Author: A.T.

If you take out a life insurance policy, the cash it produces when you die becomes part of your taxable estate. If everything you own — house, insurance proceeds, pension assets and so on — total less than $600,000 (gradually rising to $1 million over the next few years), no estate tax will be due. But beyond that, the tax is heavy.

If you’re leaving everything in excess of $600,000 to your spouse (or to charity), no estate tax will be due, either. But when your spouse dies, estate tax may well be due.

So if you’re trying to leave some money to your kids, here’s what you can do: set up an irrevocable trust and have it apply for the life insurance (or transfer ownership of an existing policy into it, at least three years before you die). When you die, the life insurance proceeds go to fund the trust, and no estate tax is due. You might set up the trust to pay your spouse an income while she’s alive and then be distributed to your kids.

Speak with a trust and estates attorney for the details, and to be sure what I’m saying applies to you. But for people who have appreciable assets, this issue of “who should own the life insurance” is a basic estate-planning question to consider.

Comes this smart tip from the Percy Hoek insurance agency (if you happen to live out on Long Island, New York, or perhaps even a bit further afield, you could do worse than to talk to these folks — one of the nicest, most knowledgeable, hardest-working independent agents I’ve ever run across — 516-589-4100):

“More insurance companies are offering or suggesting you report claims directly to them, not to the agent. It’s easy, but can be costly too.” The problem is: even if your claim proves not to be covered or not to exceed the deductible, your call to the insurer will be “logged.” They didn’t pay out a dime, yet they consider it a smudge on your record. Rack up a few such smudges, and you could see your rate rise or your renewal declined. Whereas if you had called your agent, you would have had these “non-claims” filtered out. A good agent can also provide some help and guidance in making and following through with a claim.

This is not to deny the benefits of dealing with a “direct writer” — insurers like GEICO (which happens to insure my car) that sell direct by phone rather than through agents. You’ll generally get a lower price shopping around and going with a direct writer. But there can be benefits to personal service and guidance as well. If you have more time than money, I’d shop around for a cheap direct writer. If you’re a little further along financially, you may want to establish a relationship with a good independent agent — yet occasionally do reality checks by shopping around on your own. With the Internet, this is likely to get ever easier.

Also, consider that with life insurance, unlike homeowners and auto insurance, you’re not likely to make a lot of claims. So there it’s particularly sensible, if your needs are simple and direct — you’ve got young kids, you need all the coverage you can afford — to shop around yourself for the cheapest term insurance you can find.

Tomorrow: Who Owns Your Life Insurance Policy?

If you’ve seen the current WORTH Magazine, with Marilyn Monroe on the cover, you may have read more than you’d ever want to about my “historic documents” — as indeed you may have just by visiting this site from time to time. But for those of you who thrill as I do even at letters to Marilyn Monroe, let alone a letter from her or JFK or Einstein, here’s my latest trove.

The point of this is to give you at least 70% of the fun I get from my addiction, while sparing you the zillions of dollars that it costs:

• A letter from James Hall, of “Nordhoff and Hall,” which if you’re like me rings some distant, distant bell in the back of your brain . . . 50 points and a fat-free cheesecake if you remembered them as the authors of Mutiny on the Bounty so many of us read in junior high. It’s a long letter from Tahiti, written August 24, 1935, that includes a photo from the Isle of Man Weekly Times showing rudder of the Bounty (“recently salvaged under the supervision of Mr. Parker Christian, Chief Magistrate of [Pitcairn] Island and a direct descendent of Fletcher Christian”). The bulk of the letter talks about the movie then being made with Clark Gable that would win Best Picture and rave reviews. (A 1962 remake with Marlon Brando would do nearly as well.)

• “Yes,” Hall writes, “the Bounty story is being filmed by Metro-Goldwyn-Meyer, and is to be released, I believe, sometime in the autumn. If ever you should see it, I hope that you will remember that neither Nordhoff nor myself had anything to do with the business. Frank Lloyd, who is directing the picture is an Englishman and a very fine chap . . . [but] I read the script they are working from. They have made a proper mess of history: for example, in the screen version it is Bligh himself who comes in the Pandora and not Edwards! And if I’m not mistaken, they have Admiral Nelson (then a captain) as one of the members of the court-martial! Well, so they do things in the cinema — at least in Hollywood. Lloyd says that it doesn’t matter in motion-pictures and that 999 people in every 1000 who will see the film will know nothing of the historical facts. I suppose that is true. Hollywood methods are, certainly, curious to see.”

• What’s more, Hall recounts, Lloyd and some cameramen and actors and actresses had recently been to Tahiti to “make island backgrounds for some of the scenes. They stayed four weeks, and when they returned to California, they discovered that their cameramen, unfamiliar with tropical conditions, had made a botch of the whole business; so it had to be done all over again.”

• A letter from Irving Berlin in New York to his agent in Los Angeles, September 3, 1940, pitching a big new “Holiday” musical movie for which Irving wanted 10% of the gross and a contract written in such a way that the California tax authorities would not be able to grab any piece of it. “We are to have Bing Crosby, Mary Martin and Fred Astaire, if he is available and I am pretty sure that he will be. One new song that I already have written is to be a main par of the contract – it is called WHITE CHRISTMAS and it is to be used in the Christmas Holiday sequence.”

• From the details of the letter one sees that Berlin was very much a businessman as well as a creative genius, and also that he knew his own worth. He tells his agent that in talking with Paramount, “we agreed that it wouldn’t be worth either Paramount’s or my while to do a Bing Crosby picture. This must be an Irving Berlin musical setup . . . Irving Berlin’s HOLIDAY INN.

• A long handwritten letter from Richard Cobden, the British statesman known for repealing the Corn Laws and championing free trade, written on Bastille Day, 1857, to a French journalist: “Whilst you and I aim at precisely the same end, the elevation of the mass of the people, I am afraid I have the misfortune to differ from you as to the means. I do not believe it is possible to elevate wages by any direct act of legislation. I believe that freedom of industry, & perfect liberty of exchange, are the first essential to a fair rate of wages . . . .”

• It’s interesting how little the debate changes. My own view is that this is largely correct — but that things like a minimum wage can make a positive difference. We were told it would be a terrible blow to small business and boost unemployment if the latest catch-up in the minimum wage were enacted, not to mention its inflationary impact. And yet somehow we have survived it thus far, with employment higher and inflation lower than ever. It’s a big topic, but fun to read one of the historically most important proponents of the laissez-faire point of view.

• And then there’s Einstein with a nice handwritten thank you note from December 7, 1952, that includes two snippets I particularly like: “Anything is better than being suspended between fear and hope. At least it appears that way to me, so that I never understood the attraction of gambling and betting.” And later in his note, of his adopted country: “Our good America strives successfully to be its own caricature.”

• And John Reed — about whom Warren Beatty made Reds — with an autographed second edition of his 1919 classic 10 Days that Shook the World, about the Russian revolution. (Anybody out there got a signed first edition?) And with a letter to a socialist cartoonist in which Reed writes: “The Left Wing is starting a new Labor Magazine — labor pure and simple — to be distributed by propaganda groups in the factories. We are of course poor as hell, and nobody’s getting anything for doing it. I’m supposed to be the editor. Can you do us a cartoon for the opening number cover? I suggest an enormous working man scratching himself all over (not naked) while little cooties (capitalists) in silk hats and frock coats run around biting him. Across the stream stands Russia (large, hairy and handsome, looks fine and happy) holding out a bottle labeled ‘Lenin’s Cootie Cure.'”

• Reed goes on to suggest that maybe the cooties (and here we thought this was a word we made up in high school) might be in different costumes, and that Young, the cartoonist, might label them “Manufacturer,” “Banker,” “Capitalist Newspaper Editor” and so forth. One wonders what Reed — or Marx or Lenin, for that matter — would think coming back to Earth today and reading up on the history of the 80 years just passed since those 10 days in 1917 that shook the world.

“I rolled money over from a profit sharing plan in a company I left into an IRA. At the time I knew little about investing and signed up with a gentleman who said he would manage it for 2% a year, and said that it should return 10% a year, based on his model forecasts. He gets the 2% every year, but the performance of the funds has been lackluster, which worries me because the market was doing the best it had ever done. I am 27 and plan to keep it in an IRA until I am 65. Would I be better off rolling the money into a self managed index mutual fund like Vanguard, and just forgetting about it?”

Yes! Two percent is a terrible handicap — like betting on a horse with a 400-pound jockey.

“This is no friend-of-a-friend story, this one happened to me! I received a wedding present from a friend, (let’s call him Mr. Perkins). It was a glass platter shaped like a fish. Inside the box was a card reading: ‘To: Mr. and Mrs. Perkins, From: Mr. and Mrs. Matthews.’ Apparently, my wife and I liked the platter more than the Perkins family did. We hung it up as a wall decoration. I resisted the temptation to hang the card next to it.” –Scott Flanagan

Well, see? That was just my point! The Perkinses were right to regift it to you! You like trout-shaped platters! They just should have paid closer heed to Regifting Principle #2.

From Simeon: "In June of 1983, my parents purchased $15,000 worth of Seagate, 750 shares at 19 5/8. They sold those shares at 6 1/4, losing $10,360 in the deal. In August of 1989 they received information about a class action lawsuit, but the letter said that nothing needed to be sent in at that time. Nothing else was ever heard from the lawyers, and it was assumed that the case was lost. My mother was watching the news one evening in 1995 and she heard about the class action lawsuit — and that it had been successful. She was very upset and called the law firm responsible for the suit. They sent her a claim form, but said they did not have her on record of being a claimant. She would be considered a "late applicant." We had never heard anything from them informing us before that we needed to send them anything! In August of 1995 we sent in the claim form, with proof of purchase. From there the case has been a dead end.

"Any help or advice would be greatly appreciated. If you help us in recovering any money, not only will you make two anti-smoking activists/professors very happy (they have your book on the shelf), but we’ll also send you 10% of it.

"P.S. Why am I, a 20-year-old college senior, pursuing this case for my parents? Because I think it is terrible what happened to them. They got burned as novices in the stock market by this company which didn’t disclose their financials honestly, and now they will never touch the market again. Hasn’t stopped me, though."

Sorry I can’t be of help — if the law firm that handled the class action isn’t helping, I can’t either. But at the risk of making you REALLY mad, and without knowing all the facts, I’d suggest that this may not be quite the case of good and evil it seems.

Investing in any small high-tech stock, as Seagate was back then, is risky. Had your folks held on, they would have made a big profit. The fact that they bought at a high price on the promise of a bright future — but then lost money when they sold at the bottom because there was a scary disappointment along the way — is not necessarily someone else’s fault. SEA’s future, as it turns out, WAS very bright — your folks were right to buy into its long-term promise.

The question, clearly: Did SEA purposely mislead people about that quarter’s results (or whatever). I have no idea. But I do know how hard it is to foretell the future of anything, let alone the profits of a then small disk drive company in a wildly evolving, zooming, competitive market. So maybe they were just carried away with their optimism — which did ultimately prove more than justified — rather than trying to bilk your folks out of money that should have been safe and sound in a speculative growth stock. Safe and sound and speculative growth stock are just not phrases that properly belong together.

The last thing to say, incidentally, is that — to my knowledge (which may be wrong) — SEA never lost such a suit; they settled one. The difference being that, in the real world, maddening as it is, innocent parties really do wind up settling suits frequently. (Of course, guilty-as-sin parties do, too.) If you can settle a $100 million suit for less than the legal costs to win it — and at the same time protect your shareholders from the outside chance of a crazy verdict (juries are not immune to being misled on occasion) and protect your management from having to divert attention from selling more/better disk drives, the logical thing to do, sadly, is settle.

It sets a very bad precedent, of course. And it offends our sense of justice. We want to know for sure whether the party was guilty or innocent — and have him pay through the nose if guilty and be fully reimbursed for the lawsuit if innocent. But in the real world, it just doesn’t work this way. (Nor is guilt or innocence in a matter like this always clear-cut. Where does optimism end and fraud begin?)

I really don’t know whether SEA purposely misled your folks. But if you’ve researched the company, you can see it was not exactly some total scam — it’s today grown to be, I think, the largest disk drive manufacturer in the world, or something like that.

(And how come you’re only offering 10%? The lawyers who sue SEA, et al, normally take a heck of a lot bigger slice than that! Which is one reason that, along with lots of good suits that should be brought, there seem to be even more that shouldn’t be, but are to extort a settlement.)

(And one last thing. If this is the settlement I think it may be — sorry I haven’t had time to check for sure — I believe the lawyers settled for something like 9 cents on the dollar, which would mean $900 for your parents, less a third to the lawyers. It amounted to maybe $3 million to the lawyers, but $600 to folks like your parents. So, if it’s any consolation, it’s not as if by missing a notice of the suit your folks left $10,000 on the table.)

I know this is a controversial topic. As usual, all comments welcome.

From J.C.: “Does offshore banking provide the financial privacy and competitive return it’s represented as doing? I am not interested in anything illegal or banking with drug lords, just like to have more privacy in my financial dealings without sacrificing returns. What are the advantages and disadvantages of taking my money abroad?”

I’m no expert in this, but the first disadvantage is that you have to check a box on your tax form saying you have foreign accounts. So there goes the privacy, or at least some of it. Second, you don’t have the FDIC standing behind your deposits. Third, there is not likely to be a meaningfully better return from a German or Swiss or Bahamian bank than from a U.S. bank unless you’re taking more risk. Fourth, the transaction costs for doing this, and the effort, may overshadow any advantages.

That said, some people do want their assets abroad, sometimes outright, sometimes in trusts, to escape creditors or lawsuits or whatever. But the idea’s never grabbed me.

See also: Offshore Funds.

Thanks to Dave Davis for these facts about America’s money (from a book called The History of Money):

• It’s printed on presses made by Germans and Italians.

• The average life span of a bill varies from eighteen months for the one-dollar note to an ancient nine years for a one-hundred-dollar note. A bill can be folded four thousand times before it tears.

• Nearly half the bills printed in a day are one-dollar notes, and 95 percent of the bills are used to replace worn-out bills. [Which, even if accurate and up to date, doesn’t necessarily mean our money supply is growing at 5% a year because . . . ]

• Coin and paper account for only 8 percent of all the dollars in the world. The rest are merely numbers in a ledger or tiny blips on a computer chip.

The “money supply” used to be an easy concept back in the days when money was money. But how much money is there in circulation today? Just by whimsically taking out a cash advance on your credit card this afternoon (hey, don’t: the interest rate is ridiculous), YOU create money and balloon the money supply.

Actually, with more and more transactions going plastic or electronic, one might expect the supply of physical money in the U.S. to shrink a little each year. Especially if we could get you to turn in those pennies (don’t give me “what pennies” — you know what pennies). But in fact, a good chunk of the money we print, especially those great new Ben Franklin $100 bills, isn’t printed for the U.S. anyway. It winds up serving as the de facto currency in many countries around the world. This is a good deal for us, because it’s kind of like . . . well, printing money. We don’t just give the Russians, or whomever, this money. They have to buy it from us by exchanging something worth $100 for each one. With dollars more or less as good as gold in places like Russia, our printing $100 bills is kind of like our being able to turn paper into gold. Ah, alchemy.

It’s not fair, exactly, but the rich get — or in this case, the richest nation gets — richer.

Just don’t try printing any on your own.

It used to be that sex and politics were the two hottest topics. Then, for many years, just sex. Now, clearly, credit cards and frequent flier miles are what get the bells ringing. Three responses worth sharing:

Martin Dauber: “Discover Card rebates up to 1% of purchases in cash at the end of the year. So the miles for your 20,000-miles-per-year reader must be worth more than the $50 annual fee plus the $175 or so that Discover gives back. On the other hand, VISA and MASTERCARD Gold cards offer certain product insurance. If this insurance has any value, this needs to be factored in. Our solution: Discover for most purchases. Gold card when we think we may need the extra protection from Mastercard’s Gold Protection. No miles!”

[If you occasionally have to fly without much advance notice, or without a Saturday night stay-over, miles can easily be worth anywhere from two cents to a nickel or more — i.e., 2% to 5% versus the Discover 1%. But if you’re invariably able to snag $279 round-trips, or can only travel during busy or “black-out” periods when the free tickets are unavailable, they’d be worth little more than a penny to you, so Discover would be just as good. — A.T.]

Jonathan Hochman: “Because of my business, I do a lot of traveling, spend a good amount on credit cards, and make plenty of international phone calls. My strategy is to convert these miles into US Savings Bonds. I know of one long distance company (AT&T) and one credit card company (Diners) that offer this type of reward. The conversion rate is between 1.25 and 2 cents per mile (I assume savings bonds are worth 50% of face value). This strategy may seem less effective than taking free airplane tickets, possibly worth up to 5 cents per mile. However, when I need airplane tickets, I can usually get a low price by shopping around, planning ahead, or else by using miles accumulated on actual flights. Free US Savings Bonds are free money. Who knows, I might even hold them for a while and earn tax deferred interest. A ‘free’ airplane ticket is a temptation to waste money on food, entertainment, rental cars, and hotels.”

Dorothy Mallonee: “Your column today was fine, as far as it went. But you ignore one of the simplest and best frequent flier programs around. Southwest Airlines’ Rapid Rewards program is based on trip segments, not miles. Every time a member flies one-way, she receives credit for one trip segment; a round-trip earns two trip segments. When the member accumulates 16 trip segments (flies 8 round-trips), Southwest sends her a free ticket good for a round-trip anywhere Southwest flies. I normally fly on business between Los Angeles and northern California (Oakland or Sacramento), but I often use my free tickets to fly from Los Angeles to Baltimore (to visit DC) and hope soon to fly from Los Angeles to Providence (to visit Boston or NY).”

[Oh, sure, Dorothy. Just wait til you see what a cab from Providence to New York costs!]

“Free tickets may be used by the member or given away; I often give them to friends or family members as gifts, and have given them to organizations to raffle off to raise money. I have seen advertisements for companies that will buy the free tickets for around $320, although I have never sold one and don’t know Southwest’s official policy on selling them. I once overheard a fellow passenger on a Southwest flight tell his companion that when he accumulates several free Southwest tickets, his travel agent will exchange them for tickets to Europe.

“Now for the part of the program relevant to today’s column: Southwest now has an affinity credit card tied to Rapid Rewards. The fee is $29 per year (waived the first year), and the member receives one trip segment for every $1000 she charges.”

[Aha! A free ticket thus costs just 16,000 dollar-credits, versus American’s 25,000, say. Of course, with American, you don’t have to take a cab from Providence.]

“Southwest also has other affinity arrangements with MCI (trip segments if you use their long distance or cellular service) and Hertz and Alamo (one trip segment each time you rent a car).”

[That works out to be a lot better than the 500 miles you typically get from the other carriers’ frequent flier programs for renting a car.]

“Between my flights, credit card purchases and car rentals, I now qualify for the Companion Pass, the ‘premium program’ which allows me to take the person of my choice free with me whenever I fly on Southwest, even if I am using a free ticket! Southwest’s routes now cover most of the continental US, and they are adding several cities per year. I know the Rapid Rewards program does not have the cachet of the programs of some of the international carriers, but it’s simple and gets you free trips fast. The major restriction is that the member must collect 16 trip segments within a year.

“I will admit that travel on Southwest is something of an acquired taste. You have to get used to the ‘airplane as bus’ concept, and long trips (e.g., LA to Baltimore) normally involve a couple of stops. And Southwest usually uses the ‘second’ airport (Midway in Chicago; Oakland in the Bay Area); that is often a blessing in disguise since the second airports usually have cheaper parking, and are often easier to get to and from. But Southwest has the best on-time record, and it’s actually kind of a hoot once you get used to it. I’ve flown United on my business routes a couple of times, and I’ll trade the Southwest peanuts and pleasantness for the surly United employees any day of the week!”

From Dana Nibby: "If index funds beat 85% of all other mutual funds, and there are 7000 mutual funds, this means 1050 funds (15%) beat or match index funds. What’s the time horizon for the 85% figure? And . . . of the 1050 funds which beat or match the index, are these largely the aggressive growth funds?"

When the market is going up, it’s the aggressive growth funds that tend to do better than average. When it’s going down, it’s the conservative funds that do.

Most funds, over time, do about average. It’s VERY hard consistently to do better. But then you have to subtract the sales loads many funds charge and annual expenses. Index funds have no loads and charge tiny expenses and so have a huge advantage. (In the investment derby, I’m fond of saying, the fund with the lowest expenses is the horse with the lightest jockey.)

As an individual stock picker, this is also your advantage in paying no annual expenses and seeking a broker that charges very slight commissions. (Counter-balancing this advantage is the amount of time and worry stock-picking can take, and the fact that you are pitting your part-time skills against some highly skilled, impressively equipped, full-time competitors.)

The longer the time horizon, the better the index funds will do. Why? Because of the 15% (or 25% — whatever) of actively managed funds that do manage to beat the market by enough to more than overcome their expense handicap in any given year, study after study shows that few do so consistently; i.e., the ones in the 15% this year may do poorly next year.

(Index funds also subject you to less tax, because they tend to buy and hold. In a taxable account, that gives them yet another strong edge over actively-managed funds.)

So if you take the mutual fund route, you should not feel dumb betting on a couple of index funds rather than trying to find tomorrow’s outperformers.

Monday: The Money or the Miles – Part II