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Berkshire Hathaway
In Reply To:
House of Reps. to Repeal Estate Tax

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By pococurante
June 26, 2003

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I have followed this board for some time. I have used a roommate's computer for access and because I liked what I found at the Fool, I decided to join today.

I hope I'm welcome.

This particular issue has quite a bit of resonance for me. When my grandfather died some years ago, he left behind a very valuable estate. The total value was somewhere north of $250,000,000 and it was virtually all in art, as you'll read about below.

The story/post is one that includes issues about estate taxes as well as, I think, some parallels with Warren Buffett's and Charlie Munger's investment style and lifestyle. Decide for yourself.

My grandfather was a resident of New York and so, in addition to the Federal Estate Tax -- which at the time quickly escalated to 55% -- the estate also paid New York State Estate Tax, which I think was 10%. Like normal state income taxes, the NY Estate tax was deductible against the Federal Tax. But, when all was said and done, checks were sent to the IRS and New York Treasury totaling about $150,000,000.

So, do not believe what you read/hear that anyone with such an estate just avoids taxes with "tricks" and such. Or, maybe, grandpa was a better collector than he was businessman or planner. One cannot be everything.

I am not sure what I think is fair. I find it hard to complain. One thought I have had is that heirs should only be entitled to some amount that should be limited, as has been mentioned by Munger and many on the board. Should it be $5 million per person, $10?, $20?, $100 million, $1 billion. I do not know. But a limit does seem fair. I can assure you all, though, that my extended family has no plans to "take over the world" and nor do we live slothful, Gatsbyesque lives. And, in any case, it isn't my money. Most, if not all of the heirs, have nice homes and nice cars but that is about it. No jets. We don't even fly first class and neither did my grandparents. No yachts. No gambling. We are lawyers, social workers, artists, administrators, etc. Everyone still works. Maybe that has more to do with what my grandparents taught their children. The money is nice but it is mostly a safety net. I am not complaining.

However, with the amount above the threshold, I think the heirs should have the right or opportunity to determine to what cause or purpose the money is directed and Buffett seems to agree based on his plans. To think [that] a life's work and a life's love ends up paying for 150 cruise missiles, which is one way to think of it, is somewhat depressing. Buffett often equates Berkshire to his 'canvas' and I think it would sicken him to imagine it dismantled upon his death. Happily, it appears it will not be. The life's work of my grandfather did not enjoy such a happy fate and maybe that was because of faulty planning as well as faulty laws. Nevertheless, I hope you enjoy the story.

I was pretty young at the time but I knew those numbers were very large. Even then, though, I wondered how the government could take more than half. It just didn't seem "right". Still doesn't but maybe it is. When I read about Buffett's plans I am curious as to how it works. Maybe my family could have done something so that we could have retained control over the assets that went to taxes instead and held them for the benefit of the public or to honor his life's work. One he passed, though, things were set in stone.

However, I would not ask anyone to feel sorry for my family or that of my relatives. My mother and her 3 siblings each shared a quarter of about $100,000,000.

My Grandfather's estate was virtually entirely made up of a collection of modern art (mostly Picasso), a $3 million apartment on the upper east side of Manhattan and a few hundred thousand in furniture.

My Grandfather lived a comfortable life but not at all extravagant. I received $100 for every birthday. Many of you might beg to differ. But, when he started collecting, he was not a wealthy man but was well off. He worked in a family jewelry business that had modest success.

His most important purchase was also his first purchase.

In 1943 he purchased a Picasso oil for approximately $7,000. It had been brought to U.S. by a woman who had fled the Nazis in Germany. It was rolled up and smuggled out. You might call the sale a 'distress sale'. Some time ago, I got on the Internet and figured out that the $7,000 in 1943 equaled about $70,000 in inflation-adjusted dollars by 1996, around when the picture was finally sold.

The family had to sell it and all the other important works to pay the taxes due upon his death. He owned the picture for approximately 53 years and it was sold for over $53,000,000. At the time, I figured that the compound annual growth rate on the investment was about 17.75% a year, before the estate taxes are figured in. The picture hung on the same wall in their apartment for more than 40 years, as they had lived somewhere else in New York when it was first purchased. The picture did occasionally leave its place to be shown in retrospectives, for example.

After that first purchase, my Grandfather bought only Picasso's for the next 22 years. He had a self-described 'love affair with Picasso'.

However, he continually looked at all art and spent each and every weekend with my Grandmother looking at art in galleries all over New York city and each year he traveled to Europe to look some more at whatever he could find and yet, because he did not have 'unlimited' means, he had to choose carefully and he just kept buying what he loved the most. That was Picasso.

Eventually, he amassed the largest private collection of Picasso in the world. But, he was not a typical "collector". He did not have a few important pieces from each genre or artist. No impressionist, no old master, no other modern or contemporary artists for 2 decades. And yet, he looked and looked at all the art that there was to see. I asked him once why he only bought Picasso for so long. He smiled his wry smile and, seemingly impressed by this question from his 11 year-old grandson, he said: "I could never find anything better." Sound familiar?

In fact, much like Warren Buffett, he was looking all the time and acting very infrequently.

He purchased only newer works of Picasso, as those from the earlier periods were already too expensive for him even back then. By newer I mean works that were being produced by Picasso around the time that he was collecting. He did acquire two very important cubist pieces which were 'affordable' (even though they had been painted in the late teens or early 1920's, if I recall) but I think that was because even in the late 1950's, Cubist pictures were not appreciated nearly as much as they are today. Most people at that time did not feel that these pictures -- the cubist ones -- were beautiful and many still do not today. But, they were cheaper and my grandfather thought they were beautiful and important. Purchased for 'a song', those pictures were sold at auction for over $13,000,000 and $20,000,000 respectively. As Buffett says, "You pay a very high price for a cheery consensus."

In fact, almost all of my grandpa's friends and acquaintances thought he was crazy to be buying these wild looking and strange Picasso's -- not just the cubist ones but virtually all of them. They were NOTHING like the tame but still beautiful pictures Picasso produced during his Blue and Rose periods. But, they were much, much cheaper. People often refused to sit across from them when invited over for dinner.

By the mid 1960's, grandpa could no longer afford to buy Picasso's from any period. At least, not without selling others that he loved. Over the years, though, he did trade pictures or groups of pictures for something he wanted more -- much like one might trade baseball cards or sell one stock/business he loves to buy another he thinks is "better".

As well, I think, my grandfather also decided that after all this looking he was finally finding some other artists that he really loved. He then began collecting, almost exclusively, three other artists. More FOCUS buying. Those artists, for those of you who are interested, were Jasper Johns, Robert Rauschenberg and Frank Stella. He also collected art produced by a woman whose life was cut short by cancer. Her name was Eve Hesse. And, while she produced little, he purchased all that he could. The art made by these artists was much more affordable as these artists were not "big names" at the time. And, happily, he became involved with these artists on a personal level and in a sense was able to act as benefactor and mentor because by then he did have a very good reputation as a collector. He lived a full life even after his affair with Picasso ended :)

After his death, a reporter or book writer (I cannot recall) asked Leo Castelli what he remembered of my grandfather, what made him different or unusual. Leo Castelli was a gallery owner and represented Johns, among others.

Castelli answered: "He was looking, looking, looking; he was always looking. He bought few artists. But, when he bought, he bought the very best pieces that were available. And he drove a hard bargain."

Again, doesn't this sound familiar? Maybe this IS a recipe for success.

Finally, in sum, my grandfather spent less than $2 million on art (and almost half of that was for one picture purchased in the early 1980's). Not Buffett numbers but Buffett/Munger style...ALL the way.

pococurante


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