlords too. Something called passive activity loss rules.
If your property throws off a tax loss — and most do at least during the early years — things get complicated. The so-called passive activity loss, or PAL, rules will probably apply. The fundamental PAL concept is this: You can deduct passive losses only to the extent that you have passive income from other sources — like positive operating income from other rental properties or gains from selling them.
There are exceptions to the rules, but one of them is that adjusted gross income must be less than $100,000 (or under $150,000 to get a portion of the exception). Chances are that if you're mass affluent you won't pass this exception rule. The IRS has several articles and publications on passive activity losses.

Dividing non-financial assets in inheritances

Here's a story chock full of good anecdotes and advice on dividing up physical assets for heirs. The lead 'graf sums it up.

Several years before Jeannie Stevens' parents passed away, they invited their three children to an unusual Thanksgiving gathering. The engraved invitation informed the heirs of their right to divvy up more than $1 million of "worldly belongings," including a $90,000 painting by Hudson River School painter Asher Durand, a Heppelwhite sideboard, and a 17th century silver kettle. The siblings drew straws to determine who would pick first and reversed order in successive rounds until everything was spoken for. All of the items were earmarked "for future delivery." At first, Stevens recalls, she and her siblings were "very uncomfortable" with the experience, in part because it forced them to confront their parents' mortality. But when their parents did die, "it made life simple at a very tough time," she says.

Manipulation of LIBOR

BusinessWeek is running a story on possible manipulation of LIBOR (the story was originally broken by the Wall Street Journal). Now, the upshot is:

Because Libor may be lower than it should be, consumers are actually spending less on interest payments than they should be. "It's one of those rare instances where financial institutions might not be quite on the up and up, but it's worked out to the consumer's benefit," says Keith Gumbinger of mortgage researcher HSH Associates. If the BBA discovers that rates were manipulated, loan rates could bounce up the next time they are reset.
A cheat that actually benefits consumers, nice. How widely is LIBOR used? Glad you asked.
It has the biggest reach in the mortgage arena, where, for example, it was used in 2005 and 2006 to set rates on approximately 75% of subprime, adjustable-rate mortgages (ARMs)—about $700 billion worth of the loans, according to Guy Cecala, publisher of Inside Mortgage Finance.
I had no idea how often LIBOR is used in setting variable rates in the U.S. I'd always thought that the prime rate was king. Personally, I wouldn't be comfortable getting a loan based on LIBOR. It would be my luck that prime would take a dive right when LIBOR took off. (Note: This analysis shows the move roughly together, so I realize my fears of this happening are irrational. However, since I live and work in the U.S., I want loans that track U.S. set interest rates, which in theory track the health of the U.S. economy.)

Update: LIBOR didn't drop as quickly as the prime rate did in the latter half of 2007.

Consumer Reports to rate hospitals

Consumers Union (Consumer Reports to you and me) will start a new hospital rating service (free WSJ Digg Link).

The nonprofit Consumers Union is launching a new hospital-ratings service, adding to the growing competition to provide online consumer information about health care.

The effort by the publisher of the popular Consumer Reports magazine is a gamble that the credibility of the magazine's name and its no-advertising stance, identified with widely used ratings for cars and other products, can translate into the tricky field of health care, where doctors and other providers have objected to some evaluations proposed by insurers. The field is increasingly crowded, with an array of players trying to build definitive consumer-health information sources.

Consumers Union already offers assessments of health-insurance plans, drugs and some medical treatments. Other areas the nonprofit is considering include physician groups and elder care. The new hospital ratings, which are expected to be supplemented with further information later, are the first step in a broader effort to expand the nonprofit's health-care offerings.

The article brings up objections to the rating methodology, but what methodology is perfect? I support efforts to bring more transparency to health care outcomes and costs. This transparency is especially necessary if people are going to start using HSAs and consumer driven plans.

I'm very late to the game on this topic, I know, but I was catching up on some Kiplinger's podcasts, and listened to one on Joel Greenblatt's The Little Book That Beats the Market. I went to the Kiplinger's site to learn more.

The Little Book argues that if you know a mere two numbers, you can identify those great companies selling at discount prices. The first is return on capital, because a company that can reinvest its profits at a high rate of return will become a very successful business. The second is earnings yield, or earnings per share divided by the share price. The higher the earnings yield, the more bargain-priced the stock.

To make it easy for everyone to find great buys by the numbers, Greenblatt maintains, where you can order up (free, so far) your own list of candidate stocks that score best by the two criteria.
The article goes on to explain how the formula broke down in the short term, and Greenblatt's response. I haven't tried using Greenblatt's method myself, but it's worth keeping an eye on. At a minimum, I'll register at Greenblatt's site.