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years, the result assured to an estate for a period of twenty years is greater than the amount that might, theoretically, be accumulated by devoting the same principal fund to a straight compound interest accumulative trust. That is to say, if death should occur within twenty years, this plan gives the utmost possible estate. And if the insured life continued beyond twenty years, the ultimate result still represents as full a return as could any alternate sound plan for accumulation of a family estate.

An interesting feature of the plan is that, under the Federal Income Tax Act the income from the deposited securities becomes the income of a trust taxable to the trustee as a separate fiduciary income. As such an income is exempt to the amount of $1,000, and is then taxable only as the income of a single individual, the tax deductible therefrom is obviously smaller than the tax payable out of the same income, had it been retained as part of the income of the insured. For, as part of his entire income, it would pay the highest rates of normal and surtax income tax, which he has to pay. The saving thus made in tax may, therefore, be legitimately and properly used in part payment of the insurance which may be carried.

Other advantages are freedom from inheritance taxes and from probate proceedings, considerations which weigh heavily with men who wish to provide the largest possible protection to their dependents.

It is stated above that the trust created should be irrevocable. That means that the donor, or person creating the trust, does not retain in himself alone any power to modify or cancel the trust or to terminate. or change the beneficiaries under the insurance policies payable to the trustee.

Only so far as the beneficiaries may be given power to so modify the trust as may be necessary to meet possible emergencies, is it wise to permit any exercise of a power to modify or terminate the trust.

This, it is believed, should be the general policy to be followed in establishing such trusts. It conforms to sound principles of family protection and of income and inheritance tax legislation.

The principal object of such a trust should be the maintenance of a sound family estate. The effort should be made to conform to the principles governing such an estate, in the preparation of the trust agreement. The object should not be to draw an agreement merely to take advantage of provisions of income and inheritance tax legislation that may be favorable, and certainly in no case should the object be to merely conform in a

colorable or collusive manner with the form, while violating the spirit of such legislation. A recent ruling, Law Opinion 1102, 1-30-425 of the Federal Internal Revenue Department, published in Vol. 1, No. 30, July 24, 1922, Internal Revenue Bulletin, reverses the position heretofore taken by the department on trusts established subject to a power of the donor to modify or revoke.

It has always been an important element in the creation of voluntary trusts that some power should exist to modify or revoke. In the case of The People vs. Northern Trust Company (289 Ill. 475), the Supreme Court of Illinois remarked: "This character of deed, with such a power of revocation, has long been recognized by our law as a proper mode of an ancestor deeding his property to his children and of protecting them in the use and enjoyment of the same. All well-skilled and far-seeing lawyers advising for the benefit of their clients usually suggest the insertion of such a clause of revocation, and no court, so far as we know, has ever declared that such a deed is testamentary in character or is to be held to take effect only after death, by reason, alone, of such a clause of revocation."

The Internal Revenue Department in Law Opinion 1102 simply recognizes this state of the law so far as income tax is concerned.

It should be noted then, that under such a ruling as that in L. O. 1102 the income tax aspect of such a trust would not be involved if the donor should reserve a power to modify the terms of the trust as to the application of income or with respect to the beneficiaries who should receive the proceeds of the insurance and the principal of the deposited securities.

One's mind runs far ahead when he gives thought to the advantages which this plan offers the man whose income is expressed in as much as five figures. Many such men can easily set aside in securities,

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cash for their purchase, enough to create, in combination with the insurance the income will buy, a considerable family estate. Such an estate, in the form of a trust, would be immune from the hazards of business. Under trust company administration it would be freed from the dangers of exploitation which beset heirs. The advantages of non-intervention of probate proceedings, with incidental costs and delays, are immediately apparent. And the considera. tions in connection with income and inheritance taxes opening the way, as the plan does, for the application of that separate basis of tax provided by the law, have a strong appeal to the man whose surtaxes 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.

Presenting the Plan to the Public

A booklet has been prepared which gives to insurance agents in some detail, and with 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 several 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.

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.

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CHAIRMEN OF COMMITTEES OF BANKERS WHO PROVIDED GENEROUSLY FOR THE ENTERTAINMENT AND COMFORT OF DELEGATES 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

(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.)

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HERE will be general agreement that there is no matter of more deep concern to the world's trade at the pres 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 international payments are liable to be viewed with suspicion. A creditor may, if

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believe that I can do so conclusively. In the course of my argument I shall show that England has the ability to pay, and, once that is established, I can unhesitatingly assert her determination to honor her bond in full. I believe I am justified in asking you to treat England's debt to the United States as certain to be provided for, and, if this be conceded, we shall be free to consider the question of the remaining international debts as one in which America and England are equally concerned and in which both have the same interest as creditors.

Magnitude of International Debts

First let us look at the magnitude of these international debts. The greatest of all is that of Germany for reparations, a debt of which the United States declined to receive any share. The amount was not defined by the Treaty of Versailles, but subsequently by the London Ultimatum it was put at 32 billion dollars, at which amount it stands nominally today. Of the remaining debts the liability of France to the United States and Great Britain is 62 billion dollars, and of Italy to the same two countries 42 billion dollars. Russia owes these countries 31⁄2 billion dollars and a further 1 billion dollars to France. These are the principal debts; the others are all comparatively small in amount. Of the creditors of the European Continental Governments England is the greatest.

The figures we have to deal with today are on a far larger scale than the indemnity exacted from France fifty years ago, but the problem in all essential particulars is the same. We have to discover the capacity of the debtors to pay and to consider the consequences of payment. As the indemnity demanded from Germany is much the greatest of the debts and is the one most urgently in need of a satisfactory settlement I place it in the front of our discussion.

Germany's Capacity to Pay

The first question is, what is Germany's capacity to pay? You are perhaps expecting that I am about to give you an inventory of Germany's natural resources and an estimate of her productive power. All this has been done many times and much industry has been displayed in the enquiry. I have no doubt that the experts who advised the signatories of the Treaty of Versailles that Germany could pay 120 billion dollars had made many careful calculations of this kind. But what we have to investigate is not Germany's capacity to produce wealth, but her capacity to pay foreign debt. I cannot help thinking that we have here the source of the

error into which the Versailles experts secm to have fallen. Nobody has ever doubted Germany's immense power to produce, but production by itself is not enough. She must find a market for her exports, and the problem thus becomes one of determining the possible extension of German export trade. Nor is this the end. We must remember that an increase in her exports will only provide funds for reparations if there is no corresponding increase in imports. Payment for her indispensable imports must be the first charge upon the proceeds of her foreign sales, and it is only the balance, the exportable surplus, which is available for reparations.

In speaking of a nation's exportable surplus we must not forget that other factors may contribute to it besides the balance of exports over imports. Interest received from foreign investments and payment for external services, such as shipping, may be contributory factors. Before the war Germany possessed a very considerable exportable surplus derived from all three sources, but mainly from the interest on her foreign investments which were probably worth not less than 5%1⁄2 billion dollars. As regards the surplus from the sale of her products and payment for services it is safe to say that it never exceeded 100 million dollars a year. But what is her position today? Most of her foreign investments have gone. Some were sold during the war, others have been seized as enemy property by the governments of the Allied and Associated Powers, and most of what remain have lost their value as in the case of the Russian investments. Her shipping has been largely confis. cated, and she has been deprived of some of her most productive areas Alsace-Lorraine, the Saar Basin, and the Polish provinces. All the sources whence an exportable surplus might have been drawn have been greatly impaired if not wholly destroyed. At no time was Germany's exportable surplus sufficient to enable her to make the annual payments demanded under the London Ultimatum; it is entirely out of the question that she could do so today.

But let us get a little nearer to the problem of Germany's present capacity to pay from the surplus sale of her production. According to a recent statement by the Chan. cellor of the Exchequer in the House of Commons she has paid money and delivered property altogether to the value of about two billion dollars. Of this amount 1,645 million dollars represented the value of ships, coal, other payments in kind, property in ceded territories and local payments to armies of occupation. The amount in cash

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