Archive for July, 2014

Wealth Management News – July 25

Sat Jul 26, 2014 1:55am IST

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The Hangover

On a fall night in 1955, Federal Reserve Chairman William McChesney Martin stood before a group of New York investment bankers at the Waldorf Astoria Hotel and delivered what is now considered his famous “punch bowl” speech. It earned this label because Martin closed his eloquent talk by paraphrasing a writer who described the role of the Fed as being “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Current Fed Chair Janet Yellen’s recent congressional testimony suggested that she does not subscribe to her predecessor’s temperance. While citing that valuations in certain sectors, such as high-yield or technology stocks, appeared “substantially stretched”, Dr. Yellen’s overall sentiment was clear: the Fed does not view the party as having warmed up to the point that the punch bowl need be removed.

The excessive risk taking among investors lulled into complacency by an overly loose Fed is a powerful cocktail indeed — one that could produce a hangover in the form of volatility. Having said that, the Fed’s party can still go on for a long time. As I’ve said before, bull markets don’t die of old age; they die of an exogenous event or a policy mistake.

In his famous speech, Martin preceded his punch bowl comment by saying, on behalf of the Fed, “…precautionary action to prevent inflationary excesses is bound to have some onerous effects…” The flipside — a lack of precautionary action by the Fed — will have its own set of consequences in time. It is very difficult to say when exactly these will happen, but near-term indicators suggest the hangover won’t hit while you’re relaxing at the beach this summer.

 

Equity Markets: The Bigger they Come the Harder they Fall

The SP500 has now gone nearly 800 days since a correction of more than 10 percent – the “meaningful” level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.

 

EX-RECESSION SP500 CORRECTIONS (10% DECLINE) SINCE 1962

Source: Bloomberg, Guggenheim Investments. Data as of 7/23/2014. Note: Correction refers to a greater than 10 percent decline from peak to trough.

 

This material is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

 

Scott Minerd is Chairman of Investments and Global Chief Investment Officer at Guggenheim Partners

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Friday, July 25th, 2014 EN No Comments

You are here: Home99% of wealth managers embrace outsourcing

Global Investor MagazineCopying and distributing are prohibited without permission of the publisher

25 July 2014



Wealth management outsourcing is also far more varied than in the institutional sector, according to a survey by Knadel

Read more:

Outsourcing

Some 49% of wealth managers outsource some or all of their
middle and back office operations to a third party, according
to a survey by business consultant Knadel.

Almost all (50%) of the remaining participants said that they
would consider it in future.

“It’s clear that wealth manager’s attitudes have changed
towards outsourcing. We now have a critical mass of suppliers,
[an issue which had previously been] a barrier to growth, and
this greater choice is fuel to the fire,” said Gilly Green,
wealth management practice leader.

With over 30 providers and more set to enter the market, a
quarter of participating suppliers in the survey started up in
the last five years, outsourcing is becoming less constrained
by a lack of credible service providers.

The survey of over 50 wealth managers and third-party service
providers, representing assets under management of
£135bn ($230bn), also found that the variety of functions
outsourced was far greater than in the institutional sector.

Driven largely by increasing regulation and a need to scale,
wealth managers are outsourcing further up the value chain,
focusing on core value activities such as investment process
and client services.

“The regulatory focus on client experience and suitability
means that wealth managers are choosing to outsource as many of
the non-client facing and administrative functions as they
can,” said Green.

“They are outsourcing activities including investment
activities like market execution and research. This is very
different to what we currently see in the outsourcing market
for institutional asset managers.”

Despite the extent of outsourcing seen, he said wealth managers
need to get better at service provider governance and the need
for recovery and resolution planning – many wealth managers are
unaware of the regulators focus in this area.

Bruno Prigent, global head of Societe Generale Securities
Services, recently spoke to Global Investor/ISF about
opportunities in the UK outsourcing market, read about it
here: http://bit.ly/1nGFpii


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Estate of Tanenblatt Raises Valuation Issues

A recently decided Tax Court decision further underscores the need to obtain an objective valuation and to have a valuation expert substantiate the valuation.  In Estate of Tanenblatt v. Commissioner, T.C. Memo 2013-263, the Tax Court also provided some analysis on valuation issues associated with closely held limited liability companies’ (LLCs) holding real estate as the primary asset. Diane Tanenblatt, who passed away in 2007, owned a 16.67 percent membership interest in an LLC, which had been transferred into her revocable trust during her lifetime.  The LLC’s principal holding was a fully leased, 10-story commercial building in New York City.  The LLC operating agreement restricted the transferability of LLC membership units to limit ownership to the three family groups that owned the LLC.  If the LLC units were transferred outside the three family groups, the non-family owner wouldn’t have any rights to participate in the management or control of the LLC unless the owner received unanimous approval from the other members.  The non-family owner, however, would receive the same distributions.

The estate valued Tanenblatt’s interest in the LLC at $1,788,000 and attached this valuation to the Form 706.  However, the initial appraisal obtained by the Internal Revenue Service showed a value of $2,475,883, and a notice of deficiency was issued. The estate appealed.  The IRS hired a second appraiser who valued the LLC interest at $2,303,000.  The estate in turn engaged a second appraiser to provide a value of the interest in the LLC.  The second appraiser valued the LLC interest at $1,037,796.  However, the second appraiser for the estate wouldn’t testify at the trial due to a dispute over the fee, so the estate had to use the original appraisal.  The estate challenged the valuation approaches to be used, the type of interest being valued and the appropriate discounts.

 

Conflicting Valuation Approaches

The estate contended that the LLC acted as an operating company and should be valued using a weighted approach with the income and net asset value (NAV) approaches. The IRS countered with the position that the LLC was a real estate holding company and that the discounted NAV approach was the proper valuation method. The court acknowledged that while the LLC was being run as a going concern, there was no evidence that an income based approach would have led to a different valuation. This is interesting considering that the IRS accepted the initial value of the building proposed by the estate, which was based on an income approach.

While the first appraisal obtained by the estate and the two appraisals obtained by the IRS started with the same NAV, each used different discounts for lack of control and lack of marketability (DLOM). The first estate appraisal used a 20 percent lack of control discount, while the two IRS appraisals used a 10 percent discount for lack of control. The initial estate valuation used a 35 percent DLOM, while the first and second IRS valuations used 20 percent and 26 percent respectively. The difference in the lack of control and marketability discounts was due to varying opinions on the type of interest that Diane owned. The initial appraisal obtained by the estate considered the LLC interest a “non-membership interest” or an assignee’s interest, while the IRS considered it a membership interest. A membership interest is more valuable than an assignee interest due to the ability to participate in the management of the LLC. In the end, the court agreed with the IRS’ assessment that the subject interest was a member’s interest because at the time of death, Diane’s trust was a member of the LLC, which is in accordance with IRC Section 2038, cited below.

(a) (1) To the extent of any interest therein of which the decedent has at any time made a transfer
(except in case of a bona fide sale for an adequate and full consideration in money or money’s
worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to
any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3 year period ending on the date of the decedent’s death.

The court noted that the difference between a membership interest and an assignee interest is included in the DLOM analysis.

 

Missing Expert

Lastly, the outcome in this case may have been different if the expert who provided the second appraisal for the estate had been in court to testify. Under Tax Court Rule 143 Evidence (c) Ex Parte Statements, “Ex parte affidavits or declarations, statements in briefs and unadmitted allegations in pleadings do not constitute evidence.”  Although Diane’s estate had an expert report with a new appraisal showing a lower value than initially included in the original Form 706, the evidence wasn’t admitted because it wasn’t accompanied by the expert’s testimony. The court accepted the discounts used by the IRS’ expert without changes and ruled that the value of the interest should be $2,303,000. 

Valuation is both an art and a science. This case highlights the need to select a valuation provider who’s reputable, will stand behind his valuation and will testify if the need arises and withstand scrutiny on the witness stand.

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Friday, July 25th, 2014 EN No Comments

Where Are They Now?

Every few months, we profile an advisor struggling to overcome a practice management hurdle—anything from attracting wealthier clients to jumpstarting a fledgling business. Then a panel of three experts offers advice and tips.

Occasionally, we go back and see how some of these advisors have fared. We want to know if they followed the advice, if it helped and what their plans are for the future.

Here’s a look at three of them:

Jim Parks:

Grooming the Reluctant Apprentice

The background: Two years ago, Jim Parks of Parks Wealth Management in Ridgewood, N.J, was at a crossroads. He’d spent a long time looking for a junior associate to work with his clients, freeing him up to focus on getting new business. He’d finally hired a promising candidate with some institutional financial services experience named Ania Karcher (formerly Ania Bielicka). She started doing basic paperwork, scheduling meetings with clients and sending them information on their accounts, and taking notes in client meetings. A year later, the new hire had freed up a lot of Parks’ time, and clients liked her. But Karcher herself wasn’t sure she was ready, or even wanted, to take the next step to advisor. What should Parks do?

The advice: Philip Palaveev, now CEO of practice management consulting firm The Ensemble Practice, and Hellen Davis, president of coaching firm Indaba, urged Parks to be patient. It can take years before a newbie is ready to become a lead advisor, said Palaveev, and as long as there’s a basic interest in taking on the role, a slow training approach should do the trick. Chip Roame, managing principal of Tiburon Strategic Advisors, recommended thinking out of the box-, not only keeping Karcher in her current position, but also bringing another person on board to help with operations, freeing up Parks to focus even more on clients and new business.

The update: Parks decided to follow Roame’s advice, at least partially, and forget about pushing Karcher to assume a hands-on advisory role. “We have her do as much as possible, other than being the advisor making the recommendations,” he says. Her new duties include even more client communications and customer service, as well as running the firm’s social media campaigns and updating client data. According to Parks, Karcher’s role has helped him increase assets to $85 million, from $70 million about two years ago.

At the same time, Parks still is interested in finding a junior advisor. It just isn’t as pressing an issue as before.                    

Brad Thurber: 

New Kid on the Block

The background: In 2011, Brad Thurber, an advisor at D.A. Davidson, had recently moved his practice from his hometown (population 58,000) in Montana to Salt Lake City. He was the father of a four-year-old, and he and his wife were having twins. They figured they’d all benefit from being closer to his in-laws. To maintain his client relationships in Montana, he would return once a month, making the eight-hour drive and staying a week. But he also knew he needed to find a way to build a book in his new town, and his solution—courting attorneys and CPAs—was proving a lot harder in the big city.

The advice: Palaveev, Davis and Roame urged Thurber to focus more on his new territory than his former stomping grounds. Their suggestions ranged from seeking help from a D.A. Davidson branch manager, to selling his book in Montana and buying one in Salt Lake City. As for networking with attorneys and CPAs, there was a catch-22: The most effective route would be to meet professionals used by his clients, but he couldn’t do that until he’d found some clients. Patience was a requirement. “This is a relationship-driven business,” said Palaveev. “It can take as long as five years to get traction in a new market.”

The update: Thurber decided to keep his clients in Montana, although he now meets them every two to three months, communicating via email and phone when he’s not in the area. In fact, he’s found that route to be a lot more successful than he’d anticipated. “It gives them an incentive to see me when I’m in town and helps me structure my practice,” he says.

As for meeting CPAs and attorneys in Salt Lake City, Thurber has reached out to a couple of his local clients’ professional advisors, but that hasn’t reaped particularly promising results. He has, however, been able to find clients through networking with friends, neighbors and his in-laws. About 20 percent of his business is now from Salt Lake City. 

His relationship-building has been somewhat constrained recently, since he became co-branch manager of the three offices in the area. He gets an override on the production of the 14 advisors there. “Overall, it’s worked out about as well as I could have expected,” says Thurber. Assets are about $80 million, up from $60 million in 2011.

Charles Sachs: 

Getting the Word Out

The background: We profiled Sachs last summer, shortly after he had started his own RIA, Miami-based Private Wealth Counsel, following four years working for another wealth management firm. His plan: Focus on charitable giving and estate planning. To that end, he wanted to establish himself as a “thought leader” and get the word out about some unusual approaches to these strategies, but wasn’t sure how to do that. A blog probably wouldn’t attract much attention and a public relations firm would be too pricey. What about LinkedIn or Facebook? Or perhaps finding development officers for philanthropic organizations willing to distribute his articles on the subject to donors?

The advice:  Our panel of experts included Palaveev and Davis, as well as Matt Lynch, principal of Tiburon Strategic Advisors. Their suggestions included tapping clients who had friends with a charitable focus, attending association meetings likely to attract professionals able to refer him to suitable clients, and creating relationships with non-profit organizations and co-branding his articles with them.

The update: Sachs ended up doing an about-face; he’d discuss his charitable giving approaches with clients, but not make them a focal point of the practice. Why? His clients were telling him they needed more advice around taxes and the repercussions of recent changes to the tax code, so that’s where he dug in and found his niche. “I find among high-net-worth clients, their focus is on, ‘How can I save money on my taxes and build a more efficient portfolio?’” says Sachs, who sees his role as fitting a “gray area” between advisors and CPAs.

In fact, he’s now guarding his articles carefully, using them as one-page leave-behinds for some clients. His marketing focus is on 20-minute podcasts with a variety of experts on issues related to wealth. His assets are about $10 million, up from $5 million in 2013, and he’s shooting for $30 million by the end of the year.

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Institutions on hunt for RMB assets, says Deutsche

Institutions on hunt for RMB assets, says Deutsche

25 July 2014
 
Category: News, Asia, China, Global, Europe
 
By Derek Au




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Deutsche Asset Wealth Management (DeAWM), the asset manager with 934 billion euros (US$$1.3 trillion) in AUM, expects demand from institutional investors for RMB allocations to grow amid continuing internationalisation of the currency.

Speaking at the company’s press event in London, head of DeAWM, Michele Faissola, said that both institutional and private investors were keen on additional exposure to assets denominated in the Chinese currency. He said that there was particular interest from sovereign wealth funds, which “seek diversification as AUM is growing”.

Chinese policymakers have been actively promoting the use of RMB in overseas markets. Besides London, the Chinese central bank has also empowered Frankfurt, Paris and Luxembourg to set up domestic RMB clearing houses in a move to enhance the RMB’s reputation as a reserve currency.

Likewise, Mr. Faissola believes that demand from Chinese investors for foreign assets also presents opportunities for DeAWM. He says that the impending launch of the mutual recognition of funds scheme between Hong Kong and Mainland China “is clearly an opportunity to accelerate the delivery of international products to Chinese investors”.

Mr. Faissola believes that DeAWM is well positioned to provide Chinese investors with differentiated international investment products in emerging assets classes, such as real estate. “We have seen, for instance, lots of Chinese interests in real estate,” he elaborates, adding that DeAWM “could deliver interesting ideas for those investors”.

During the press event, Mr. Faissola also gave a business update on DeAWM. He said that the firm achieved record inflows of net new money in the second quarter, mainly due to contributions from alternatives, passive and wealth management products.

Addressing the key challenges to the overall industry, Mr. Faissola said that asset managers need to “have the scale” and be efficient to deliver the best services to clients amid ongoing margin pressure. He added that they must also overcome the impact of regulations, which are becoming more fragmented and complex.

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Thursday, July 24th, 2014 EN No Comments

Innovest Announces the Release of InnoPay Version 3.4


Innovest Announces the Release of InnoPay Version 3.4

PRWEB.COM Newswire

PRWEB.COM NewswireSacramento, CA (PRWEB) July 24, 2014

Innovest today announced the immediate release of InnoPay (previously known as ASIPay) Version 3.4. InnoPay is a highly scalable, fault tolerant, secure payment management system, offered in a SaaS environment as part of Innovest’s Payment Solutions.

Innovest’s Payment Solutions allow firms to choose the most cost effective method for providing benefit and other payments: completely outsource payment and tax reporting operations, manage them in-house, or any combination in between. InnoPay’s advanced technology is coupled with Innovest’s secure print and mail capabilities and provides SSAE16 audited controls and procedures, which meet the industry’s ever increasing compliance requirements.

With 8,000 baby boomers retiring every day and a full 75% of the wealth management community describing themselves as “somewhat to very unprepared” to make the transition from client wealth accumulation to client wealth distribution, many wealth managers are discovering that automating and streamlining the payments process is becoming mission critical. Specialized payment solutions help to automate a function that is traditionally labor intensive and has become increasingly important for client retention.

“Creating flexible and intuitive tools in the employee benefits marketplace is the key to helping firms grow their business and retain satisfied clients,” said Mitch Carlsen, chief information officer of Innovest Payment Solutions, “We are excited to continue streamlining and maximizing efficiency through new releases on the InnoPay platform, and we are confident that our solution can provide value to any organization involved in benefit payments processing.”

The platform empowers firms to provide a branded client solution with full featured disbursement and tax reporting services. Self-service increases overall client satisfaction and productivity by providing end-clients with direct access to and management of their disbursement and tax information. Additionally, InnoPay provides configurable workflows for controlling payment updates with peer and management review. Separation of duties and role based user permissions allow firms to mitigate the risk of fraud and unauthorized payments. The intuitive layout is optimized for entering new payments and reducing data entry mistakes.

About Innovest

Innovest is a leading provider of financial technology solutions delivered to forward thinking trust, wealth management, and retirement professionals. Innovest’s solutions empower its clients to acquire new customers, invest assets effectively, manage trust and investment portfolios efficiently, and flexibly report results to customers. Innovest has over $425 billion in assets under administration on its trust and wealth management platform, processes more than 4 million payments annually and provides fulfillment services for more than 10 million documents including checks, advices, and tax forms each year. For more information about Innovest, visit http://www.innovestsystems.com.

Read the full story at http://www.prweb.com/releases/2014/07/prweb12041634.htm

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Thursday, July 24th, 2014 EN No Comments

Wealth management update

August Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts

The August § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.2%, the same as the § 7520 rate for July. The August applicable federal rate (“AFR”) for use with a sale to a defective grantor trust, self-canceling installment note (“SCIN”) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded annually) is 1.89%, up 0.07% from July.

Lower rates work best with GRATs, CLTs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans. The low AFR presents a potentially rewarding opportunity to fund GRATs in August. Current legislative proposals would significantly curtail short-term and zeroed-out GRATs. Therefore, GRATs should be funded immediately in order to be grandfathered from the effective date of any new legislation that may be enacted.

Clients also should continue to consider “refinancing” existing intra-family loans. The AFRs (based on annual compounding) used in connection with intra-family loans are 0.36% for loans with a term of 3 years or less, 1.89% for loans with a term between 3 and 9 years, and 3.09% for loans with a term of longer than 9 years.

Thus, for example, if a 9-year loan is made to a child, and the child can invest the funds and obtain a return in excess of 1.89%, the child will be able to keep any returns over 1.82%. These same rates are used in connection with sales to defective grantor trusts.

Inherited IRAs are not exempt from creditors

In Clark v. Ramekers, 573 U.S. (June 12, 2014) the United States Supreme Court addressed the issue of whether funds held in an inherited IRA are exempt from bankruptcy creditors under 11 U.S.C. § 522(b)(3)(C), ultimately holding that such funds are not exempt because they do not constitute “retirement funds” within the meaning of § 522(b)(3)(C).

At issue in Clark was an inherited IRA owned by Heidi Heffron-Clark (“Heidi”). Heidi had inherited the IRA from her mother upon her mother’s death. Several years after inheriting the IRA, Heidi filed for bankruptcy and claimed that the funds within the inherited IRA were exempt from the claims of her creditors under § 522(b)(3)(C).

Section 522(b)(3)(C) exempts from the claims of bankruptcy creditors “retirement funds” that are held in an account or fund that is exempt from taxation under IRC §§ 401, 403, 408, 408A, 414, 457 or 501(a). Accordingly, to qualify for the § 522(b)(3)(C) exemption, two requirements must be satisfied:

  1. The funds must be held in a qualifying tax-exempt account or fund and
  2. The funds must constitute “retirement funds.”

Inherited IRAs are exempt from taxation under IRC § 408, therefore satisfying the first requirement of § 522(b)(3)(C). The only issue left for the Court to determine was whether the funds held in the inherited IRA constituted “retirement funds” with respect to Heidi. Because the term “retirement funds” is not defined in the bankruptcy statutes, the Court applied the ordinary meaning of the term. According to the Court, the ordinary meaning of “retirement funds” is “a sum of money set aside for the date an individual stops working.”  Applying this definition of “retirement funds” in reaching its conclusion that funds held in an inherited IRA do not constitute “retirement funds” for purposes of the § 522(b)(3)(C) exemption, the Court identified the following three legal characteristics of inherited IRAs which distinguish inherited IRAs from traditional or Roth IRAs:

  1. The holder of an inherited IRA is prohibited from making additional contributions to the inherited IRA;
  2. The holder of an inherited IRA is required to withdraw funds from an inherited IRA irrespective of the holder’s age relative to retirement; and
  3. The holder of an inherited IRA may withdraw funds from the inherited IRA at any time and in any amount without the imposition of a penalty.

Based on these characteristics, the Court held that funds held in an inherited IRA are essentially a pool of funds available for the account holder’s immediate and unrestricted consumption, rather than funds “objectively set aside for retirement.”  Accordingly, such funds are not “retirement funds” for purposes of § 522(b)(3)(C) and, therefore, are not exempt from the claims of bankruptcy creditors under § 522(b)(3)(C).

The IRS publishes final regulations on the deductibility of miscellaneous itemized deductions of trusts and estates

The IRS has released final regulations addressing the deductibility of miscellaneous itemized deductions of non-grantor trusts and estates, effective for taxable years beginning after December 31, 2014 (Treasury Regulation § 1.67-4). The final regulations largely adopt the 2011 proposed regulations.

IRC § 67(e) of the Code provides that miscellaneous itemized deductions of non-grantor trusts and estates are deductible only to the extent that the aggregate of such deductions for any particular year exceed 2% of such trust’s or estate’s adjusted gross income (“AGI”) for such year. An exception to this general rule provides that miscellaneous itemized deductions of non-grantor trusts and estates will be fully deductible if the cost or expense “would not have been incurred if the property were not held in such estate or trust.”  Historically, disagreement existed between the courts and the IRS as to the meaning of this phrase. See O’Neil v. Comm’r, 994 F. 2d 302 (6th Cir. 1993); Mellon Bank v. United States, 265 F. 3d 1275 (Fed. Cir. 2001); J.H. Scott v. United States, 328 F. 3d 132 (4th Cir. 2003). This disagreement was resolved in 2008 with the U.S. Supreme Court’s decision in Knight v. Comm’r, 552 U.S. 181 (2008).

In Knight, which addressed the application of IRC § 67(e) to investment advisory fees, the Supreme Court held that a miscellaneous itemized deduction of a non-grantor trust or estate will not be subject to the 2% floor only if it would be “uncommon or unusual” for an individual to incur such expense. Because it is not uncommon or unusual for individuals to incur investment advisory fees, the Supreme Court held that investment advisory fees are subject to the 2% floor, except to the extent that the fee constitutes a special, additional charge applicable only to fiduciary accounts or due to unusual investment objectives.

In 2011, in response to the Knight decision, the IRS issued proposed regulations addressing the deductibility of miscellaneous itemized deductions of non-grantor trusts and estates that closely tracked Knight. The final regulations do not depart significantly from the 2011 proposed regulations.

Under final regulations, which are published at Treas. Reg. § 1.67-4, a cost will be subject to the 2% floor if it:

  1. Is included in the definition of miscellaneous itemized deductions under IRC § 67(b);
  2. Is incurred by a non-grantor trust or an estate; and
  3. Commonly or customarily would be incurred by a hypothetical individual holding the same property.

Similar to the 2011 proposed regulations, the final regulations set forth numerous categories of expenses and addresses whether such expenses are subject to the 2% floor. The following is a brief summary of some of the expense categories addressed by the final regulations:

  1.  Litigation Expenses – Costs incurred in defense of a claim against an estate, a decedent or a trust that is unrelated to the existence, validity or administration of the trust or estate is subject to the 2% floor.
  2. Tax Preparation Fees – Costs incurred in the preparation of estate and generation-skipping transfer tax returns, fiduciary income tax returns and the decedent’s final income tax return are fully deductible. Costs incurred in the preparation of all other tax returns are subject to the 2% floor (this includes gift tax returns).
  3. Appraisal Fees – Costs incurred to determine the fair market value of property as of the date of death (or the alternate valuation date), for purposes of making distributions or as otherwise necessary to prepare the estate’s or trust’s tax return are fully deductible. Costs incurred to determine the fair market value of property for any other purpose (e.g., to obtain insurance), are subject to the 2% floor.
  4. Investment Advisor Fees – Generally, investment advisor fees are subject to the 2% floor. However, certain incremental costs in excess of what an individual would pay are fully deductible. Such incremental costs include special, additional changes added solely because the investment advice is rendered to a trust or an estate rather than an individual or is attributable to unusual investment objectives.
  5. Bundled Fees – Generally, bundled fees (i.e., a single fee paid to a fiduciary for the performance of a variety of services) are required to be unbundled and allocated between expenses subject to the 2% floor and expenses not subject to the 2% floor. However, if the bundled fee is not computed on an hourly basis, only that portion of the fee attributable to investment advice is subject to the 2% floor. The regulations provide that any reasonable method may be used to make the necessary allocation.

The IRS announces changes to its offshore voluntary disclosure program

The IRS has announced changes to its offshore voluntary disclosure program (“OVDP”), including changes to its streamlined compliance procedures (IR-2014-73, June 18, 2014). The changes are anticipated to assist a larger population of taxpayers come into compliance with their U.S. tax obligations.

The most significant changes to the streamlined filing procedures include: (1) making the streamlined procedures available to a wider population of U.S. taxpayers residing outside of the U.S. and, for the first time, to U.S. taxpayers residing in the U.S.; (2) eliminating the requirement that the taxpayer have $1,500 or less of unpaid tax per year; (3) eliminating the required risk questionnaire; and (4) requiring the taxpayer to certify that previous failures to comply were due to non-wilful conduct.

The most significant change to the OVDP will be an increase of the offshore penalty percentage from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account is under investigation by the IRS or Department of Justice.

New streamlined application procedure for charitable organizations to have their exempt status recognized by the IRS

On July 1, the IRS released Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, providing small 501(c)(3) organizations a significantly streamlined procedure (a three page application rather than the current twenty-six page application) for having their exempt status recognized by the IRS (Revenue Procedure 2014-40).

The new streamlined application is available only to 501(c)(3) organizations with assets of $250,000 or less and gross receipts of $50,000 or less. Form 1023-EZ includes a twenty-six question Eligibility Worksheet for the applying entity to complete to determine whether it qualifies to use the new streamlined application. The IRS anticipates the approximately seventy percent of 501(c)(3) organizations will qualify to use the new streamlined application.

Is a Madoff account taxable for estate tax purposes?

Estate of Kessel, is a case that arose out of the Bernie Madoff (“Madoff”) Ponzi scheme (Estate of Kessel v. Commissioner, T.C. Memo 2014-97 (May 21, 2014)). Bernard Kessel (“Mr. Kessel”) was the sole owner of Bernard Kessel, Inc. (the “Corporation”). The Corporation had a pension plan (the “Plan”) of which Mr. Kessel was the sole participant. The Plan invested approximately $2.8 million in an account with Bernard L. Madoff Investment Securities, LLC (the “Madoff Account”).

Mr. Kessel died in 2006, prior to Madoff’s arrest and the subsequent collapse of the Ponzi scheme. Mr. Kessel’s estate reported the Madoff Account as an asset of Mr. Kessel’s estate, valued at approximately $4.8 million. The value of the Madoff Account was based on an appraisal of the assets purportedly held in the Madoff Account on the date of Mr. Kessel’s death.

Following Madoff’s arrest, the Plan attempted to recover the assets purportedly held in the Madoff Account the month prior to the arrest (a little over $3 million) from the Madoff Trustee. The Madoff Trustee rejected the Plan’s request because the Plan was deemed to be a “net winner.”  That is, the Plan had actually withdrawn more money from the Madoff Account than the Plan had contributed to the Madoff Account. After the Plan’s request to recover assets was rejected, Mr. Kessel’s estate filed a supplemental estate tax return reporting the value of the Madoff Account as $0 and requesting an estate tax refund of $1.9 million, which was the estate tax attributable to the inclusion of the Madoff Account in Mr. Kessel’s estate at $4.8 million.

The IRS rejected the estate’s request for a refund and the estate subsequently filed a Tax Court petition. In response to the Tax Court petition, the IRS filed a motion for summary judgment on two issues, both of which the Tax Court denied. First, the IRS argued that the property to be valued for estate tax purposes was the Madoff Account itself, and not the assets purportedly held in the Madoff Account. Based on the facts before the Tax Court, the Tax Court determined that it could not say whether the Madoff Account constituted a property interest includible in Mr. Kessel’s estate separate from, or exclusive of, any interest Mr. Kessel had in the assets purportedly held in the Madoff Account. Second, the IRS argued that a hypothetical willing buyer and willing seller of the Madoff Account would not reasonably know or foresee that Madoff was operating a Ponzi scheme at the time of Mr. Kessel’s death and, as a result, the later occurring event (i.e., the collapse of the Ponzi scheme) should not be taken into consideration in determining the fair market value of the Madoff Account on the date of Mr. Kessel’s death. The Tax Court held that whether a willing buyer and willing seller would have known of or foreseen the Ponzi scheme is a question of disputed fact that needs to be resolved at trial. Accordingly, the Tax Court denied the IRS’s motion for summary judgment on both issues.

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Thursday, July 24th, 2014 EN No Comments

Succession acquires LRH Wealth Management for £3m


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Succession has bought LRH Wealth Management for over £3m as it eyes another 17 acquisitions this year.

The purchase is Succession’s eighth so far, with the group spending more than £33m buying advice businesses.

Halifax-based LRH Wealth Management was formed in 2007 and joined Succession in 2010. It has more than £100m in funds under management.

Succession says it expects more deals to be announced in the next month.

Succession Group chief executive Simon Chamberlain says: “We have accelerated our acquisition programme and are on schedule to acquire at least 17 wealth management businesses by year end, establishing a significant branded presence across the UK.

”Our target is to acquire the best 50 firms from the membership of Succession Advisory Services by 2017.”

In January, Succession Group sold a 50.1 per cent stake in the company to Inflexion Private Equity in a deal that provided capital for acquisitions.

In May, Cornerstone Financial Planning and Hopkinson Associates become the sixth and seventh firms acquired by the business, adding around £100m in assets under advice.

Last year, Succession bought Smart Wealth Management, Campbell Dallas Financial Services, The Financial Management Group, Westminster Financial Planning and Westpoint Financial Consultants.

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Wednesday, July 23rd, 2014 EN No Comments

Colony Acquires $200M Boston-Based RIA

The Colony Group picked up Long Wharf Investors on Wednesday in a deal that boosted the Boston-based Focus Financial partner firm’s assets to $3.75 billion under management. 

Long Wharf brings $200 million in client assets to the table in Wednesday’s deal, Colony’s third since joining Focus Financial.  Since 2011, Colony has tripled its assets under management, from $1.2 billion to approximately $3.75 billion.

Co-founded in 1995 by John Keller and David Bush-Brown, Boston-based Long Wharf is a boutique RIA that serves 125 high-net-worth clients, including families, trusts, foundations and non-profits. Long Wharf’s principals, Keller and Rod Macdonald, will join the Colony team following this transaction. Bush-Brown will not be joining Colony.

Macdonald said he was attracted to Colony’s like-minded approach and similar core values, adding the merger allows Long Warf to better protect their clients’ interests through a built-in succession plan and provided their advisors with access to greater pools of capital.

“Long Wharf was founded 20 years ago to provide our clients with boutique wealth management services and proprietary investment strategies,” Macdonald said. “When we were introduced to Colony by Focus, we immediately recognized that they had a similar client service philosophy, and there was a natural fit between the two firms.”

For Colony, the deal continued the firm’s strategy to acquire outstanding talent as a way to achieve growth, says Michael Nathanson, CEO of The Colony Group. “Long Wharf Investors has built a firm that is fully dedicated to providing clients with a first-class wealth management experience and the investment strategies to match.”  

Colony previously acquired Mintz Levin Financial Advisors in Boston in 2012 and Prosper Advisors in New York in 2013.

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Wednesday, July 23rd, 2014 EN No Comments