ESG Investing

ESG investing has come into focus in recent years as a new means of analyzing the capital markets for investors looking to align their portfolios with their own personal values.  In this post, we’ll discuss what ESG means, some examples of ESG screening, potential benefits & drawbacks of the method, and current & possible trends in the ESG space.

What is ESG?

ESG investment screening and integration is the method of utilizing environmental, social, and governance factors to select securities whose corporate business models and values closely align with the investor’s.  ESG evolved from the original practice of socially responsible investing (SRI).  SRI investing initially began in the 1960’s to focus on investing in companies that contributed to causes like civil & women’s rights and anti-war efforts.  The mantra of “doing well while doing good” and having portfolios that represent their values were the focus, and SRI provided the framework that would grow into ESG.

The environmental component could include the company’s carbon footprint, waste & resource management, pollution, natural resource conservation, evaluation & management of environmental risks, and relationship with the EPA. 

The social component corresponds to the people-related elements of culture, issues – both within the company & greater society – that impact employees, customers, consumers, & suppliers, and community involvement. 

The governance component relates to the board of directors, company oversight, and relationship with shareholders.  Areas of interest for this component might include executive compensation packages, diversity & inclusion on the board & in management, separation of chairman & CEO roles, dual/multiple class stock structures, and the company’s relationship with governmental regulatory agencies.  

ESG Resources

Investors can use resources such as the Global Reporting Initiative’s (GRI) sustainability database, the Principles of Responsible Investment (PRI) library, and scores from the United Nations Global Compact to make informed decisions.  Other resources investors can utilize for the social criterion are Fortune’s “Best Companies to Work For” and the Forbes’ “Just 100”.  Some investors even utilize the website Glassdoor to gauge how current & former employees receive the company & it’s management.  Investors can also find most governance questions answered in annual proxy reports and annual financial statements.

Example of ESG Implementation

When S&P Global began constructing the S&P 500 ESG Index, a very specific set of criteria were used for implementation.  S&P focused on eliminating companies that fit the following criteria:

  • · Produced tobacco, derived more than 10% of revenue for tobacco, or held more than 25% of ownership in companies related to these activities;
  • · Were involved in controversial weapons (i.e. cluster weapons, land mines, biological & chemical weapons, white phosphorus weapons, or nuclear weapons; companies holding more than 25% of ownership in companies involved in these activities;
  • · Had a score in the UNGC database and were in the bottom 5% of overall scores;
  • · Had a proprietary S&P DJI ESG Score in the bottom 25% of scores within GICS industry group.
  • · Not in the top 75% of market capitalization of industry group.

This screening resulted in 154 members with a total weighting of approximately 24.5% of the S&P 500 being excluded. chart for corresponding exclusions & parent index market cap.

When back tested against the parent index, performance was nearly mirrored and better for the S&P 500 ESG Index in two the three return periods.

Benefits of ESG

Proponents of ESG screening & integration hypothesize companies on with an ESG focus will outperform those who do not.  In the case of the S&P 500 ESG Index, S&P Global showed a strong performing portfolio can be constructed using ESG principles, even when eliminating more than 30% of the parent index’s constituents.  Additionally, with a shift in younger investor’s mindset, companies are being tasked with hiring management teams focused on ESG factors, casting long-term vision for their companies, rather than chase short-term, quarterly profits. 

Another benefit, and perhaps most important, is the personalized approach to build an ESG portfolio. While individual ESG factors are important, some investors incorporate personal cause specific screens, such as eliminating firearms & tobacco-related companies as shown in the S&P 500 ESG Index, further personalizing the portfolio.  ESG investors are intent on “doing well while doing good”, willing to sacrifice absolute, total return in exchange for a portfolio molded on their personal core values.

Customizable ESG Screens

One limitation of ESG screening & integration is the lack of consistent process across the industry.  While an individual can thoroughly utilize the tools listed above to screen for individual equities, vetting mutual funds & ETF’s can be a much more intensive statement.  Investors need to utilize the available prospectus & investment policy statement for a giving offering to fully find one to their liking that matches their individual principles & values. 

Another issue is the elevated costs associated with ESG investment managers.  Even as fee compression affects the space, ESG funds & ETF’s tend to have higher expense ratios than traditional style & sector investment vehicles.  Additionally, while the investor would see the positives in building a portfolio individualized to their values & objectives, advisors might find the task for each client burdensome.

ESG Trends

Some current & coming trends for the ESG space are exciting.  As more low-cost ETF providers enter the space, the method is becoming more cost effective for the average investor.  Recently, Blackrock & Vanguard have both launched low cost ESG ETF’s with expense ratios under 20 basis points.  This product availability should encourage actively managed vehicles to become more cost focused.  Also, as it stands currently, proponents are actively campaigning for the SEC to require specific ESG disclosure requirements to make the screening & implementation tasks less tedious.  Currently, the SEC is actively comparing information companies provide voluntarily with their SEC disclosure to determine what would be necessary.


The ESG movement is a rapidly growing movement.  In the first two months of 2019, Morningstar tracked $180mm flow into ESG ETF’s.  As the space continues to grow, it’s important to continue to monitor the movements & developments in the space, in order to keep passionate ESG investors & their portfolios abreast and ahead of potential challenges and opportunities.

First State Trust Company believes in supporting our clients to the fullest.  Our most passionate clients can access ESG screening & implementation by utilizing one of our partners as an individual portfolio manager or using ESG mutual fund and ETF managers through a proprietary management platform.  Our alliance partners each have ESG capabilities to manage trust portfolios.  If you have any questions or are looking for an appropriate solution, please reach out to me at the email address below.

Les Eisel

AVP, Investment Officer


The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

When to Consider Decanting a Trust to a Special Needs Trust

Trusts created under Wills are created for the benefit of a beneficiary after the Grantor passes.  These Trusts are meant to help support the beneficiary, oftentimes the Grantor’s children, after the Grantor’s passing to help ensure that their needs are taken care of after the Grantor is gone. 

What happens in the instance when the terms of the Trust under will do not adequately meet the needs of a beneficiary due to circumstances the deceased Grantor would not have anticipated?

For example, in the unfortunate circumstance when a Grantor dies unexpectedly a Trust is often established for a minor.  It was not possible for the Grantor upon creating the Trust under Will to anticipate every need that their minor child would need as the child grows older. 

This case occurred for a relationship at First State Trust Company for a minor beneficiary who had special needs.  The terms of the Trust allowed for distributions to the beneficiary per the trustee’s discretion for the minor beneficiary’s health, education, maintenance and support. 

The minor beneficiary was about to turn 18.  When a beneficiary reaches the age of majority, it becomes the responsibility of the beneficiary to be able to manage their finances.  It is no longer the guardian’s responsibility.  In this instance, the beneficiary was not able to handle their finances in a manner to be able to support themselves.    

In addition, the Trust contained age attainment provisions, in which the beneficiary would eventually receive the Trust outright in full upon reaching 30 years old.  The money to support the beneficiary would be lost due to the beneficiary not being able to properly manage their finances. 

This Trust was essential in the support of the beneficiary.  The Grantor’s intent was to take care of their child. 

The solution was decanting the Trust to a Special Needs Trust.  The Trust contained language allowing the decanting, and the Trust’s situs was in Delaware.  Therefore, legal counsel was able to complete the decanting. 

The advantage of a Special Needs Trust was knowing that the trust would not terminate upon the beneficiary turning 30 years old, but rather last until their death.  In addition, a conservator was appointed so the beneficiary’s finances and care would be ensured.  All the beneficiary’s needs through the newly decanted Trust and the newly appointed conservator were met. 

Due to decanting, we now know that the Grantor’s child will be adequately taken care of during their lifetime.   

If anyone has any questions regarding the decanting of a Trust to a Special Needs Trust, feel free to reach out to me.


Stacie Wolff, CTFA

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

Trustee Potential Issues When Outside Tax Preparers File Trust Tax Returns

There are occasions when a client prefers to use their CPA to file Trust tax returns rather than the Trustee. In these instances, the Trustee should ensure the CPA filing the tax returns is filing the returns correctly. The Trustee can do this by reviewing the Trust Agreement to ensure the tax return that is being filed is appropriate and review the return to ensure it been filed correctly. We have had two scenarios in 2018 where outside tax preparers filed incorrect Tax returns, as listed below;

Irrevocable Grantor Trust

When a Trust is considered a Grantor Trust for tax purposes the Grantor is responsible for the Trust tax liability. The Grantor will receive a Grantor Tax Letter annually that reports all taxable items from the Trust for that year. This information would need to be included in the Grantor’s personal income tax return.

Issue #1

  • In late 2018, FSTC was appointed Trustee of a new Trust. We were advised that an outside tax preparer was to be used. This Trust has a 30% ownership in an interest in an LLC. The LLC owned a company that was sold in December of 2018. The tax liability for the sale of the company would ultimately pass to the Trust based on its ownership of the company. The tax liability would be reported on a K-1 issued from the LLC.
  • The outside tax preparer forwarded to the Trust Officer a tax estimate payment that was to be paid from the Trust to cover the estimated income due for the sale of the company.
  • Upon reviewing the agreement, the Trust Officer noticed that the Grantor had the ability to substitute assets of equivalent from the Trust and his personal assets. This power given to the Grantor would cause inclusion of all the Trust’s tax liability within the Grantor’s personal income tax liability.
  • The Trust Officer contacted the Grantor and advised that his CPA should be forwarding him a K-1 annually which report the Trust’s annual tax liability, as the Trust is a Grantor Trust for tax purposes. The Grantor advised that he did not intend to be responsible for the Trust tax liability as there would be a significant tax liability to the Trust for the sale of the company in the LLC.
  • The Grantor contacted his attorney and rescinded his power to be substitute assets from the Trust effective to a date prior to the sale of the company in the LLC.
  • In most cases, the client’s attorney and CPA would be on the same page regarding how the Trust tax returns are to be filed. The Grantor did want to be liable for the Trust tax liability and should have been advised by his attorney how the Trust was structured, so this issue could have been avoided. All parties involved should have discussed how the Trust tax returns should be filed prior to a return being filed, if an outside tax preparer is to be used.

Irrevocable Non-Grantor Trust

Issue #2

  • FSTC had accepted a Trust in late 2016. We were notified that an outside tax preparer was to be used for the filing of the Trust 2017 tax return.
  • The outside tax preparer filed an extension for the Trust in March of 2018. In September, the tax preparer forwarded to the Trust Officer the final tax return for 2017.
  • The Trust Officer noticed that a distribution deduction has been taken on the return. The income tax liability for the Trust was reflected on the beneficiary’s K-1 in the amount of the distribution deduction reflected on the return.
  • Upon reviewing the transactions of the Trust for 2017, the Trust Officer noticed that there had been no distributions made from the Trust in 2017. An income distribution deduction should not have been taken, and there was no reportable income for the beneficiary. A K-1 for the beneficiary should have been generated.
  • The Trust Officer advised the CPA of the error, and corrections were made to the Trust tax return. The Trust tax liability was paid from the Trust.


It’s the Trustee’s responsibility to ensure the Trust tax returns are being filed correctly, whether if it’s an outside tax preparer or the Trustee’s tax preparer. These are two examples of issues that we have dealt with when outside tax preparers have been used to file Trust tax returns. There are potentially many more issues that could arise. It’s important for the Trustee to review the Trust Agreement and ensure the Tax returns are completed correctly prior to any tax filings. 


Keith Al-Chokhachy, CTFA, CFP®


The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

Trust Companies as Last Line of Defense in Preventing Anonymous Criminal Activity

Believe it or not, trust companies play a vital role defending the United States financial system from anonymous criminal activity.  Financial crime in the United States generates approximately $300 billion of proceeds per year according to the Department of Treasury.  Most of the money generated from domestic crime remains onshore, but the problem is exacerbated by the fact that the U.S. has become an attractive destination for billions of dollars of illicit funds generated abroad.  The scope of money laundering is massive as only a fraction is detected each year. Indeed, investigating such activity is akin to searching for the proverbial needle in a haystack.  This is why financial institutions are required to have a robust Anti-Money Laundering (“AML”) Compliance program dedicated to the detection and prevention of suspicious criminal activity.  Suspicious Activity Reports (“SARs”) filed with FINCEN provide leads for law enforcement and invaluable evidence for successful prosecutions.   

All profit generating crime necessitates the laundering process to enable a criminal to enjoy the fruits of his or her labor.  The penultimate risk threatening the trust industry remains anonymity.  Personal trusts with a web of underlying shell corporations are ideal vehicles to disguise ownership, control, source of funds, and the true nature and purpose of the trust structure.   A hidden powerholder pulling the strings coupled with complex legal arrangements and sophisticated transactions enables successful execution of the money laundering process with relative ease.

Money laundering occurs in three distinct stages that may overlap depending upon complexity.  The first is placement where funds are deposited into bank accounts at home or abroad in a manner that avoids reporting thresholds.  Layering follows and is best described as a shell game where layers of transactions break the audit trail to separate the funds from the crime.  Lastly, the funds are integrated when money is transferred to an account(s) to purchase luxury goods or assets thereby legitimizing its source.  Dirty money is ultimately cleaned as a return on investment(s). 

Shell corporations are legal entities; such as corporations, partnerships, and LLCs, registered with the state but conduct no physical operations and hold no significant assets.  They often serve as conduits for fund transfers or as nominee owners.  Anonymity is afforded to these entities because the United States maintains no public registry of beneficial ownership information and some states even permit the use of agents serving as directors and/or shareholders.  The lack of available information often results in an investigative dead end.

The misuse of anonymous shell corporations is a top enforcement priority and served as the primary catalyst behind the Treasury Department’s new Customer Due Diligence (“CDD”) Rule requiring financial institutions to capture the natural person beneficial owner(s) and controlling persons of legal entity clients.  Interestingly, most personal trusts do not fall within its purview as it only applies to legal entities registered with the state thus creating a glaring weakness for potential abuse.  Some companies have thankfully filled this void by requiring basic powerholder information at account opening.

Financial institutions have been effectively deputized by the Treasury to report suspicious activity and now serve as a depository for beneficial ownership information sought by law enforcement.  Financial institutions, therefore, must establish the true identity of the suspicious actor along with capturing evidence of the activity.  Until uniform standards are implemented to identify beneficial owners at the time of incorporation, trust companies are among the last line of defense in preventing anonymous criminal actors from abusing our financial system. The failure to capture hidden powerholders allows completion of the laundering process absent detection.

First State Trust Company takes its regulatory obligations very seriously.  We have implemented a robust control environment which proactively identifies, monitors, and manages our AML risk.  Knowing Your Client (“KYC”) is the bedrock principle underlying AML regulations.  We accordingly KYC all powerholders associated with our personal trusts and capture the beneficial owners of all legal entity clients.  We understand our clients’ wants, needs, and how our role can best accomplish the trust’s purpose.  We recognize the importance of truly knowing our client to not only provide exceptional customer service, but to protect our clients and ourselves from anonymous criminal activity.


Michael McElwee, JD

Assistant Vice President, Compliance/AML Officer


The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.

Observations from the ABA Wealth Management and Trust Conf

On Feb 10-12, I attended the ABA Wealth Management and Trust Conference in San Francisco, and thought I would share some observations and key points from some of the sessions I attended:

On the regulatory front it is always interesting to hear the latest and what may be forthcoming as a focal point.  It was welcoming to hear that the regulators are realizing the ever burdensome and often confusing requirements of AML, KYC and CIP, so they may be looking to make it less onerous by better guidance and understanding.  There may be extra scrutiny on proprietary products in the future. They should be evaluated in the same manner third party products are.  (Since we don’t offer any, FSTC always thought this was an advantage for us, though we must still be diligent about what is offered by our partners.)   I think most already know this but, due diligence and ongoing oversight on vendors and partners will generate more attention going forward.  Distribution requests need authentication calls backs.  (We already do this as a standard!)  Continued emphasis on UBO’s (ultimate beneficial owners).  Here’s an interesting one: possible rollback of some of the 2017 Money Market Mutual Fund rules for stable value funds.  Not sure what but stay tuned.  Cybersecurity will continue to grow in need, effort, focus and cost.

A good point I picked up on Special Assets is the need for Occupancy Agreements on any rental properties that may be in a trust.  The agreement can be part of or in addition to the lease which covers things like not being able to use the property to rent on Airbnb and similar.

With regard to wealth transfer, if the first time your calling the family members to retain the business is after someone’s death, you’re too late.  Must make the suggestion to meet, learn and explore early and often.

Taxes:  AMT will apply to less people going forward, no more Roth IRA recharacterizations after 2018, and offshore blocker corps no longer work.

On performance: the key to change is getting over the resistance.  You must change and evolve or become irrelevant, complacency kills.  Ask yourself, what will put you out of business? Client expectations are perpetually progressive.


James Okamura- President FSTC


The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.