Archive for May, 2018

Pursuing Minimized Taxes With Private Placement Life Insurance

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

How High Net Worth Investors Can Have Their Cake and Eat It Too, with PPLI

The increase in the estate exemption to $11.18m in 2018 has many Americans and their advisors focusing more on income tax planning than estate tax planning.

This shift in focus makes sense: transferring wealth outside of a client’s estate for the benefit of their children and future generations means those assets and their appreciation will not be subject to the estate tax at their death. However, they do not get a step-up in basis for income tax purposes, the result of which can be significant taxable gains when those assets are eventually sold.

For individuals whose net worth is $10m or less, it may now be better for them to NOT transfer wealth outside of their estate, and instead plan on holding it at death to achieve the step-up in basis. Of course, future tax law changes that reduce the exemption amount could still make wealth transfer planning valuable.

What Is Private Placement Life Insurance (PPLI) And How Does it Work?

So, how can an individual get the best of all worlds: transfer assets outside of their estate, invest in a diversified and appreciating portfolio, and not burden the next generation with a huge income tax bill down the road? One answer may be Private Placement Life Insurance, or PPLI.

PPLI was once a strategy for the uber-wealthy who could afford to put tens of millions of dollars into the structure. Today, PPLI is becoming even more accessible to ultra-high net worth families. PPLI is basically a life insurance policy with a high internal cash value that can be invested in a variety of ways. Like any life insurance policy, neither the appreciation of that internal value, nor the ultimate payout of the death benefit, is subject to income tax.

This structure effectively gives a client the same step-up in basis they would get if these assets were held inside their estate!

While individuals can purchase PPLI policies new, one of the ways PPLI is becoming more accessible is by allowing individuals to use existing life insurance policies. This accessibility is a recent development with insurance carriers that enables investors to attach a PPLI investment account to an existing policy (one not originally bought with PPLI in mind). The death benefit on the policy and the insured’s age will dictate how much in investment assets the policy can carry tax-free.

For individuals with health issues who can no longer obtain new life insurance policies, this development removes a significant roadblock. Additionally, using an existing policy can mitigate some of the costs of obtaining new life insurance, allowing additional premiums paid in to go further toward the investment accounts.

While there are other conditions to consider before proceeding with PPLI, it continues to be an attractive way for clients to achieve both income and estate tax minimization.

Impact Investing Strategies are In High Demand

Posted by Joseph W. Chase, CFA®

Why Advisors of High Net Worth Investors Should Pay Attention

Impact investing continues to gain popularity among investors seeking opportunities for their wealth to create positive change in the world.

As of 2016, $8.72 trillion of investment assets under professional management were managed with an impact mandate. That amount represents more than 20% of total professionally-managed assets in the United States, up from just over 10% in 2012. Advisors who ignore this trend are limiting their own potential and, more importantly, could be falling short of their clients’ expectations.

Not Just a Passing Trend

Investor demand for impact investing strategies is significant. According to Morgan Stanley, 75% of investors are interested in sustainable investing, including 84% of women and 86% of millennials. As wealth is passed down to future generations, advisors should expect an increasing demand for impactful strategies.

Motivations for impact investments are as broad and diverse as the individuals who seek to make a positive change in the world. Some investors are looking for a general alignment of their views with the holdings in their portfolio, while other investors are very specific about their goals, requiring highly-customized impact investments. Examples of these types of investments range from empowering women entrepreneurs in Africa to advancing cancer therapy research.

Advisors have not yet caught up with demand; fewer than half of investors have implemented sustainable strategies into their portfolios. This disparity creates an opportunity for advisors at the forefront of impact investing.

Why Impact Investing Hasn’t Caught Up with Demand

The lack of adoption could partially be explained by the perception that impact investing results in lower returns. Once viewed as an indirect charitable cause (giving up return to support noble causes), impact investing is becoming increasingly viewed as a viable performance-generation strategy.

Recent studies show that impact-oriented funds have outperformed their traditional peers, and impact-oriented benchmarks have outperformed traditional benchmarks. This outperformance holds true at the company level as well. Companies rated as “The Best Companies to Work For” have achieved outperformance relative to industry peers. Companies that have begun sustainability initiatives have also observed positive financial results:

It can be debated whether the sustainability investments caused the financial improvements, or if forward-thinking management teams tend to invest in sustainability projects, producing superior financial returns.

Some investors, especially those with very specific impact goals, are accepting of below-market-rate returns. A 2017 survey shows that about 2 out of 3 impact investors seek risk-adjusted market-rate returns, while 18% target below-market-rate returns that are closer to market rate, and 16% have a target return closer to capital preservation.

Overall, the results have been similar to expectations; 3 out of 4 respondents said returns were in-line with expectations, while 9% were underperforming, and 15% were outperforming.

How Do You Know if an Impact Investment is Making an Impact?

Measuring the performance of impact investments is multifaceted and requires additional metrics compared to traditional investments. Financial returns can be measured just like traditional investments, but measuring the actual impact of an investment is a bit more nuanced.

One hesitation some investors have is the fear of not knowing what their money is doing to change the world. Recently, a number of metrics have begun to surface to measure impact. These metrics include IRIS (Impact Reporting and Investing Standards), USSPM (The Universal Standards for Social Performance Management), GIIRS (Global Impact Investment Rating System), and the United Nations Sustainable Development Goals. Additionally, many impact managers provide customized impact reports for their clients’ portfolios.

Impact investing has come a long way over the past decade. As investor interest continues to gain momentum, advisors must adapt to their needs to stay relevant.