Personal Wealth Law News

There are so many books, guides, television shows, magazines and web sites on investing that it amounts to information overload. Sometimes, the reaction to so much information is to do nothing. The Morningstar web site has a short article with the author’s (David Kathman) suggestion for a handful of books for the beginner (which is most of us) who wants some guidance on investing:

The Only Investment Guide You’ll Ever Need, by Andrew Tobias

Buffet: The Making of an American Capitalist, by Roger Lowenstein

TheBogleheads’ Guide to Investing, by Taylor Larimore, Mel Lindauer & Michael LeBoeuf

A Random Walk Down Wall Street, by Burton G. Malkiel

Stocks for the Long Run, by Jeremy Siegel

All About Asset Allocation, by Richard A. Ferri

I would add two others: Against the Gods, by Peter Bernstein and Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor.

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Megatrends is a name given to important changes in the economy or in the behavior of many people. People write books and articles about megatrends, hoping to identify them before others do and to benefit in some way (usually by selling more books). There are several megatrends that have a definite impact on trusts and estates work, and that will be discussed in future blogs:

• People are becoming wealthier, even with the current stock market setbacks. This is a worldwide phenomenon and contributes to the international flavor of much estate planning.
• A large number of people (the always demanding baby boom generation) are getting close to retirement and to a “final” disposition of their assets.
• There is a strong interest in business succession planning, particularly in this part of the country, where there are so many family-owned businesses. To deal with these issues, trusts and estates lawyers often have to act like psychologists, or at least hire them.
• People want to protect their assets against litigation and divorce, among other threats.
• There is and will continue to be a need for increased tax revenues, which leads inevitably to more complex tax laws and the need to plan for them. When Congress talks about tax simplification, tax lawyers go car shopping.

The combination of these megatrends demonstrates the growing importance of the broad practice area of trusts and estates, often referred to by more general names such as personal wealth, private client or wealth transmission, and ensures that this will be an area of growing importance for lawyers, one that focuses not on death but on the enjoyment of life.

In the next blog, we’ll review the campaign to repeal the federal estate tax and the likely future of the tax and the exemption from tax, as well as efforts to repeal the Pa. inheritance tax.

Republished with permission of The Legal Intelligencer.

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The use of prenuptial agreements is becoming more frequent, especially in the case of second marriages where there are children from the first marriages. Here are three simple things to remember when considering a prenuptial agreement:

• Start the process well before the planned wedding. Leaving the prenup to the last minute is sure to make the wedding a much less happy occasion.
• Disclose all assets that each party has. The failure to make a full disclosure is the basis most often used for attacking prenuptial agreements.
• If one or both parties are giving up rights in qualified retirement plans, the prenuptial agreement should bind the parties to waive their rights and to file the necessary papers with the plans after the parties are married. A waiver of pension benefits is valid only if it is made or confirmed after the wedding.

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As lawyers, we don’t recommend investments, which is probably a very wise decision. But we find it interesting to see what others are saying. One of the most successful investors in the US is certainly David Swensen, who manages the endowment of Yale University. In a recent article in the New York Times, on February 17, 2008, Mr. Swensen cautioned against individual investors trying to duplicate the investments he makes with an endowment in excess of $20 billion. In his book, “Unconventional Success: A Fuindamental Approach to Personal Investing”, Mr. Swensen sets forth his recommendation for individual investors, which consists of 30% domestic stocks, 15% foreign stocks, 5% emerging market stocks, 20% in real estate and 15% each in US Treasury bonds and Treasury inflation-protected securities. He cautions against individual investors trying to pick stocks on their own or engaging in timing the markets, suggesting instead index funds and other low cost instruments.

This is not unlike the advice that John Bogle offered at a meeting of the Philadelphia Bar Association Probate Section. At the end of a talk on investing issues, he summed up his suggestion for individual investors: buy no-load index funds with low turnover and low internal expense ratios.

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When a retirement plan participant died and named the surviving spouse as the beneficiary of death benefits, the spouse had several options, one of which was to roll the benefits out of the plan and into an IRA, permitting a long stretchout of benefit payments, if that was desired. But if the beneficiary was not the spouse, perhaps children instead, there was a good chance that all of the benefits would have to be distributed almost immediately- and subjected to federal income tax. This problem seemed to be solved by the Pension Protection Act of 2006, which permitted non-spouse beneficiaries to roll over the benefits to an IRA and delay distribution and taxation. Initially, there was a wrinkle, though. The IRS interpreted the new law as allowing such rollovers only if the retirement plan provided for them; that is, it was a voluntary provision, applicable only if the plan permitted it.

This didn’t seem to be the correct interpretation of the law, and a technical corrections bill was introduced to make it clear. At that point, the IRS announced that while the provision was voluntary for 2007, it was mandatory in 2008 and later years. That seemed to settle the matter. But…

That technical corrections bill didn’t pass, and the latest technical corrections bill doesn’t mention the subject of non-spouse rollovers. Now, it appears that the IRS has backtracked, and has reverted to its view that non-spouse rollovers are permitted only when the plan allows them; that is, they are not mandatory. This creates a very significant tax problem for individuals who do not leave their retirement benefits to a surviving spouse. There is planning that can avoid this problem, but it should be done while the plan participant is still alive.

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A previous post made reference to a clearly written discussion of funding problems with Social Security and the pros and cons of various solutions to the problems, which discussion can be found at www.bc.edc/crr. One of the solutions suggested was to raise the retirement age for receiving full benefits.  It appears that a delay of only a few years would provide substantial relief for the funding pinch. Rather than just pushing people into starting benefits later, why not give them an incentive to do so? Suppose people were encouraged to work longer and defer the commencement of benefits by having lower income taxes on amounts they earned after age 65? If income taxes on the first $50,000 of income were 10% and the next $100,000 were taxed at 15%, people might have an incentive to delay the start of benefits. There might also be lower Social Security taxes after age 65, but the combination of continuing to pay in and delaying the payment of benefits could be a factor in helping to preserve Social Security. There would have to be some increase in benefits as a result of the delay, but there could still be a net benefit to the Social Security system. This proposal could also alleviate concerns about too many skilled workers in the Baby Boom generation retiring within a few years.

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A humorous document has appeared on numerous web sites, purporting to be issued in the form of a Notice published by the Internal Revenue Service, which provides a definition of the term “death” for the purposes of Section 409A of the Internal Revenue Code. For those of you uncertain about the meaning of death (or life), this notice can be found at http://benefitslink.com/articles/guests/notice_2007_90_rev.pdf.

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