dsmWealth March 15, 2018

Samantha Azzarello of J.P. Morgan Asset Management, and Noel Friedman, with MSCI, lead a discussion on ESG investing in a meeting with asset managers.

Investing With an Eye Toward the Greater Good
BY STEVE DINNEN

Investors deserve top guidance to build their portfolios, and a blossoming addition to their toolbox both helps them be wiser with their money and nudges companies to be wiser with the way they treat their customers, their employees and their environment. It helps a company become a better business and, hopefully, a better investment.

ESG—environmental, social and governance—is shorthand for an approach to investing that gives a look at a public company from many perspectives. Are they treating their workers right (no Chinese sweatshops)? Are they contributing to the betterment of mankind (maybe solar panel makers; definitely not tobacco)? Are they operating in an honorable fashion (take note, Volkswagen)? Do they need to prepare for climate change, or security threats? Bloomberg, which has developed a proprietary rating system for ESG, plugs 120 separate indicators into its model.

Local investors, mainly institutional managers from insurance companies, got a look at ESG during a presentation sponsored by the Certified Financial Analyst Society of Iowa. Presenters Samantha Azzarello, of J.P. Morgan Asset Management, and Noel Friedman, with MSCI, sorted out how ESG differs from other ways to look at stocks with an environmentally friendly eye—socially responsible investing, or SRI. This is not just a new version of SRI, but a more thorough look at the way a company conducts itself. A knock against SRI is that companies that follow its tenets are not necessarily rewarded share-price-wise, but that does not seem to be the case for ESG adapters.

Friedman says evidence so far indicates that returns are better for firms that use ESG guidelines. They tend to have higher cash flows, and an ability to deal with disruptive technology. Microsoft Corp. scores high on the list, as does Bank of America, whose chairman has even written that "our ESG practices are central to growing in a sustainable manner."

The push for ESG has so far come from the institutional side, such as pension plans. But there is more ESG awareness by individuals, especially by younger investors, Azzarello says. And portfolio managers are increasingly signing on to the idea as big investment houses develop ESG measurement tools.
ESG ratings on companies are still a work in progress and vary depending on who is doing the rating. The easiest way to get ESG-friendly is to buy one of the many exchange-traded funds or mutual funds that are now employing ESG standards — think Invesco Summit (P), or Hotchkis & Wiley Large Cap (A). If you prefer an individual stock, just look up the fund’s portfolio.

Endow Iowa Tax Credit Rewards Charitable Giving
BY STEVE DINNEN

Here’s a law everyone can get behind: the Endow Iowa Tax Credit.

Legislators in 2003 started a tax break program that allows credits of 25 percent of a charitable donation made through one of Iowa’s 17 community foundations. The program has to be renewed every year.

The program began in 2003 and initially was capped at $2 million. Lately the cap has been $6 million. That’s for the entire state, but it’s a good deal for someone who gets it because a $10,000 gift, for instance, gets $2,500 knocked of your state tax bill. (Plus, you get a deduction on your federal tax bill.)

That $6 million limit was reached in January, the earliest ever, according to Kristi Knous, president of the Community Foundation of Greater Des Moines. Gifts that exceed that amount go to the head of the line for next year’s credits—if they are renewed.

The beauty of Endow Iowa lies with the way the math multiplies the amount of giving. That $6 million worth of credits means $24 million was donated. Since inception, Endow Iowa has generated more than a quarter-billion dollars for charitable purposes statewide.

So let your local lawmaker know it’s perfectly OK to give Endow Iowa another year. Or two.

Ten Takeaways From the Tax Reform for High-Net-Worth Investors

The good, the bad and the GILTI.

BY MICHAEL BRUNO, STEVEN HADJILOGIOU, DANIEL HUDSON, ABRAHM SMITH AND PAUL DEPASQUALE, WEALTHMANAGEMENT.COM

The Tax Cuts and Jobs Act introduced significant changes to the taxation of high-net-worth individuals. The changes particularly affect globally mobile clients and multi-jurisdictional families with U.S. connections.
Here are some key takeaways for international HNW individuals.

The Good
1. Consider planning opportunities for overseas dividends. Qualified dividends of a U.S. individual are generally taxed at a maximum 20 percent rate while other dividends are taxed at a maximum 37 percent rate. Dividends from non-U.S. corporations qualify for the reduced 20 percent rate only if the payer is organized in a country that has an income tax treaty with the United States. In Latin America, only Mexico and Venezuela have income tax treaties with the U.S. Therefore, dividends paid to U.S. individuals from companies organized in most Latin American jurisdictions (except Mexico and Venezuela) generally are taxed at the higher ordinary income rates. The Tax Cuts and Jobs Act modified participation exemption regime and the reduced corporate tax rate of 21 percent create opportunities for individuals to restructure ownership of non-U.S. corporations to benefit from the reduced tax rates. The participation exemption exempts dividends paid by foreign corporations to U.S. C corporate shareholders from U.S. federal tax, which wasn’t the case before the act.

2. The lower corporate tax rate is driving new thinking on choice of entity. The act reduces the U.S. federal corporate tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent effective Jan. 1, 2018. The act also introduced a deduction of up to 20 percent for qualified business income earned through pass-through entities, which could reduce the top ordinary rate to 29.6 percent. The pass-through deduction is subject to significant limitations under the tax law and is set to expire in 2026. There are many factors in deciding to invest or operate through a corporate or pass-through entity. For instance, will the business accumulate, reinvest or distribute earnings? In some cases, a corporation may be subject to punitive tax if it accumulates earnings or doesn’t properly reinvest the earnings in the business. It’s important to consider the type of income earned, duration of the business, the tax treatment on exit, liquidity events and non-U.S. taxes (where applicable). The disparity between the corporate rate (21 percent) and the maximum individual rate (37 percent) require clients to consider alternative structures for holding U.S. real estate and other investments.

3. Increased gift and estate tax exclusion for U.S. individuals. The act provides immediate relief from estate tax, gift tax and generation-skipping transfer tax by doubling the exclusion to $11.2 million (expected, as the figure is indexed for inflation), beginning in 2018. By doubling the exclusion, married couples who use portability can shield up to $22.4 million (as indexed for inflation) from estate, gift and GST taxes. The increased exemption is set to decrease to pre-act levels in 2026; however, the exclusion may also be reduced before 2026 by future legislation, so clients should consider strategic gifting early to ensure that they can use the increased exclusion. Noncitizens not domiciled in the U.S. have only a $60,000 exclusion from estate tax and no exemption from gift tax.

4. New tax incentive for U.S. exporters. U.S. corporations that export goods or services may benefit from a special deduction on income earned from non-U.S. markets. This effectively reduces the tax rate from 21 percent to 13.125 percent, on qualifying income.

The Bad >> READ MORE

Four Estate Litigation predictions for 2018

What is the value of strategic corporate philanthropy? Larry Fink, chairman and CEO of international asset management and investment giant BlackRock believes businesses must play a more strategic and integral role in efforts to solve the most pressing problems of our local, national and global communities. See what he wrote in his annual CEO letter here.

This slideshow shares 10 common mistakes made when planning for art and other collectible assets and how to avoid them. This gallery was adapted from the original article in the March 2018 issue of Trusts & Estates.

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