Does the IRS Have Its Mitts on Romney’s Foreign Accounts?
February 14, 2012 3:27 pmLast week I wrote about the latest IRS program that encourages US citizens and residents to come clean and voluntarily disclose foreign account information. This week we heard that presidential candidate Mitt Romney has foreign accounts in the Cayman Islands and possibly other foreign countries. We also heard that Mr. Romney will release personal tax information as early as the next few days.
I understand the misconception that, somehow, off-shore corporate profits and foreign accounts are un-American and perhaps illegal. However, foreign accounts are more and more related to the global economy and most of these accounts are legal if properly accounted for and disclosed. By contrast, if Mr. Romney failed to make the required disclosures or report his foreign account income, this would probably end his run for the presidency. Certainly this would be much worse than the career-stalling failures of politicians and officials in the past, such as failing to properly account for and pay taxes on income paid to a maid or nanny.
I suspect that the information Mitt Romney is expected to disclose will show that he is in full compliance with federal tax and banking laws. Although the “spin” may be that somehow Mr. Romney is doing something privileged, if not wrong, for having these foreign accounts, a bigger issue upon his disclosure may be why the tax rate on his substantial income is so low. I suspect this will have a lot to do with the preferential tax treatment of certain income, like qualified dividends and capital gain, which rich people tend to have more of. This is the same issue Warren Buffett highlighted last year when he disclosed his income tax liability for 2010.
Mr. Romney’s tax footprint may also show that much of his wealth was derived from ‘carried interests’ while he was with Bain Capital. A carried interest is a profits interest in a business or venture, usually held in a partnership or limited liability company, which becomes valuable after partners who contributed capital recover their investment plus a priority return. Although the value is created through the promoters efforts the carried interest is taxed like a partnership interest when income and gain is recognized. The Obama administration is looking to tax profits from carried interests as personal earnings instead of capital gain. The carried interest tax issue, however, is a red herring and a topic for another time. For now let’s get ready to scrutinize Mr. Romney’s return.
Good deal? Latest IRS Crackdown on Undisclosed Foreign Accounts
February 3, 2012 3:23 pmFederal banking and tax law requires people to disclose foreign accounts they own or have signature authority over. Because United States citizens and residents are taxed on worldwide income they must also report the income derived from these accounts. For various reasons, many people have not provided the necessary account information and have not reported the income.
The IRS recently announced its third program whereby people can voluntarily report previously undisclosed foreign account information and pay tax on foreign account income. I suspect the IRS is hoping the level of participation will turn into a stampede based on its success with the two previous programs and the increased reporting of account/asset information by foreign financial institutions. Over $4.4 billion has already been collected under the previous programs.
Under the new program, a penalty as high as 27.5% of the highest aggregate foreign account/asset value during the eight full tax years prior to disclosure may be assessed. In limited situations the penalty may be as low as 12.5% or 5%. In addition, participants will be required to file or amend tax returns for up to eight years and pay income tax, interest and certain tax penalties related to the previously unreported income.
Why would anyone want to voluntarily participate in a program with penalties and costs so severe? Well the short answer is if you are caught the result may be substantial fines and free housing in a federal prison for up to 10 years because you may be charged criminally. Also, the statutory penalty can quickly exceed 100% of the aggregate foreign account/asset value consuming domestic assets as well, and you are still liable for taxes, interest and tax related penalties. In this context the program looks like a good deal.
Failure to comply may not be intentional or may be the result of bad advice. People in this situation should not procrastinate. It will be harder to claim innocence as this issue becomes more public. Also, although the latest program does not have a specific expiration date the IRS may choose to end the program at any time or, worse, the IRS may find you first, making you ineligible to participate under the voluntary disclosure program. I suspect people who intentionally chose to hide assets, especially assets obtained through illegal enterprise, will not come forward and hope the financial maze they have established will evade detection.
Under whatever circumstance, if you decide to proceed under the program you should not go at it alone. Although a qualified accountant can amend returns and prepare the necessary filings, you may want to hire a qualified tax attorney because of the potential exposure to criminal liability that is involved.
A Well-Executed Succession Plan is Essential – Just Ask Apple.
January 31, 2012 4:04 pmApple just released financial results for the quarter and posted record-setting numbers.
The company’s quarterly net profit of $13.1 billion is twice the six billion dollars recorded the previous year. Much of the quarter’s gains come from the sales of the latest 4S iPhone, which sold more than 37 million units.
The gains eliminate any concerns about Tim Cook as Apple’s new CEO. Last summer, an ailing Steve Jobs named Cook as his long-awaited successor. The move was part of a thoughtful, well-executed succession plan and the results show benefits of having such a plan whether the business is the size of Apple, or a closely owned family business. A succession plan is essential to the continued success of a business. Watch as SmolenPlevy’s Jason Smolen discusses the importance of business succession plans on ABC7’s Washington Business Report.
Jason Smolen on ABC7′s Weekly Business Report:
Federal Estate Tax Still Headed in the Wrong Direction
January 24, 2012 6:20 pmUnless the law is changed, federal estate tax liability is set to substantially increase in 2013. This will be a continuation of estate tax liability being substantially affected based solely on the year a person dies. What is the logic in this outcome?
For persons who die in 2013, 2013 estates in excess of $1 million may be subject to federal estate tax liability. In contrast, 2010 estates were allowed to elect out of the federal estate tax. Many very large estates did elect out with billions of dollars of value going untaxed. Non – electing 2010 estates and 2011 estates at or below $5 million were generally not subject to federal estate tax and 2012 estates at or below $5.12 million will generally not be subject to federal estate tax. Another major difference is the estate tax rates. For 2010-2012 the maximum estate tax rate is 35%. The maximum tax rate for 2013 will be 55% starting at taxable estates over $3 million (60% for taxable estates between $10 million and 17 million due to a surtax of 5%).
With potential differences in estate tax liability in the millions of dollars, we will again face the morbid issue of which year is the better year to die. As if we are judging wine, 2013 will be a very bad year and 2010 will have been a very good year to die, with 2012 and 2011 pretty good as well. Hopefully, the very best years are ahead (perhaps as early as 2013) when the federal estate tax is repealed.
I believe legislators can negotiate a repeal of the federal estate tax (with basis step-ups upon death more generous than step-ups allowed under IRC Section 1022 for 2010) as part of an overall increase in revenue. Instead of owing taxes upon death, upper income and wealthy taxpayers would be more pay-as-you-go, with higher annual income taxes. As I mentioned in several previous articles, revenue is only part of a solution to our government’s budgetary problems. The government will also have to reduce spending to bring costs more in line with what we can afford related to GDP.
I understand that most families do not have assets in excess of a million dollars. Flat to down home values, investments, yields and personal earnings since 2008 have made it more difficult to exceed this threshold. Still, a million is a low number especially if there is improper planning (marital deduction overfunded, life insurance includible in decedent’s estate, etc.). I hope that Congress will at least keep the exemption amount above $5 million.
Because each spouse has an exemption amount, I recommend you discuss with your estate planner the optimum use of both exemptions through gifting, the use of disclaimers, powers of appointment, the marital deduction, division of assets, etc.
NOTICE: Your Credit Limit is About to Increase $1.2 Trillion Dollars, Effective February 2012
January 17, 2012 5:46 pmProbably by the end of the week President Obama will institute an increase of the federal debt ceiling by $1.2 trillion to over $16.2 trillion dollars. Although the increase is subject to Congressional disapproval, expect little more than political posturing from Capital Hill.
This increase should carry the US through 2012 before another increase will be needed to fund projected government expenses. Because of the Presidential and Congressional elections in November, expect the employee Social Security payroll tax cut (from 6.2% to 4.2%) for all of 2012 to pass, with some of its cost funded by the debt increase.
Otherwise, the big fireworks should be for 2013 when the Bush tax cuts are scheduled to expire and the debt ceiling must be raised again. While spending can also be cut it is difficult to envision eliminating another trillion dollars of spending in lieu of any increases in revenue and borrowing.
Is it a V, L or U recession? So far the federal government has attacked this recession with lower taxes, additional borrowing and quantitative easing and low interest rates via the Federal Reserve. Much of this has been done to avoid a much deeper downward lurch in our GDP. But the economy is not cooperating and US debt in excess of GDP is looking more like the members of the European Union. Unfortunately this recession is not a V recession like recessions of the past few decades, where the economy quickly bounced back and actually grew after the downturn. If this was the case the financial prescription should have worked already. Some see this as an L recession with the USA maintaining a new, less affluent, plateau in a more global economy. Others are hoping this is a U recession with the delayed upturn soon arriving.
So far government action may have prevented what would have been a depression. However, our society may have achieved its economic size through too much borrowing, not just by government but elsewhere. You should revisit my article regarding excess debt being economic steroids. If this is so, when will the medicine the government has been applying become dangerous? We ought to start weaning ourselves from excess debt now.
Another Celebrity Divorce Indicates the Need for a Prenup
January 9, 2012 10:31 pmForget the Greek, when it comes to Russell Brand’s just announced divorce from Katy Perry, it’s get him to the bank. Media reports say the British comic actor stands to make more than $20 million dollars in the split from the pop superstar. Turns out the celebrity pair didn’t have a prenuptial agreement before they tied the knot in 2010 in India. And that, says Alan Plevy and Kyung (Kathryn) Dickerson, Family Law attorneys at SmolenPlevy, is a problem for all couples – not just celebrities.
Beyond the Brand-Perry split, the “no-prenup” issue has been in the news lately with the divorce of Kim Kardashian and Kris Humphries, who are arguing over the validity of their prenup. On the line: the $17 million dollars they earned from a televised wedding special—along with her 20.5 carat, two-million dollar diamond wedding ring. In addition, notorious actor/director Mel Gibson, whose just completed divorce from his wife of 31 years cost him $425 million.
But Dickerson says these high profile cases shed light on the necessity of prenups in all marriages. Without one, ex-spouses may end up battling it out in court: a long, drawn-out process that no one wants to endure alongside the stress of a divorce. The premarital agreement often forces young couples to discuss the uncomfortable issues, which they might otherwise have ignored. “A couple might adopt a pet while they’re living together, and figure out what will happen in case they split,” says Dickerson. “But they won’t talk about finances, children, religion and other important topics. A prenup, no matter who brings it up, opens the door to those conversations.”
In many cases, people who have accumulated significant wealth have prenuptials in case the marriage doesn’t work out. Similarly, the other, less-wealthy party will want to make sure they are financially stable if the marriage fails. But Plevy explains there are other reasons prenuptials are vital for all couples:
- Prenups address not only what would happen in a divorce, but also in case of separation or death.
- Prenups force couples to address vital financial issues in case of a split.
- Second marriages and blended families create issues because in a split, everyone wants to make sure their loved ones are provided for in the event of separation, divorce or death.
Often, there’s speculation on whether a prenuptial is contractually binding. Dickerson says they are recognized contracts, but each situation is different and certain situations can be contested. For example:
- If you sign a prenup hours prior to your wedding and it’s under duress or stress, the prenups validity could be argued.
- If confidentiality of the prenup is broken (Kris Humphries is arguing the relevance of his prenup with Kim Kardashin because of an alleged breach of agreement).
- If one party was unable to seek legal advice prior to signing the prenup, a lack of understanding or knowledge of the prenuptial agreements could be argued.
Listen to Kyung (Kathryn) Dickerson discuss prenups and how many parents are encouraging their children to sign one before marrying on WMAL Radio; click here to listen to her spotlight.
A Guide For Witnesses
January 3, 2012 6:22 pm
There may be two scenarios when you might be called to testify as a witness; in a Deposition or in a Court proceeding. A Deposition generally occurs at a lawyer’s office and you are asked to answer questions. While a Deposition seems more casual, it should be treated as a Court proceeding. The questions you are asked and answers you give will be recorded by a court reporter. Regardless of whether you are deposed or are testifying in Court, there are certain steps you should take to prepare and to give the most effective testimony.
PREPARATION:
· Prior to giving testimony, it is best to review any witness statements or responses that you have made to refresh your memory.
· In the event you do not have a copy of your statement, then request one from the party that is calling you as a witness.
· If you are testifying in a Court proceeding and have given a Deposition previously, make sure that you have reviewed the Deposition transcript thoroughly.
· If you are testifying in a Court proceeding, you may wish to visit the Court in advance so that you are familiar with the location of the courthouse and the appearance of the courtroom does not appear to be strange.
· Dress appropriately. Your appearance will reflect upon you, and weight and credibility given to your testimony. Don’t chew gum.
GIVING EVIDENCE:
· You will generally be asked the questions first by the lawyer for the party who is calling you as a witness You will then be cross examined by the lawyer for the other party. Finally, the first lawyer may again ask you some questions to clarify your evidence. It is possible that the Judge may also ask you some questions.
· Hearsay evidence is generally inadmissible. You have, no doubt, heard the term “hearsay evidence” on television or in movies. This is when a statement made by another is repeated in Court. Hearsay evidence is inadmissible because you are simply repeating something that you have heard and the “observer” is not in Court to say what they have seen or heard. There are, however, exceptions to the Hearsay Rule, but it is for the lawyers who make that argument and the Court which determines whether you can be permitted to present that evidence.
· If you have ever seen a movie or tv show involving lawyers, then you have heard the word “objection”. In the event that you are testifying and one of the lawyers states an “objection”, then you should stop your testimony and allow the Judge to hear the argument between counsel as to why what you are about to say or what you have said is objectionable under the law. Do not take this personally.
· Oftentimes lawyers will repeat the same question or ask similar questions to one that was already asked. The purpose here may be to determine whether you give the same answer or change your mind. Stick to your guns!
· Sometimes a lawyer will be silent after you have given your answer, for what might feel an inordinate period of time. The purpose here may be to see if you will fill in the time and give information that you have not already provided.
· Sometimes a lawyer will appear rude and cut-off your answer. This is generally because he or she does not want to have the remainder of answer in evidence. Don’t be afraid to complete your answer.
· The lawyer for the party calling you as a witness is not allowed to ask you leading questions. The questions that will be asked will call for a narrative response. A leading question is one that suggests the answer. Hopefully, you have had adequate preparation so you know what the lawyer is seeking to draw from you in your testimony.
· The lawyer for the other party will have the opportunity to cross examine you.This lawyer will be looking to undermine your testimony and hence your credibility. You will not have advance warning of the types of questions that will be asked of you. Attempts may be made to discredit your conduct to show that you are biased or that your testimony is inconsistent.
· Make sure you know where, when, and whom you are to meet. Arrive on time so that you are not flustered. Remember many courthouses today have security like airports and it may take time to get through the front door. You may not be permitted to bring your phone into the courthouse and may have to leave it with the deputies or in a locker.
TESTIFYING:
· Tell the truth. A lie can lose the case. No matter how small or unimportant the falsehood, it could cause your entire testimony to be disbelieved. Do not stop to figure out whether your answer will help or hurt your side. Just answer the questions to best of your ability.
· Body language can be important. Sit erect and don’t slouch. Be conscious of where your hands are and keep them away from your face.
· Don’t guess – if you don’t know, say you don’t know. If you don’t remember, say you don’t remember.
· Be sure you understand the question before you answer. If you do not understand the question, ask for it to be repeated or explained. You can’t possibly give a truthful and accurate answer unless you understand the question.
· Take your time. Be certain in your mind that you are answering the question being asked. Then give the answer.
· Oftentimes an “objection” will be made to a particular question. At this time the lawyers and Judge will talk about the objection. Wait for the Court to make a ruling before answering.
· Don’t volunteer information. Answer the question that is asked and stop. If the lawyer questioning you wants more information, then he or she will ask.
· Give a clear and loud answer. Talk loud enough so that everyone can hear you. Don’t nod your head, shrug, or make gestures. Your answers must be verbal to be recorded.
· Give a definite answer when you can. There is a tendency for witnesses to hesitate in response to such questions as “are you absolutely sure?” If you are certain, be firm and don’t be afraid to say so.
· There are several trick questions that can make you look bad if you answer them the way the other lawyer hopes you will. A common trick question, “Have you talked to anybody about this case?” Of course, you have. If you say “no”, you look like a liar or a fool because everyone knows no lawyer would call you as witness without knowing what you are going to say.
· Be calm. There is also a tendency to become hostile towards lawyers. This can be distracting to you. Also, it is your job as a witness to answer questions, not to ask questions. Again, if you do not understand the question, ask the lawyer to explain it. But don’t think that you look any more credible or better because you are going toe-to-toe with the attorney asking questions.
· Be courteous. Always address the Judge as “Your Honor” and do not address the lawyers by their first names.
· Use “yes” or “no” answers when you can. Use simple words and simple sentences to tell your story. If a question cannot be answered with a“yes” or “no”, you have the right to explain your answer, but do not give your explanation before you give the “yes” or “no” answer. It often looks as if you are being cagey.
· If you misspeak or if your answer was wrong, correct it immediately. This is very important since your wrong answer can effect your credibility and your correcting an error lends some credibility.
· Evidence is based on a witness’s personal knowledge, not another’s statement. Just state what you know, saw, smelled, heard, or touched. What someone else has told you is not evidence.
· In recalling facts or a story, pick a good starting point – usually the beginning. If you start in the middle, inevitably you will forget to say something important. If describing injuries, start at your feet and work up, or your head and work down, that way you won’t forget anything.
· Be careful of questions involving distances and time. If you can make an estimate, be sure that everyone understands that you are only estimating. If you anticipate your testimony to include distance or time elements, think about them beforehand so that you can give as many specific facts as possible.
· If the Judge interrupts you, stop immediately and listen. Look the Judge in the eye and listen to what he or she is saying and answer in a direct manner. If the Judge seems angry, he or she probably is.
· Most of all, stand firm in what you know and have testified about. Give positive answers. Phrases such as “I believe”, “probably” or “I think” are not helpful.
· Lastly, testifying is hardwork. It comes with anxiety and causes fatigue. Don’t let testifying cause you to act in a disrespectful, discourteous, tired, angry or careless manner.
As Schwarzenegger Split Demonstrates: Baby Boomers Breaking-up in Record Numbers
December 30, 2011 7:59 pmMaria and Arnold Schwarzenegger just announced their split after 25 years of marriage. The news of the power couple’s separation was unexpected to most—unless you are a divorce attorney swamped right now with calls from clients looking to “untie the knot.” Family law attorneys at SmolenPlevy in Vienna, Virginia say they are seeing a dramatic increase in the number of older couples deciding on divorce, often after decades of marriage. It’s a trend, Alan Plevy, a founding principal of SmolenPlevy, says of couples that have been married for 40-plus years ready to call it quits. “These “twilight divorces” can be financially and emotionally complex,” says Alan Plevy. “At that age most couples have accumulated a comfortable nest egg, have done some, often significant estate planning and have moved their assets into trusts, and there is the devastation to adult children and grandchildren.”
According to Plevy, the improving economy is one reason for the increase in divorces right now. Many couples weathered the “financial storm” in hopes of gaining back some value to the retirement funds and housing values that took a hit during the recession. There is a direct correlation between an improving economy and an increase in divorces.
Issues that affect the vitality of any marriage are issues that can also result in the divorce for older couples, like abusive behavior or adultery by one or both spouses. Other factors may include:
- Major Life Changes: Arnold Schwarzenegger is working on reviving his movie career after two terms as California governor. Shriver has suffered several personal tragedies, including the loss of both her parents. These kinds of major life changes are more the norm than the exception in long-term marriages—and can add stress to any union
- Economy: The financial stress of the last few years has become too much for some couples to bear. Many couples have endured long-term unemployment. They’re upside down on their mortgage; a spouse has maxed out the credit cards or even drained a 401k to meet their daily expenses.
- Empty Nest Syndrome: Many couples stay together for the sake of their children. They use a benchmark such as high school or college graduation before deciding to divorce. In many cases, the empty nest syndrome spotlights a bad marriage.
- Longer Life Span: 65 is the new 50. As people live longer, they look at starting new chapters in their lives. Many of these “boomer couples” married very young and are now feeling like they missed out on some life experiences.
Another example: The divorce announcement in June of 2010 from 63-year old Al Gore and his wife, Tipper, stunned even family and friends of the longtime couple who had been married for 40 years. Unfortunately such announcements are no longer unusual.
Warren Buffet’s Tax Return and What Congress Already Knew
December 27, 2011 9:18 pmBy, Matt Campione, Principal of SmolenPlevy
Originally Published in Forbes.com
Warren Buffett has revealed information about his 2010 federal tax return providing further support for his position that the wealthiest taxpayers should pay more federal tax. He has challenged other wealthy people to publish their tax information, expecting that such information will also reveal a relatively low tax rate on taxable income. I thank Mr. Buffett for taking this initiative and increasing public awareness of what the federal government has known for years; our tax system is not as progressive (higher tax rates for those with higher income) as it seems. A brief analysis of the information Mr. Buffett has published can highlight this point.
Before I analyze the information Mr. Buffett has provided I should point out that he did not disclose his entire 2010 return. I suspect that other information on his return would reveal a tax rate even lower than the rate discussed below. There may be items of income not included in his adjusted gross income, e.g., tax exempt interest from municipal bonds. The charitable deduction on his return may also include untaxed appreciation on contributed assets such as publicly traded stock. I should also point out that increasing taxes paid by the wealthy is only part of a solution to the federal budget/debt crisis. For a more comprehensive approach please read my article Managing Federal Deficits and Federal Debt in a Flagging Economy: It Won’t Be Painless (10/7/11).
For 2010, Mr. Buffett’s adjusted gross income was $62,855,038. After deductions of $23,040,254 (mostly charitable contributions and state and local tax) his taxable income was $39,814,784. Mr. Buffett paid 17.4% of the taxable income or $6,923,494 in federal income tax. For 2010 this may be the same percentage a married couple paid on $98,000 of taxable income and a single person paid on $49,000 of taxable income. For taxable income above these amounts tax rates may increase progressively from 25% to 35%, with the married couple and single person paying 35% on taxable income over $373,650.
The federal government (Congress and the Executive Branch) has known for years, based on information from all the tax returns filed each year, the reasons why the tax system is not so progressive. The difference, in part, is due to the types of income taxpayers receive and the tax rates applicable to different types of income. Income from personal services such as wages is taxed at progressive rates reaching 35%. The first $106,800 of compensation, which covers most earners, is also subject to employee employment taxes subject to a fixed rate on every dollar, 7.65% in 2010 and 5.65% for 2011. Income from other sources may be subject to a lower tax rate or is not taxable at all. Long term capital gains and qualified dividends are generally taxed at a rate no greater than 15%. Interest income from municipal bonds is generally tax exempt.
The amount of income subject to lower tax rates or not taxable at all is usually directly related to a taxpayer’s wealth. The wealthy have more to invest so they have more of this income. (They also have money to hire professionals to take advantage of benefits that further reduce tax liability.) In contrast, most of you can look in the mirror and see your biggest source of earnings, you.
It appears that Mr. Buffett had about $599,000 of compensation related income in 2010, based on the $15,300 of employment taxes he paid. Most of his taxable income is from tax-favored income discussed above. Again, while Mr. Buffett’s disclosures are illuminating, which should add to the public discussion, they do not reveal anything Congress didn’t know already.
Unhappily Ever After
December 27, 2011 9:09 pm
It may be unsettling to hear that almost half of first marriages end in divorce. In fact, statistics show that your second marriage is even more doomed to fail. According to an article by The Huffington Post, “Second Marriage, For Better or For Worse,” 60% of your second “I do’s” will end in separation.
Authors at The Huffington Post say that individuals often jump into new relationships so quickly without considering what went wrong in his or her previous marriage. When this happens, the past is doomed to repeat itself. A divorce can leave someone hurt, fragile, and ultimately more vulnerable to the comfort of companionship—often leading to drastic decisions that have not been well thought out.
Kyung (Kathryn) Dickerson and Alan Plevy, Family Law attorneys at SmolenPlevy, say that before you consider marrying again, reflect on went wrong with your ex-spouse. Was it finances? Disagreements over whether or not to have children? When you find a potential mate, you should lay it all out on the table. Let him or her know your position on having kids, blending families, and intimacy. Finances are often a source of trouble in a marriage, and if you are in debt or have spending issues—it is imperative that you reveal this to your new partner as well. If you don’t, you may be sorry years down the road.
To read more on how to prevent a failed second marriage, the full article can be found in the Huffington Post here.
Weaning Ourselves from Economic Steroids – Excess Debt
December 22, 2011 9:15 pmBy Matt Campione, Principal of SmolenPlevy
Originally published on Forbes.com
I suspect you may already see the analogy. In the right circumstances, debt and steroids in the right amounts can be beneficial. Steroids occur naturally in humans, plants and animals and are essential to human physiology and development. Steroids can also be used to treat certain medical conditions when physiology has failed. Debt is an important part of the biology of a growing or developed economy as well. Debt can be used to manage cash flow (e.g., a business line of credit) or to acquire assets that require significant capital expenditures (e.g., a building or heavy equipment). However, just like the use of steroids to pump up athletic performance can lead to disastrous health consequences, excess debt can bulk up economic performance that is not sustainable.
When debt is treated more like a utility, with the lender managing risk so there is a high probability the loan and the agreed-upon yield will be paid, such lending is more consistent with its economic purpose. Even where a loan is related to development, risk can be managed with guarantees, additional capital and cash flow projections based on reasonable assumptions. True economic growth can be an affirmation of monies borrowed: Population growth (more consumers) and the ongoing technology revolution are real examples; cash flows are more than sustaining, and inflation makes the cost of repaying the loan less expensive. Even in this environment there will be defaults, but such defaults should be less frequent and managed through workouts and bankruptcy.
But what happens when the due diligence of the lender is missing, or economic assumptions are unreasonable or no longer reasonable partly because they are so intertwined with debt? This is when debt can become excessive. Excessive debt can bulk up and fuel an economy for many years before it is understood. After it is identified it cannot be quickly mitigated without causing convulsive changes to our society.
I am sure by now many are aware of the home mortgage crisis. Borrowers were not required to satisfy traditional lender requirements designed to ensure repayment. Even worse, many of the mortgages were based on information the loan originator knew was fraudulent. The manufacture of these mortgages appeared to be driven by a limitless demand for securitized debt, with investors throughout the world buying interests in various mortgage pools. In this environment investors were the ultimate lenders with no one doing the due diligence on their behalf. This of course contributed to the building boom and houses appreciated dramatically. Existing homes became more and more expensive to buy, and current homeowners found their houses to be treasure troves for borrowing to spend elsewhere. Companies guaranteed these mortgages for substantial fees (expecting they would not be obligated to cover these loans), and other companies used these guarantees to enhance their financial reporting. This arrangement came crashing down in the fall of 2008 as mortgage defaults increased and the guarantees became real liabilities. We continue to manage through this problem with millions of homes that are underwater, mortgages in excess of value.
But the home mortgage crisis is not the only excess debt. Debt on student loans has grown significantly in the past few years, with many graduates having debt in the tens of thousands of dollars and some having debt in the hundreds of thousands of dollars. I continue to believe a college or graduate school education is important to a person’s future success. However, in the current job market many graduates are unemployed or underemployed and unable to pay their debt, making the benefits of a student loan more speculative. The current job market has also forced families to deplete their savings and max out credit cards to pay for their everyday needs. Many states have operating deficits and the federal government has been running at annual deficits in excess of a trillion dollars for the past few years. Think of the federal government as running up its line of credit to avoid the calamities we would face if it did not do so.
It is likely that the growth, inflation and affluence of our economy would not have been as great if debt was managed more conservatively in the past. The delicate issue now is how to manage excess debt without causing a convulsive situation such as additional job losses and a contraction of our economy. This problem needs to be addressed at many levels. In a future article I will discuss ways to address excess federal deficits and debt. Of course, if our economy starts growing at a significant pace (sustained annual GDP growth of at least 4%) and jobs return, we could defer the problem to another day.
Succession Planning Equals Success
December 22, 2011 9:11 pm
In this economy, having a succession plan could be a CEO’s saving grace.
Jason Smolen, co-founding Principal of SmolenPlevy, says that not enough businesses have solid succession plans in place—and waiting until the last minute is the worst thing you can do for your company.
Let’s look at the example of Steve Jobs and Apple. While it may appear as if Jobs’ stepping down as Apple’s CEO in August 2011 was sudden, he had a concrete succession plan in place that allowed for a smooth transition. Over ten years ago, he brought in Tim Cook who was able to grow within the company. Jobs also surrounded himself with a solid team. And according to Smolen, this model is scalable to almost any business. Even after Jobs’ death, the company appears to be running smoothly: their Apple Iphone 4s raked in 4 million in its first week on the shelves.
But then there’s the issue of naming the successor in advance: a situation that is never cut and dry. While planning ahead is essential, giving a blow-by-blow to outsiders is not always the best idea—especially if your company is prominent in the public eye.
To hear more about why revealing your successor beforehand may not be the best idea, watch Jason Smolen touch on these points and more on ABC7’s Washington Business Report.
Business is intricate; plan at least 5 years in advance. You never know what the future holds.
Handling the Holidays as a Divorced Parent
December 22, 2011 8:56 pm
When you’re divorced with children, the holidays are more stressful than ever. How will you share the children? Should you blend your families for celebration? What about gift-giving?
Alan Plevy, Family Law attorney and co-founding Principal of SmolenPlevy says that when it comes to family celebration, it may not be the best idea to blend ex-spouses, their children, and their respective partners for dinner—especially if the divorce is fresh or there are unsettled issues. This will just bring about unnecessary tension, and ultimately hurt rather than help the children.
If you are dealing with a divorce in the family, Plevy suggests you rethink your idea of tradition; in fact, now is the time to start new traditions. Plevy says, “A divorce will change the dynamics of a family, and it is necessary to schedule your plans accordingly. One parent could take the kids on Christmas Eve this year, and then Christmas Day next year. It all comes down to scheduling.” Parents should figure out their holiday plans with the children ahead of time, and then put it in writing. That way, neither parent will be able to push the limits or change their minds—ultimately reducing conflict and allowing for a happy holiday.
For more on how to deal with ex in-laws around the holidays, watch Alan Plevy discuss this issue on News Channel 8’s “Let’s Talk Live.”
Cain’s 9-9-9 Plan & Perry’s Flat Tax Likely to Assure Expiration of Bush Tax Cuts
December 22, 2011 8:47 pmBy, Matt Campione, Principal of SmolenPlevy
Originally published in Forbes.com
I assume that Herman Cain and Rick Perry are counting on the public having a short-term memory with their Presidential
campaign tax proposals. A flat(er) tax has been proposed in the past by representatives of each party only to fail for some of the same reasons the Cain and Perry proposals will fail. The two most common reasons are taxpayers (and interests benefiting from these subsidies) are not willing to give up the tax benefits (currently more than $1 trillion) doled out under present tax law, and the tax system would be more regressive with the richest Americans actually paying less tax. But there are two other troubling factors related to the latest flat tax proposals.
The most obvious is that these proposals are part of the Presidential candidate debates, not current legislative proposals. Does this mean a flat tax proposal will not be seriously considered, if at all, until 2013? Have Congress and the President already discounted such proposals as being only the posturing of candidates running for office? I suspect the Democrats and Republicans will choose not to significantly address tax law changes until the lame duck session in 2012, or early 2013. At that time both parties will be faced with the expiration of the Bush tax cuts as the default if they cannot agree on alternative legislation. The Republicans should not expect the “gift” Barack Obama gave them December 17, 2010, agreeing to extend the Bush tax cuts another two years and providing additional benefits mostly to the wealthy. Just in case, Democrats should have President Obama promise he will not unilaterally make such concessions again.
A bigger issue is that a flat tax is usually proposed in conjunction with a goal of having the government spend less. The proposals of Cain and Perry are not likely, without further revision, to generate revenue equal to, let alone above, the revenue generated now. Flat tax proposals in the past were made at a time when total federal debt was relatively low and annual deficits were usually less than 20% of the total budget. From 2009 to 2011 annual deficits have been significantly in excess of $1 trillion each year, with debt funding 37% to 43% of the annual budget. The annual deficit is expected to exceed $1 trillion again in 2012. For 2013 the annual deficit is expected to drop below $1 trillion and the deficit will again approximate 20% of the budget assuming the Bush tax cuts are allowed to expire. Still the deficit is projected to be $767 billion in 2013 with total federal debt exceeding $16 trillion.
In earlier periods when the federal debt was not so large and annual deficits were a much smaller percentage of the total budget the revenue and spending goals of a flat tax may have been much more feasible. Based on the projected federal debt for 2013 and actual and projected annual deficits for 2009-2012, over $500 billion dollars may have to be cut from the 2013 budget for a flat tax to be considered and to keep debt from further spiraling out of control.
In this environment Democrats are not likely to go along with a flat tax or a continuation of the Bush tax cuts. Republicans will not want to see the Bush tax cuts expire and resist further increases in the federal debt ceiling until a budget and tax agreement has been hammered out. Both parties should consider the proposals set forth in my article Managing Federal Deficits and the Federal Debt in a Flagging Economy: It Won’t Be Painless (10/07/11). Fix the problem, don’t make it worse.
Playing the “Limits Game”
December 22, 2011 8:41 pmResearch shows that parental conflict post-divorce can be harmful to children’s psychological health. And according to an article published by The Huffington Post, parents are using the “limits game” to undermine one another—and it could be detrimental to the lives of all parties involved.
For example, following a divorce, the father may allow his kids to eat sweets for breakfast when visiting his home. And when the children spend time with their mother—and dessert in the morning is against the rules—the kids may rebel and favor their father.
Authors at The Huffington Post say that more often, parents are using their children for self-satisfaction. They point out how kids learn from example, and may mimic their parents’ behavior in school by acting manipulatively toward classmates. Kids who witness their parents’ post-divorce battles are likely to believe that “rules are made to be broken”—and that authority isn’t to be taken seriously.
To read the full article, click here and find out how to avoid playing the “Limits Game” with your ex-spouse.