ERICOPOLY

They have a dividend franking system. My cousin informed me that if you own Australian shares and receive a fully franked dividend, then your tax rate will only be 9%. A fully franked dividend is one that is paid out of a corporation's already-taxed earnings. They don't believe in double taxation of dividends, and rightly so in my opinion.

Suppose I'm not married but I have 4 kids. I can only leave them $875,000 each next year before inheritance taxes kick in. That's not the kind of obscene wealth you are talking about is it?

I enjoyed the interview -- the only critical thing I have to mention is that early on in the interview he stated that you could have pretty much thrown darts and done well. At the end of the interview he started attributing his recent string of successes to a checklist: We made a huge number of investments, more than any other period, any other 18-month period in our history. So with more activity so far, and it's a very short period, we have a much lower error rate.

I think if you want to give your child some money without taking away any motivation, offer to reimburse them for their tax bill. They pay no tax and therefore get no money from you if they do not get a job. They get little money if they choose to work 3 nights a week as a ski bum. However if they choose to work full time the extra money gets them a vacation, daycare for their kids, etc...

Page 41 actually explains an "alternative tax regime" for the 10 yr period following renouncement of US citizenship: http://www.jct.gov/x-44-08.pdf Essentially, during that 10 yrs it looks like you still fall under full income tax and estate and gift tax rules if you spend more than 30 days in any calendar year in the US. If you spend less than 30 days, you fall under partial tax rules to the extent that the taxable assets or income are based out of the US. It's really complicated/confusing. But again, it looks like the provision does not apply to me since I've been a dual citizen since birth and if I am a resident of Australia for at least 5 of the prior 15 yrs prior to renouncing my US citizenship.

No, it was Bush that did this to "us". Bush signed it into law. But notice I put the "us" in quotes -- it doesn't apply to me because I was born with my dual citizenship! I merely have to live as a resident of Australia for at least 5 of the 15 years prior to renouncing my citizenship. It seems to be aimed at people who came to the US for a time, made their fortune, and then intend to leave with that fortune. And it only makes it a capital gain taxable event (requires them to pay any tax on capital gains as if sold) and gives them a $600,000 capital gain exemption. http://www.withersworldwide.com/news-publications/324/exit-tax-u-s-expatriates-to-become-law.aspx Here is the part that makes a special exception for me: The Act contains two exceptions, which are broader than those contained in current law. An individual is not a ‘covered expatriate' if he certifies compliance with US federal tax obligations as specified in item (iii) above, and: (i) he was at birth a citizen of the U.S. and another country, provided that (a) as of the expatriation he continues to be a citizen of, and a tax resident of, such other country, and (b) he has been a resident of the U.S. for no more than 10 of the 15 taxable years ending with the taxable year of expatriation; or (ii) he relinquished U.S. citizenship before reaching the age of 18 ½, provided that he was a resident of the U.S. for not more than 10 taxable years before relinquishment.

Crap, I didn't know of any exit tax but you're right! The stock market plunge of late 2008 and early 2009 may also have played a role in the spike in expatriations. Since 2008, Americans with net worth greater than $2 million have had to pay an exit tax assessed on their assets. With gains reduced or wiped out by the market collapse, those seeking to give up their U.S. citizenship had an opportunity to do so with less exit tax required. http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201004050814dowjonesdjonline000053&title=more-americans-give-up-citizenship-as-irs-gets-aggressive-overseas

I was there a few months ago -- spent all of January in Palm Beach (a beach a little bit north of Sydney). It was not just a vacation from winter (middle of summer there), but a vacation from the financial doom and gloom. Australia has not even entered a recession yet despite the global financial crisis. They will feel a lot of pain if China implodes.

Prior to roughly 1980, they didn't even have a capital gains tax. Today, they have a capital gains tax but they (I'm not sure exactly) only tax you on 1/2 of your gain (the theory being that some portion of your gains are due to inflation, and thus not "real" gains). They also have a system of dividend "franking". This system acknowledges that your dividends were already taxed on the corporate level. After speaking with my Australian cousins, I discovered that if you hold Australian shares and earn dividends, your tax rate will be roughly 9% or so. They all live in Sydney. Their property taxes are really "land taxes". The tax is based strictly on the land itself, ignoring the value of the improvements! Further, your primary home gets a $1m valuation tax-free. So if you have a $5m house on land only worth $1m, then you pay no tax at all! You only pay tax if the land value exceeds $1m. So to sum it up: 1) 9% tax on dividends 2) reduced capital gains rate 3) no gift taxes 4) no inheritance taxes 5) no property tax on your home if land worth less that $1m. Australia is WAY MORE capital friendly than the US. There are other intangibles: 1) friendly people 2) health care affordable (an emergency room visit in Sydney is only $75 -- less than it costs us to have a scheduled preventive care visit in US) 3) beautiful weather 4) beaches 5) Australia's government is in good financial shape

I've been both an Australian citizen and US citizen since birth (mymother was an Australian citizen but I was born in California). Australia has no similar requirement -- I've never once reported my income to them nor have I ever disclosed any bank balance to them. But you think the US would require this of me even if I live overseas and get residency in Australia? I suppose I could give up my US citizenship and just get travel visas. I like Australia more anyhow... but we live here in the US today because our parents (my wife's too) still live in the US.

I just think that our inheritance tax is really dumb. Next year, the inheritance tax threshold will be $3.5m per person ($7m for a married couple). But you talk about family dynasties... well, if you have 10 kids a "dynasty" is $350k per child, or $700k per child per married couple? And if you have 1 kid he can get either $3.5m or $7m? What does it matter if its a "family" dynasty, isn't the real point here HOW MUCH each person (as in individual) stands to inherit? Why do my kids only get 1/2 of the amount tax-free compared to an only-child situation? I forget where I read it but things like family "ranches" get special exceptions and far greater wealth can be passed down this way -- way in excess of the typical $7m maximum. The moment I read that I thought "OH, that explains what the Bush family is doing with the Crawford ranch". I've heard Buffett on this issue, and Gates. I'm reading the Andrew Carnegie biography right now (richer in his day than Gates and Buffett put together), who clearly predates Buffett on this matter and Carnegie spend the latter days of his life giving his wealth away (at age 50 he publicly declared that he would no longer attempt to grow his wealth but rather focus on giving it all away). Carnegie pleaded with his fellow millionaires to follow him. Carnegie believed that a man should be ashamed if he died with his wealth.

I think this country is on the wrong course with these stupid incentives to give your money to your kids too young (annual gifting from an early age), rather than just eliminating the gift tax & inheritance tax. We're already spending 1 month a year in Australia as it is (visiting family and the beach), but will need to cut it back to 3 weeks a year when the kids start school. Then once their school is done, I want to spend at least 1/2 of the year there (to avoid Seattle's rainy season) and spend July,Aug,Sept in Seattle when it is beautiful. The things I need to figure out are: 1) will the US still be able to get their greedy clutches on my gifting program 2) will Australia respect the tax-free status of my RothIRA if I fall under their tax laws I think I definitely need to hire an expert in these matters.

I am 37, and have two kids but they are ages 2 and 4. I can dribble money to them but I don't yet know how they will turn out. I know people who inherited too much money at 18 and it has effectively robbed them of their initiative. They have low self esteem because of it. Instead, I want to keep it as much of a secret as possible to make sure that they try their best to build a life for themselves. Then, when they are 35 or 40 I will know at that time if it is safe to give them a large sum.

I am starting to think about keeping as much of my future wealth in the family. I am a dual citizen of Australia so naturally I have an idea. At some future time when I am fabulously wealthy, is it possible to just move my residence to Australia and then gift the money away to family? Australia has no gift tax. Australia has no inheritance tax. Is there some "gotcha" in there that would prevent me from doing this? Would it mean that I would owe a big tax in the US if I moved back and got residency in the US once again? It seems too easy, what am I missing?

My kids have their Coverdell accounts with Fairholme (opened accounts directly with them). So Bruce Berkowitz is managing their college savings.

The bank shares are rallying because of a perception that loan losses have peaked. Loan losses do not factor into the values of those other sectors you named.

It's too small to abuse. $2,000 bucks a year max contribution per child.

I think they are actually much more capable of further acquisitions now. First off, you state they need to digest the ORH buyback even though it was paid for by selling $1b in FFH shares. Secondly, the Zenith purchase of $1.3 billion... most of that was funded from last year's profit in addition to YTD profit. So compared to where they started last year they are stronger for two reasons: 1) acquisitions were paid for out of capital raises & earnings 2) they now have significantly higher cash flows at holdco. MUCH higher... added dividend capacity of ORH and Zenith is huge Bulging with cash despite acquisitions (from 2009 AR): "This increase in shareholders’ equity, together with the decrease in net premiums written due to the soft markets, has resulted in a build up of very significant excess capital in our insurance and reinsurance subsidiaries." The soft market has freed up capital to deploy elsewhere.

I don't have state tax thank goodness. One day I might live in such a state -- all the better reason to convert now for my situation. I think many wealthy Californians just have second homes elsewhere to avoid it. Just get a place in Jackson Hole -- it will pay for itself in tax savings if you have enough taxable income.

The return the market demands -- got it. Thanks for the clear explanation.

As Prem points out in the latest annual report, most of the debt is merely a liquidity reserve to be tapped reliably even if the overall financial system is under severe stress, offset by an equal amount of cash and securities at holdco. This debt is not used to achieve returns, but rather used to REDUCE overall risk. It is a hedging strategy against systemic risk. I was primarily involved in stress testing when I was employed, and I designed and implemented a stress automation system for user-mode Windows applications. My automation framework allocated a very large (200mb) chunk of virtual memory as a reserve for the error reporting. When an application crash was detected, I would then free the reserve, collect some data, and send the reports to the database. The data reporting and such required system resources (virtual memory) -- however, under stress the virtual memory may not be available for dynamic allocation... in other words, when the system is under stress everybody else may have already claimed all available virtual memory. So by pre-allocating a large chunk of memory I reduced the risk of being unable to grab system resources when the system was under severe stress (at the very time that the apps I was testing tended to being crashing). In short, Prem seems to be doing the same. This makes Fairfax less risky than the business model would otherwise suggest, because even the best underwriter can be wiped out if the unthinkable claims come in at a time when the capital markets are frozen.

I've got to say I'm confused.

This is something I never have come to understand (likely because I don't have an MBA nor did I ever study the topic). What do you mean by "cost of capital"? Are you talking about the cost of their float? The cost at which they borrow money? Their float does not cost 8-9%, and they borrow money at less than 8-9%. Even if it did cost them 8-9%, those numbers are pre-tax and their ROE is after-tax. So what exactly is costing them 8-9% in your estimation?

Look, if you are not already maxing out your IRA contribution opportunities then perhaps you have reasons for doing so (low on money perhaps). Me, I would do both. I would max out my IRA contribution (if I could make one at all!) and I would ALSO do the Roth conversion to establish the stealth Roth-like tax reserve. This is not mutually exclusive, unless you can't afford to do both. I never can have too much of a good thing when it comes to tax shelters. Taking money out of your IRA (as was suggested previously) to pay the conversion tax is stupid if you have a large taxable account which can easily handle the conversion expenses -- the goal is to maximize tax-deferred compounding, rather than taking money out early to pay off a future tax liability in a shell game that gets you nowhere. I'm not allowed to make regular IRA contributions -- I don't have any earned income. So this conversion opportunity is a bonus -- the only way I can increase my tax-deferred compounding via contributions.

To make the proposal simpler perhaps we can change the wording of the "roth conversion" to "one-time opportunity to make a Roth contribution as large as your tax liability". Pretend that tax rates would be the same. Would you argue that there is no benefit to a large Roth contribution?