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years, the result assured to an estate for a colorable or collusive manner with the form, period of twenty years is greater than the while violating the spirit of such legislation. amount that might, theoretically, be accumu A recent ruling, Law Opinion 1102, 1-30-425 lated by devoting the same principal fund of the Federal Internal Revenue Department, to a straight compound interest accumula- published in Vol. 1, No. 30, July 24, 1922, tive trust. That is to say, if death should Internal Revenue Bulletin, reverses the pooccur within twenty years, this plan gives sition heretofore taken by the department the utmost possible estate. And if the in on trusts established subject to a power of sured life continued beyond twenty years, the donor to modify or revoke. the ultimate result still represents as full a It has always been an important element return as could any alternate sound plan in the creation of voluntary trusts that some for accumulation of a family estate.

power should exist to modify or revoke. In An interesting feature of the plan is that, the case of The People vs. Northern Trust under the Federal Income Tax Act the in- Company (289 III. 475), the Supreme Court come from the deposited securities becomes of Illinois remarked: “This character of deed, the income of a trust taxable to the trustee with such a power of revocation, has long as a separate fiduciary income. As such an been recognized by our law as a proper mode income is exempt to the amount of $1,000, of an ancestor deeding his property to his and is then taxable only as the income of a children and of protecting them in the use single individual, the tax deductible there and enjoyment of the same. All well-skilled from is obviously smaller than the tax pay and far-seeing lawyers advising for the beneable out of the same income, had it been

fit of their clients usually suggest the inserretained as part of the income of the insured.

tion of such a clause of revocation, and no For, as part of his entire income, it would

court, so far as we know, has ever declared pay the highest rates of normal and surtax

that such a deed is testamentary in charincome tax, which he has to pay. The sav

acter or is to be held to take effect only after ing thus made in tax may, therefore, be

death, by reason, alone, of such a clause of legitimately and properly used in part pay

revocation." ment of the insurance which may be carried.

The Internal Revenue Department in Law Other advantages are freedom from inheri: Opinion 1102 simply recognizes this state of

the law so far as income tax is concerned. tance taxes and from probate proceedings, considerations which weigh heavily with

It should be noted then, that under such men who wish to provide the largest pos

a ruling as that in L. 0. 1102 the income tax

aspect of such a trust would not be involved sible protection to their dependents.

if the donor should reserve a power to It is stated above that the trust created

modify the terms of the trust as to the should be irrevocable. That means that the donor, or person creating the trust, does not

application of income or with respect to the

beneficiaries who should receive the proretain in himself alone any power to modify

ceeds of the insurance and the principal of or cancel the trust or to terminate. or change

the deposited securities. the beneficiaries under the insurance poli

One's mind runs far ahead when he gives cies payable to the trustee.

thought to the advantages which this plan Only so far as the beneficiaries may be offers the man whose income is expressed in given power to so modify the trust as may as much

as
five figures.

Many such be necessary to meet possible emergencies, is men can easily set aside in securities, it wise to permit any exercise of a power to or cash for their purchase, enough to modify or terminate the trust.

create, in combination with the insurThis, it is believed, should be the general ance the income will buy, a considerable policy to be followed in establishing such family estate. Such an estate, in the form trusts. It conforms to sound principles of of a trust, would be immune from the bazfamily protection and of income and inheri- ards of business. Under trust company adtance tax legislation.

ministration it would be freed from the danThe principal object of such a trust should 'gers of exploitation which beset heirs. The be the maintenance of a sound family estate. advantages of non-intervention of probate The effort should be made to conform to the proceedings, with incidental costs and delays, principles governing such an estate, in the are immediately apparent. And the considerapreparation of the trust agreement. The ob- tions in connection with income and inheriject should not be to draw an agreement tance taxes opening the way, as the plan merely to take advantage of provisions of does, for the application of that separate income and inheritance tax legislation that basis of tax provided by the law, have a may be favorable, and certainly in no case strong appeal to the man whose surtaxes should the object be to merely conform in a come in high brackets.

Enlists Active_Aid of Life Insurance

Fraternity Too much cannot be said of the benefits which the trust company will derive from the eager co-operation of the insurance fraternity. Imagine this high class of men, in their interviews with men of affairs, demonstrating to such men the advantages of this feature of trust service; imagine them bringing their prospects in to the trust officer for enlightenment. Imagine also to what further extent the services of a trust company may appeal to a client after he has arranged, through an insurance trust agreement, for the trust company to stand as protector for his heirs. It is reasonable to anticipate that much larger dealings with reference to such a man's estate may ensue. The insurance trust plan is an opening wedge to larger relations.

After nearly a year's study and consultation with insurance actuaries, general agents and counsel, and upon competent advertising advice, we have found that the plan is best presented by the following advertising matter.

A fundamental principle in the plan as set up is that the trust company does not undertake to direct or control the placing of the insurance. Inquirers are referred to their own insurance agents, or advised generally as to how they should select an insurance company. And in all cases, as far as possible, the selling of the insurance is made the duty of the regular insurance agent. The client is thus assured that the trust company is disinterested in the placing of the insurance, and concerned only that a sound company writes it.

Finally, it should be noted that the cooperation of attorneys is always sought for. As many attorneys have not taken occasion to make a special study of the newer aspects and development of inheritance and income tax questions, and as to such a form of family settlement as is involved in this plan, a memorandum opinion has been found useful, wherein are set out the authorities and references bearing on this subject, and developed by consultation with insurance attorneys.

Presenting the Plan to the Public A booklet has been prepared which gives to insurance agents in some detail, and withi adequate treatment of its technical aspects, the necessary advice and explanation.

A separate "master booklet” explaining the plan in detail, for the layman or business man, states the propositions involved without technical terms being employed. This booklet is for distribution to persons who call or write for information, prompted to do so by newspaper and other announcements.

In addition to these booklets we have seyeral small folders furnished to life insurance agents to place in the hands of prospects; these folders simply arouse interest in the plan and prompt inquiry for the "master booklet" explaining the plan.

To aid in conferences with clients, held at the bank, we have graphs, wall charts and other material which are helpful in making demonstrations. We invite insurance men to bring their prospects in to consult these data. Also, we have drawn up and had printed a standard form of trust agreement.

Our brief experience with the life insurance trust plan has given us confidence in it. It seems to develop new possibilities every day. We expect to see this plan an important addition to trust service widely adopted by trust companies.

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CHAIRMEN OF COMMITTEES OF BANKERS WHO PROVIDED GENEROUSLY FOR THE ENTERTAINMENT AND COMFORT OF DELE GATES AND GUESTS ATTENDING THE RECENT A. B. A. CONVEN

TION IN NEW YORK (1) Gates W. McGarrah, Finance Committee; (2) Walter E. Frew, Executive Committee, (3) T. W. Lamont, Reception Committee; (4) Henry J. Cochran, Entertainment Committee: (5) Seward Prosser, Committee of One Hundred; (6) Harvey D. Gibson, Hotel Committee; (7) Guy Emerson, Convention Information Committee; (8) Mrs. Dwight W. Morrow, Women's Reception Committee;

(9) Edward C. Delafield, Ball Committee

REPARATIONS AND INTERNATIONAL DEBTS

GERMANY'S CAPACITY TO PAY INDEMNITIES

THE RIGHT HON. REGINALD MCKENNA
Chairman, London Joint City and Midland Bank, Limited, and former Chancellor of

the British Exchequer

T

(Editor's NOTE: The one feature of the recent annual convention of the American Bankers' Association in New York City, which commanded the most profound interest, was the address by the distinguished English banker and former Chancellor of the Exchequer. His masterful exposition of the subjects of reparations and international debts, made a deep impression upon his hearers. Particularly interesting was his conclusion that Germany can only pay, at the present time, what she may have in foreign balances or can realize by the sale of her remaining foreign securities; that such payments are only possible by the granting of a moratorium on other claims and stabilization of the mark; that England has the will and capacity to meet her obligations to the United States and that none of the other national debtors are in position to meet more than a small part of their external liabilities.) THERE will be general agreement that

he like, open up questions of that kingi, but there is no matter of more deep con

a debtor should admit his obligation without cern to the world's trade at the pres

further discussion. I recognize that these

are objections which I must answer and I ent time than reparation payments and international debts, and I trust therefore you will not deem 'it out of place that I have chosen this subject for discussion today.

There are two preliminary observations which I must make. The first is that I speak as a banker expressing my personal views. I have nothing to do with politics and I do not appear here in any representative character. I approach the question solely from the economic point of view and my endeavor is to determine so far as I can the limit of the debtors' capacity to pay, and the effect of payment upon the world's trade. Our duty is to satisfy ourselves on the financial possibilities of the case. It is not what the debtors may justly be called upon to pay, but what they are able to pay, which we as business men, anxious to discover the conditions upon which trade prosperity is founded, must consider with the most careful attention.

My second observation is to meet a possible criticism. How can I, a member of a nation which is one of the debtors of the United States, speak freely to an American audience upon international indebtedness? The primary and essential duty of a debtor is to discharge his liability, and, until this is done, all observations on the origin of the debt and on the economic consequences of

REGINALD MCKENNA international payments are liable to be

Chairman, London, Joint City & Midland Bank who deviewed with suspicion. A creditor may, if

livered the keynote address at the A. B. A. Convention on

"Reparations and International Debts."

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believe that I can do so conclusively. In the error into which the Versailles experts secm course of my argument I shall show that to have fallen. Nobody has ever doubted England has the ability to pay, and, once Germany's immense power to produce, but that is established, I can unhesitatingly as production by itself is not enough. She must sert her determination to honor her bond in find a market for her exports, and the probfull. I believe I am justified in asking you lem thus becomes one of determining the to treat England's debt to the United States possible extension of German export trade. as certain to be provided for, and, if this be Nor is this the end. We must remember conceded, we shall be free to consider the that

increase in her exports will question of the remaining international debts only provide funds for reparations if as one in which America and England are there is no corresponding increase in imequally concerned and in which both have ports. Payment for her indispensable imthe same interest as creditors.

ports must be the first charge upon the pro

ceeds of her foreign sales, and it is only the Magnitude of International Debts

balance, the exportable surplus, which is First let us look at the magnitude of these! available for reparations. international debts. The greatest of all is In speaking of a nation's exportable surthat of Germany for reparations, a debt oi plus we must not forget that other factors which the United States declined to receive may contribute to it besides the balance of any share. The amount was not defined by exports over imports. Interest received from the Treaty of Versailles, but subsequently by foreign investments and payment for exthe London Ultimatum it was put at 32 bil ternal services, such as shipping, may be lion dollars, at which amount it stands nom contributory factors. Before the war Gerinally today. Of the remaining debts the many possessed a very considerable exportliability of France to the United States and able surplus derived from all three sources, Great Britain is 642 billion dollars, and of but mainly from the interest on her foreign Italy to the same two countries 442 billion investments which were probably worth not dollars. Russia owes these countries 312 less than 542 billion dollars. As regards tbe billion dollars and a further 1 billion dol surplus from the sale of her products and lars to France. These are the principal payment for services it is safe to say that debts; the others are all comparatively small it never exceeded 100 million dollars a year, in amount. Of creditors of the European But what is her position today? Most of Continental Governments England is the her foreign investments have gone. Some greatest.

were sold during the war, others have been The figures we have to deal with today are seized as enemy property by the governon a far larger scale than the indemnity ments of the Allied and Associated Powers, exacted from France fifty years ago, but and most of what remain have lost their the problem in all essential particulars is value as in the case of the Russian investthe same. We have to discover the capacity ments. Her shipping has been largely confis. of the debtors to pay and to consider the cated, and she has been deprived of some of consequences of payment. As the indemnity her most productive areas Alsace-Lorraine, demanded from Germany is much the great the Saar Basin, and the Polish provinces. est of the debts and is the one most urgently All the sources whence an exportable surplus in need of a satisfactory settlement I place might have been drawn have been greatly it in the front of our discussion.

impaired if not wholly destroyed. At no

time was Germany's exportable surplus sufliGermany's Capacity to Pay

cient to enable her to make the annual payThe first question is, what is Germany's ments demanded under the London Ultiņacapacity to pay? You are perhaps expecting tum; it is entirely out of the question that that I am about to give you an inventory of she could do so today. Germany's natural resources and an esti But let us get a little nearer to the probmate of her productive power. All this has lem of Germany's present capacity to pay been done many times and much industry from the surplus sale of her production. has been displayed in the enquiry. I have According to a recent statement by the Chan. no doubt that the experts who advised the cellor of the Exchequer in the House of signatories of the Treaty of Versailles tbat Commons she has paid money and delivered Germany could pay 120 billion dollars had property altogether to the value of about two made many careful calculations of this kind. billion dollars. Of this amount 1,645 milBut what we have to investigate is not Ger lion dollars represented the value of ships, many's capacity to produce wealth, but her coal, other payments in kind, property in capacity to pay foreign debt. I cannot help ceded territories and local payments to thinking that we have here the source of the armies of occupation. The amount in cash

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