Flower Bonds

Flower Bonds are fixed income products those were originally purchased by investors at a discount for the purpose of paying federal estate taxes upon their maturity. The term “Flower Bond” apparently developed because these bonds blossom or mature after death.

Investors would purchase these bonds before their death in anticipation of federal estate taxes. If the bondholder passed away, the bonds would mature at par value and be used as payment for the deceased's federal estate taxes.
A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the "unlimited marital deduction".

When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion limit. Because the estate tax can be quite high, careful estate planning is advisable.

In 1997, a change in U.S. laws increased the value of assets that a beneficiary may exclude from federal estate taxes - though many states have their own estate taxes. With this change of laws, small business owners became able to pass on farms and other qualifying businesses to their heirs.
The ‘Flower Bonds’ had the advantage when estate taxes are paid. Under no circumstances the purchase of Flower Bonds in the name of the Child is recommended. However, individuals who expected to leave a large estate, purchasing Flower Bonds in their name is considered to be a good decision.

“Flower Bonds” are certain U.S. Treasury bonds that have an advantage when they pay Federal Estate Taxes. They picked up that strange moniker because they come in handy when funeral wreaths arrive. The face value of those bonds can be used to satisfy a federal estate tax obligation you leave behind.

As per the information dated 1988, Flower Bonds where trading in the marketplace at about 95 percent of their face values, meaning that someone can buy $100,000 face value of those bonds for about $ 95,000. Then when the investor leaves their vale of tears, the bonds $100,000 face value can be applied against federal estate tax.

According to David Mayers and Cliff Smith analysis, the market value of a Flower Bond should be equal to the sum of the values of a straight government bond with the same coupon and maturity plus a net single premium for the imbedded term life insurance.

Flower bonds stopped being issued in 1971, and the last of them, with a 31⁄2% coupon, matured in 1998.

In the absence of the Flower Bonds some of the U.S. based Estate Planning firms recommend life insurance (Information obtained from Private estate planning online advertisements).

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Cheers
Naveen Victor.

Reference:
- Death and Taxes : The Market for Flower Bonds : Discussion by Robert C. Witt (1987)
- Investopedia
- St. Petersburg Times – Oct 4, 1988

Bernard Madoff

The former chairman of the Nasdaq and founder of the market-making firm Bernard L. Madoff Investment Securities. Madoff, who also ran a hedge fund, was arrested on December 11, 2008, for running an alleged Ponzi scheme; his hedge fund lost about $60 billion, but kept it hidden by paying out earlier investors with money from later investors.

The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919. A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system. For both schemes, however, eventually there isn't enough money to go around and the schemes unravel.

The scale of the fraud is staggering. Tens of billions have been lost – perhaps as much as $60 billion over many years. Wealthy families, numerous charities, and even college trusts have been all but wiped out. The Palm Beach Country Club, where Madoff recruited many of his victims, investors. Perhaps the largest private victim is Carl Shapiro and family, who had known Madoff for 50 years and had $545 million invested. A number of large players were caught in the scam too. Britain’s HSBC Bank may have lost as much as $1 billion. Banco Santander had more than $3 billion in exposure through its money management arm.

Bernard Madoff was sentenced to 150 years in prison on June 29, 2009-- the maximum penalty the judge could give him for "extraordinarily evil" crimes in Wall Street's biggest and most brazen investment fraud. Madoff, who has been accused of bilking investors worldwide out of as much as $65 billion. The case has triggered widespread criticism of the U.S. Securities and Exchange Commission, which has been accused of missing red flags that could have brought the curtain down on his asset management business.

Madoff was arrested in December 2008 after his two sons told authorities that he had confessed to them that his investment empire was a sham. Bernard L. Madoff Investment Securities showed $65 billion in customer accounts weeks before his arrest, but the trustee winding down the firm has so far only been able to collect $1.2 billion to return to investors. Madoff told investors in the courtroom that he could offer no excuses, saying he tried to undo his crimes but "the harder I tried, the deeper a hole I dug for myself."

Why was nobody watching? There are countless ways to perform due diligence, but many methods miss the mark. While it's easy to blame the Securities and Exchange Commission (SEC) for missing the signs and accusations, there is a long line of interested parties who also failed to clue in to Madoff's scam.

One lesson to be learned by this event is that due diligence means more than just dropping by for a visit or relying on the opinions of others. It's a methodology that encompasses all aspects of an investment management organization, including investment policy, trading patterns and verification of investment returns. While there is no official handbook or checklist, a skilled due diligence team has the experience and know-how to complete the process.

Nothing stupefies like money. Even the savviest investors tend to look the other way when extraordinary returns are being made. This unfortunate human trait is the fuel behind speculative bubbles and the magic behind all financial scams.
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Cheers
Naveen Victor

Reference:
- Investopedia – How to Avoid Falling Prey To The Next Madoff Scam by Michael Schmidt, CFA
- Commodity Online – How Bernard Madoff Cheated Investors by Justice Litle
- Reuters
- Bloomberg