End of the IRA Trust?

Recently the SECURE Act (Setting Every Community Up for Retirement Act of 2019) passed the House but the Act is currently stalled in the Senate.  It is expected to pass once a few provisions are ironed out.  One of the provisions in the bill does away with the ability to stretch your IRA after death over the lifetime of a designated beneficiary.  The “stretch” IRA is eliminated and is replaced with a requirement to pay out the IRA over a 10 year period - with a few exceptions.  RMD also gets bumped from age 70.5 to 72.

This severely hampers the benefits of IRA Trusts. The conduit trust is effectively eliminated and the discretionary trust becomes much less efficient.

There are still some options to help clients especially if they have a Roth IRA (no RMD requirements) or can convert to a Roth, want to set up a charitable trust or can qualify for life insurance.

Likely, more to come on this topic, especially if the SECURE Act is passed.  Regardless, FSTC will be able to help navigate the options.

Please reach out to our Business Development Officers for details.

Jim Okamura, President FSTC

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

The First State is still the Best State

You often hear that Delaware is a “trust friendly state.”  The reason is because Delaware has focused on generational planning for high net worth families.  It has enacted fiduciary laws to allow for modifications within irrevocable documents.  It allows for trust assets to pass from one generation to the next in perpetuity.  It also defines what duties are performed by a corporate trustee versus individual advisors.  For example:   A grantor can appoint family members to be Trust Protectors with the role of changing trustees or amending irrevocable trust documents should there be changes in laws that would be advantageous to the family. Your trust can name Distribution Advisors to make distributions to family member’s or charities without specifying an amount.  The benefit is to allow for the changing needs of future beneficiaries or charities that are no longer in line with the family’s values. There is also a benefit to naming Investment Advisors.  An example of that is to instruct the trustee to hold a concentration of stock or closely held business interest.  Many families that I have dealt with, have had and wanted to continue to hold onto Coca-Cola stock.  A corporate fiduciary is typically required to sell down concentrated stocks that family members may want to hold onto.  By naming an investment advisor in your trust, the investment advisor could instruct the corporate trustee not to sell certain stocks.

Delaware law also allows for Non-Judicial Settlement Agreements.  This Agreement keeps family members and trustees from having to go to court for permissible modifications to a trust document. Through the use of a Non-Judicial Settlement Agreement, whereby all parties agree to certain changes, you can make a restrictive document more in line with the needs of current beneficiaries.   

A number of other states have followed Delaware’s lead in fiduciary planning, but Delaware was the first state to enact such favorable fiduciary laws.  There are numerous other reasons why individuals choose Delaware for their estate planning needs.  At First State Trust Company we administer both personal and institutional trusts and can help you navigate the many issues surrounding trusts.  Please let me know how I can help you with your estate planning needs.  Contact me at:  tmitchell@fs-trust.com.

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

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.

Conclusion

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

leisel@fs-trust.com

 

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

One of the most important tools in your shed: The Follow Up

How do some people get things done while others don’t?  Don’t we all have the same 24 hours in a day?  What separates the successful from the rest of the pack?  How do you get people to respond?

I’ve come to realize that though the answer is pretty simple, most don’t do “it.”  You control it, it doesn’t cost anything, it doesn’t take much time or effort.  What is “it?"  It’s: the follow up.

No that is not a typo.  It is the FOLLOW UP!  Following up with the person, team, department, group or company that you wish to receive an answer, get a response from, develop a relationship with, win business is key to success.  Very often, our daily responsibilities require receiving information from another party.  We cannot complete our task until that information is received.  We are often dependent on others to perform a task.  We send an initial request and then either forget to, or don’t bother to, follow up with the person whom you requested information from.  Thus, your task or responsibility does not get completed. 

We have all heard stories of persistence paying off.  The business owner who grants the interview to the kid who contacted him every other day for a year.  The sales person who followed up months or years after initially not winning the business.  The relationship that was developed after initial non-responses (just ask my wife 😊). 

More often than not, the person you are waiting for became sidetracked with other priorities and just needed a gentle reminder.  “Hello, just following up with you on……” or perhaps “Hello, I recognize this is likely a busy time of the month for you, is there a particular time I could reach out to you to move this forward?”  That’s usually all that it takes.   Other times the request can be deeper and requires additional reminders and inquiries.  Let’s call that nudging.  But in the end, you get your response and you complete your task.

In business, a follow up every 2-3 days is sufficient.  I get it!  You don’t want to be a pest!  So let the situation dictate the frequency and need for the follow up.  Also, in this age of texts and emails, let’s not forget the power of the phone call!!  (This may be its own blog post later!)

If you observe the successful, they are not afraid to follow up but most importantly, they don’t forget to or leave it be.  Figure out the method that works for you to keep open items at the top of your list.  For some it is a calendar alert or a to do list or perhaps an email in your inbox that stays there until the item is brought to fruition.  This simple task takes rather little time, effort or cost but can be the difference between your success and other’s failures.

Jim Okamura, President FSTC

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

Swolff@Fs-Trust.com

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