Archive for April, 2018

Impact Investment Programs: One Size Fits… One

Posted by Buddy Webb, CFA®

A Custom Impact Investment Strategy Seeks to Meet High Net Worth Investors’ Unique Values and Priorities

Working with Ultra High Net Worth families involves tailored strategies in the areas of estate planning, tax planning, and risk management. Custom investment portfolios are also often part of a comprehensive wealth management offering so why should families who are looking to implement an impact investment program go with an “off the shelf” option?

Defining A Legacy – Investing for Impact

Each of our client families has an opportunity to define their legacy. In many cases, this means imparting a particular set of values on to the next generation. In other cases, it means improving the lives of others through charitable giving (both time and financial resources). Most often it is a combination of these ideas, and more and more families want to use their investment portfolios to define their legacy. Each family’s unique values and priorities dictate a custom impact investment program.

Portfolio Return Versus Impact

It was not long ago that a conversation around investing for impact involved the trade-off between earning a market-based expected return and having a positive impact. Finding the “sweet spot” where you could expect both was challenging. Today, the landscape is somewhat different, but families will still on occasion accept a return on an investment that is below market in order to target a specific impact (community loan funds may fall into this category). We feel this option is perfectly acceptable, provided the client has a good understanding of the trade-off and the ramifications for the portfolio in aggregate.

Finding the Right Recipe: What to Include and What to Take Out

As referenced above, the impact investing arena continues to evolve. The idea of “negative screening” (removing fossil fuel stocks from an equity portfolio for instance) is not new–if anything, it has become progressively easier to implement. While it is rewarding to help clients eliminate positions from their portfolios that do not align with their values, often the next step in the process is to help clients proactively include investments that do align with their values (renewable energy for instance). These investments can be public or private and depending on the background of the particular family and the scale of the investment, they can potentially afford the family an opportunity for an active role in the investment. This example is another in which values can be passed across generations.

The Opposite of Set It and Forget It – Revisiting Your Impact Investing Strategy

We have discussed the pros and cons of robo advisors in another post but it should be clear that helping a family articulate and implement their beliefs and values is anything but a “cookie cutter” process. Furthermore, like any investment strategy, an impact investing program should be revisited frequently. Returns should be measured as should impact (to the extent possible). Family values can evolve over time and, as referenced above, the investment landscape changes. Independent wealth management firms that specialize in working with Ultra High Net Worth families are well-suited to help their clients develop and continually improve on these customized programs.


Protect Your Assets for Future Generations

Posted by Sean T. Perkins, CFP®

Asset Transfer Strategies that Safeguard Your Legacy

As your family grows with marriage and children, it can change the way you think about the future of your assets. It can also bring into sharp focus any concerns you may have about the flow of your assets and how you can best protect your legacy.

It’s important to understand what terms you can write into a trust regarding the transfer of your assets to future generations, and the potential consequences of the terms you choose to include or exclude in your documents

When it Comes to the Language in Trusts, Less is Sometimes More

Whether you’re conferring assets during your lifetime or leaving them as an inheritance, drafting trusts with well-thought-out terms can ensure your assets end up in the right hands. You can write any terms or restrictions you wish into a trust, but it’s important to weigh the options between including a strict requirement versus leaving some flexibility for the trustee to exercise discretion. This is particularly true as the world changes, as what makes sense today may not make any sense 5 or 10 years from now, either due to changing tax law or changes in your objectives or the lives of your beneficiaries.

To reduce the chance of regret, it is often recommended that a trust be drafted with provisions that bestow trustees with discretion on distribution of income or capital to the beneficiaries. Sometimes referred to as discretionary trusts, these trusts tend to restrict the extent to which a beneficiary can make demands upon the trustee. They provide trustees with the freedom to make decisions on their merit and without any interference from the beneficiaries (and hopefully reduce the exposure to creditors of the beneficiaries).

If leaving full discretion to a trustee causes concern, there are some important items that can help with this, such as providing guidance to your trustee in a non-binding manner and ensuring that the right trustee provisions are included (language regarding successor trustees as well as who has the right to remove and replace a trustee).

Regarding the non-binding guidance, grantors can outline their general wishes with respect to the trust assets and how/when trust distributions should be made. Since the letters are non-binding, the trustee can use the letter to have a better idea of the values and objectives of the grantor while maintaining the right to ignore the guidance if that is in the best interest of the beneficiary. These types of circumstances could include:

In our view, a properly-drafted trust with a non-binding letter not only provides the trustee with freedom to make decisions, but also some guidance on what decisions to make.

Here are 3 topics a grantor may want to discuss with their attorney that could be included in their trust via non-binding letters:

  1. Prenuptial Agreements

Marriage is a business relationship almost as much as a romantic one. This dual nature and purpose has led to the increased acceptance of prenuptial agreements (prenups, for short) as a tool to protect a spouse’s financial interests. If you’re concerned about your assets remaining within your family (i.e. passing to your relatives, such as children, grandchildren and great-grandchildren), then a prenup can help with any possible divorce or separation.

You may choose to hardwire language into your trust that specifies a prenuptial agreement is in place for your married children before any distributions are made, or other requirements about how trust assets can be used with respect to your children’s lives and choices. Spelling out certain parameters can eliminate any ambiguity down the road, but be sure you work closely with your estate attorney and wealth advisor to understand the potential impact of these types of decisions. It is ultimately your choice how specific to make the language in your trust and whether it is binding or not binding on the trustee, but it is recommended that this decision be made with your attorney since it could have significant consequences if done incorrectly, such as unintended family resentment or financial/creditor exposure.

  1. Age-Specific Distributions

Grantors may also choose to hardwire language into a trust that requires distributions to the beneficiaries once they reach a certain age. Alternately, grantors could leave distributions to the full discretion of the trustee and outline their distribution wishes in a side letter. Assets that are placed in a trust for another party’s benefit are typically not considered to be property of the trust beneficiaries and therefore have a higher level of creditor protection in the event of a divorce. However, once a distribution is made to the beneficiary (or made available to the beneficiary if hardwired into the document), the assets are no longer protected and become part of the beneficiary’s personal property rather than part of the trust property.

  1. Business Investments

If your children are entrepreneurial, it might make sense to consider how trust assets are best used to support business ventures. One option may be to require your child to establish a business plan and provide funding to a certain point–whether through their own investments or with the help of an outside investor–before they can tap into their trust. This prerequisite, along with a cap on trust distributions, allows you to ensure the trust assets aren’t being used for incomplete ideas that may not last. The trustee could also choose for the trust to make the investment directly, rather than making a distribution to the beneficiary to make the investment, which would keep the assets under the control of the trust and potentially with a higher level of asset protection.

Regarding trustee powers, the key items to be mindful of include:

These considerations are particularly true with discretionary trusts, since you’re leaving control to the trustee to use their judgment on how best to manage the assets and when to make distributions. A few items to consider are:

  1. Successors

It’s all too common for a grantor to select a close friend or attorney to serve as successor trustee, but that friend or attorney is often the same age (or older) than the donor, so what happens when both the grantor and the successor age? Who should replace them on a trust that could last multiple generations? It may make sense for the beneficiaries to serve as co-trustees so they’re involved in the management of the assets. It may also be wise for a professional to serve with them to make sure the trust is being managed properly from a tax, legal and investment standpoint.

  1. Removal Power

Without removal power, a donor or beneficiary may be forced to work with an unreasonable trustee and may have no leverage to negotiate fees, asset management or distributions.

  1. Appointment Power

It’s typical for the donor to be able to appoint a trustee in the event of a vacancy or to plan for succession, but it is as important to consider who has this right after the donor. Keep in mind that the trust may last for multiple generations, so having some governance structure that works with an evolving world is important.

Optimizing Your Trust Performance

A trust is a vehicle by which your assets can be transferred to future generations, and it ultimately controls how your legacy is protected. Executing a trust should be a collaborative effort between your estate attorney and wealth advisor to ensure the distribution parameters are optimal for your goals, and reflect your intentions with respect to your heirs.

Your financial legacy is the culmination of your hard work, and represents a gift to your beneficiaries that will last long after you. Considering these different approaches to your asset distributions and trustee provisions will help ensure your legacy will be protected for future generations, and leave you with the peace of mind that your assets will be used the way you intended.