Bob’s Journal for 9/26

An Irrevocable Trust Isn’t Always Irrevocable

In another celebrity estate plan gone wrong, Rupert Murdoch and his children are in court this week arguing over whether a key family trust can be changed.

Currently, an irrevocable family trust controls 40% of the voting power of Fox Corp. and News Corp., and Murdoch personally controls the trust.

The trust states that after Murdoch’s demise, the voting shares will be divided equally among his four oldest children.

After years of competition, sibling rivalry and intrigue, about a year ago Murdoch decided his oldest son, Lachlan, would run the companies. Murdoch believes Lachlan’s views most closely align with his own and that the success of the companies is most likely to continue under Lachlan.

The other three children have indicated they don’t like some aspects of the way the companies have been run and might team up to impose changes. They might even sell the companies.

Murdoch is asking the court to allow the trust to be amended to give Lachlan all the voting rights while all four children would continue to share equally in the financial benefits. He said that would be in the financial interests of all beneficiaries.

This is a very common problem with family-owned and managed businesses.

Often, the children disagree on key issues. The problem is especially likely to arise when not all the children work in the business, as is the case with the Murdoch family.

Often, the business suffers while the children try to resolve their differences. It’s not unusual for them to decide the only resolution is to sell or divide the business.

The Murdoch trust is a result of a divorce between Rupert and his second wife, the mother of three of the children.

She was concerned that at some point Rupert might disinherit one or more of the children or favor children from a subsequent marriage. So, as a term of the divorce, she insisted the stock be put in the irrevocable trust with equal rights for each of the children.

That made some sense when the children were young, but now they’ve developed into adults with different experiences and points of view.

A better solution might have been to separate the voting rights from the financial rights.

A strategy that works well for many families is to divide assets so that each child receives equal monetary value, but they don’t share control or decision making of the same assets.

Such a separation might be difficult with the Murdoch companies, however, since the holdings have changed a lot over the decades and are intertwined.

Another option is for one child to buy out the others. But that would be expensive and probably require Lachlan or the companies to take on a substantial amount of debt.

Year ago, Rupert Murdoch might have been able to purchase life insurance to fund a buyout, but that would have been a substantial amount of insurance.

Perhaps the biggest mistake was to create an irrevocable plan for such valuable assets so many years ago. The plan didn’t allow for adjustments to changing circumstances.

An IRA Can Help Retirees Reduce or Avoid Estimated Tax Penalties

Estimated taxes are a frequent problem for retirees.

There’s a little-known strategy that can help avoid penalties for underpaying estimated taxes.

Income taxes have to be prepaid during the year. If they aren’t withheld from income, a taxpayer has to make estimated tax payments four times during the year.

The estimated tax payments are supposed to be made as income is earned. You can’t avoid the penalties by making a lump sum estimated tax payment by the January 15, 2025, deadline.

But there’s an option that can be used late in the year if you forgot to make estimated tax payments earlier in the year or the payments turned out to be too low.

When taxes are withheld from income, the IRS considers the withholding payments to be made evenly during the year, even if there’s a large withholding amount near the end of the year.

That’s where a traditional IRA comes in.

You can ask for a distribution from the IRA late in the year and request a portion be withheld for federal income taxes. Request enough withholding to avoid incurring estimated tax penalties for the year.

For more details about estimated taxes, see the June 2024 and December 2023 issues of Retirement Watch, available in the Archive of the members’ section of the website.

But first check with your IRA custodian.

Some custodians limit the amount or percentage of a distribution that can be withheld for taxes. They might require that the distribution and withholding be requested by a certain date. They don’t guarantee the transactions will be processed by Dec. 31, if they aren’t received by an earlier date.

For many retirees, though, the IRA withholding strategy is a good way to avoid the penalty for underpaying estimated taxes.

Global Threats and America’s Weakness

International politics and conflicts can have significant impacts on the economy, markets and individual finances. That’s why it’s a good idea to keep an eye on what’s happening around the world.

A good tool is the recently published report by the Commission on the National Defense Strategy, which was chartered by Congress and is bipartisan.

The Commission concluded that the United States faces its most serious and challenging threats since World War II and that there’s a real risk of a major war in the near term. It also concluded the United States is not prepared to meet the threats.

The report discusses the increased efforts by Russia and China to undermine U.S. influence around the world and how those two countries are working together.

The most important sections of the report discuss the extent to which the United States is unprepared to meet the situation. Its leaders don’t recognize the challenges and don’t have strategies or even discuss developing them.

The report also compares the resources Russia and China are committing to challenging the United States compared to the declining resources America is committing.

The failure of government leaders to recognize or address the issues over the last few decades also is reviewed.

You can agree or disagree with all or some of the report, but you should review it and be familiar with its key points.

The Data

The Consumer Confidence Index from The Conference Board tumbled to 98.7 in September from 105.6 in August.

September’s decline was the largest since August 2021. The index fell to near the lower level of the range it has been in for about two years.

Consumer confidence in present conditions fell by a considerable amount while expectations for the future declined by a smaller amount. Concerns about the labor market were the major factor in lower confidence levels.

The PMI Flash Services Index found the service sector slowed a bit in the first half of September. The index fell to 55.4 from 55.7 at the end of August.

The PMI Flash Manufacturing Index also fell in the first half of September to 47.0 from 47.9 at the end of August.

The combination made the PMI Flash Composite Index for the economy drop to 54.4 in mid-September from 55.7 at the end of August. Any reading above 50.0 indicates an expansion.

The Leading Economic Index declined 0.2% in August after falling 0.6% in July, according to The Conference Board. That is the index’s sixth consecutive monthly drop.

The good news is the Coincident Economic Index rose 0.3% in August and fell only 0.1% in July.

The combination of the two indexes indicates growth is slowing in the second half of 2024 but a recession remains unlikely, said The Conference Board’s analysis.

The Philadelphia Fed Manufacturing Index rose to 1.7 in September from negative 7.0 in August.

The Richmond Fed Manufacturing Index fell to negative 21 in September from negative 19 in August.

Home prices were unchanged in July, according to the S&P Corelogic Case-Shiller Home Price Index, after rising 0.6% in June.

The index was up 5.9% for the 12 months through July, the lowest level since November 2023, after being up 6.5% for the 12 months through June.

Existing home sales fell 2.5% in August after rising 1.5% in July. On a month-to-month basis, existing home sales have increased only four months in the last 12 and declined in five of the last six months.

New home sales dropped 4.7% in August after rising 10.6% in July.

New unemployment claims fell by 12,000 to 219,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.829 million from 1.843 million.

The Markets

The S&P 500 rose 1.77% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.47%. The Russell 2000 increased 0.78%. The All-Country World Index (excluding U.S. stocks) added 3.04%. Emerging market equities advanced 5.83%.

Long-term treasuries lost 2.17% for the week. Investment-grade bonds fell 0.21%. Treasury Inflation-Protected Securities (TIPS) rose 0.05%. High-yield bonds gained 0.34%.

In the currency arena, the U.S. dollar declined 0.57%.

Energy-based commodities increased 2.79%. Broader-based commodities rose 4.15%. Gold advanced 3.67%.

Bob’s News & Updates

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