Perspectives. Estate Planning 2016: A Changing Focus

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1 Spring 2016 Perspectives Estate Planning 2016: A Changing Focus DAVID K. PLOTTS Director of Wealth Planning Estate Tax From 2001 through the end of 2012, the estate tax environment was one of constant flux. Lifetime exemptions the combined amount of assets an individual can pass during life and at death, free of tax climbed from $675,000 to $5.12 million. Estate tax rates, once at 55 percent, declined gradually to 35 percent. Unsettling to advisors, however, was the fact that these changes took place under a law that removed the estate tax completely in 2010 only to expire and reappear a year later at 2001 levels. As a result of this unnerving time and the now infamous fiscal cliff legislation enacted on January 1, 2013, the lifetime exemption now stands at $5.45 million, per individual. Further, in 2001, married couples were required to establish trusts in order to benefit from the combined exemption of $1.25 million ($625,000 each). Today, these same couples can fully utilize their 2016 combined exemption of $10.9 million with relative ease, thanks to portability laws. After a decade of uncertainty, estate planners are enjoying the stability of permanent estate tax laws, a consistent tax rate of 40 percent and a historically high exemption level that increases annually with inflation. Interestingly, as a result of these changes, less than 0.2 percent of Americans who pass away in 2016 will owe a federal estate tax. Can we surmise that estate planning concerns are now mostly alleviated? Income Tax The same legislation that introduced estate tax relief and stability also increased income tax rates, phased out income tax exemptions and limited itemized deductions for high earners and investors. When combined with the new Medicare taxes on net investment income and wages, as well as increasing state budget deficits, many Americans now face combined federal and state income tax rates in excess of 30 percent on capital gains and more than 50 percent on ordinary income.

2 Estate Planning 2016: A Changing Focus CONTINUED FROM PAGE 1 After a decade of uncertainty, estate planners are enjoying the stability of permanent estate tax laws, a consistent tax rate of 40 percent and a historically high exemption level that increases annually with inflation. Due to this turn of events, affluent Americans, who are now less likely to be subject to estate tax, have a heightened need to focus greater attention on the impact of income taxes on their family s overall wealth today and in the future. Old Wisdom in a New Light The Internal Revenue Code has long provided for a step-up in tax basis on certain assets passing from one individual to another at the time of death. When lifetime exemption levels were much lower, conventional wisdom led taxpayers to remove appreciating assets from their estates either during 2.00% 4.99% 3.80% 40.00% 39.60% 4.99% 3.80% 20.00% life or upon the death of the first spouse. The plan was to avoid a 50+ percent estate tax at the cost of later paying a 20 percent tax the formerly lower federal and state capital gains rates. However, those planning strategies may be causing individuals no longer subject to any estate tax to remove assets from their estates too soon. As a result, heirs are missing the step-up in tax basis, costing them 30 percent or more in otherwise avoidable federal and state capital gains taxes. By properly strategizing around new portability laws, a married couple can now better manage this situation and save the family thousands in taxes. Effective Income Tax and Transfer Tax Rates to Residents of Cleveland, OH and Philadelphia, PA in 2016 Residents of Cleveland, Ohio Federal Medicare State Local Residents of Philadelphia, PA 4.50% 3.91% 3.07% 3.80% 40.00% 39.60% 3.91% 3.07% 3.80% 20.00% Transfer Tax Rates Earned Income Tax Rates Capital Gains and Qualified Dividends Tax Rates Transfer Tax Rates Earned Income Tax Rates Capital Gains* and Qualified Dividends Tax Rates *Long-term gains and certain retirement income not subject to Philadelphia local tax. In recent years, the effective aggregate rate of federal, state and local taxes imposed on a Cleveland or Philadelphia resident may well exceed the effective transfer tax rate in that jurisdiction. Perspectives Page 2

3 With the current estate tax laws appearing to have settled, and income tax rates increasing at both the federal and state levels, now is the time to refocus on a comprehensive estate and income tax strategy. The estate of an individual worth between $5 and $15 million is often comprised of large IRAs, as well as appreciated assets such as real estate or stock portfolios held outside an IRA. In the context of estate planning, the key difference between these assets is that an IRA s eventual distribution to heirs will be subject to ordinary income tax rates and will not receive a step-up in basis at the time of death. Prior conventional wisdom may have led an individual to defer the distribution of his or her IRA until the last possible moment, instead spending down a stock portfolio in order to save current income tax. However, with the estate tax diminished or eliminated, children likely would prefer to inherit appreciated real estate or stock rather than a parent s IRA. Any distribution from an inherited IRA would be taxed at the highest income tax rates and could push the child into a higher tax bracket. Further, charitable gifting directly from IRAs during life (if over age 70½) or at death can provide substantial income tax savings over the use of appreciated property for the same purpose. For the wealthiest Americans still subject to estate taxes under the new laws, lifetime wealth transfer strategies remain a viable option. With the proper use of trusts, diligent planning through the coordination of advisors, and the passage of time, individuals can efficiently and effectively reduce or eliminate estate tax exposure for multiple generations. However, traditional planning methods that remove rapidly appreciating assets from an estate have left some taxpayers with low-basis assets sitting in trusts. Given the rising tax-rate environment, older taxpayers should explore opportunities to swap high-basis assets on their balance sheet with those low-basis assets. With the current estate tax laws appearing to have settled, and income tax rates increasing at both the federal and state levels, now is the time to refocus on a comprehensive estate and income tax strategy. Spring 2016 Page 3

4 Diversity, Equity and Inclusion are More Than Buzzwords NINA L. COHEN Director of Endowment & Foundation Advisory ERIKA McDANIEL Officer, Endowment & Foundation Group Across the philanthropic industry, the words diversity, equity and inclusion (DEI) have bubbled to the surface. As the United States grows more diverse, nonprofit entities are adapting by becoming more intentional about incorporating DEI initiatives into all facets of their organization. Through large-scale initiatives like D5, a five-year effort to advance DEI in philanthropy, several influential nonprofits have come together to take practical steps in moving DEI programming forward. For example, Philanthropy Network, a Glenmede partner, is participating in the D5 initiative by launching a DEI Task Force. Other individual organizations are implementing smallerscaled initiatives through programming, funding, leadership and fundraising. changing demographic landscape. By more clearly defining the term DEI, organizations can more easily determine how to best address these concerns within the framework of their mission and vision. For example: Diversity refers to historically under-represented individuals and groups that can be engaged through philanthropy. Equity focuses on the creation of philanthropic opportunities and access to philanthropic resources for historically under-represented individuals and groups. Inclusion involves active, deliberate and continuing engagement with historically under-represented individuals and groups. 100% Through Glenmede s philanthropic legacy and ongoing work, we have a unique perspective on the ways organizations from small private foundations to large public charities are pursuing DEI initiatives. Among the most common are: 1. Programming In response to changing demographic needs, nonprofits are developing and implementing specialized programming. As the aging population increases, nonprofits focusing on human services may shift more attention and dollars to serving and supporting the elderly. Staying current on shifting demographic trends is imperative and may drive the way programming is added, continued or terminated, impacting the budget, staff and even volunteers. U.S. Population Will Become Increasingly Diverse Hispanic Origin Asian, Native Hawaiian and Pacific Islander Two or more races Black American Indian and Alaska Native White For nonprofit organizations in particular, it is important to understand and adapt to the Source: U.S. Census Bureau, 2014 National Population Projections, 12/2014. Perspectives Page 4

5 2. Funding DEI initiatives also influence how foundations and other grant-making institutions distribute their dollars. Many organizations have broadened grantmaking programs to include a larger pool of potential grantees and impact investments such as mission- and program-related investments. The mission of a family foundation, for example, may be to support the education of minority students in the inner city. Whereas they may have primarily granted money to programs that supported students in STEM subjects (science, technology, engineering and math), census data shows that immigrant populations are increasingly moving to inner city areas. As such, the data would support the foundation s expansion of funding to include organizations that support basic reading initiatives or English as Second Language programming. 3. Leadership DEI initiatives can also affect the types of candidates considered for board and staff positions. Research has shown that diversity within organizations drives innovation, increases productivity and improves future recruitment efforts. Beyond racial or ethnic diversity, there is diversity of age, gender and physical ability. Many organizations have implemented Next Gen Boards to engage a younger, more diverse group of individuals in their philanthropic mission and develop future leaders. 4. Fundraising Nonprofits are always challenged to better segment and target donors, cultivate deeper donor relationships, make more salient requests for donor support and engage donors in a way more meaningful for the donor. Yet organizations also need to understand that various cultures view philanthropy differently. Within some cultures or ethnic groups, it is important that the right asker makes the request and offers an opportunity to donate time as well as money. For other communities, friendraising is an effective tool, and passion and cause can at times outweigh the lack of a personal connection to the organization. The evolving demographic face of America is shifting every aspect of daily life, from television programming to a multi-generational workforce. These transformations are driving technological innovation, political change and, now, changing the philanthropic industry. By embracing DEI initiatives, both foundations and nonprofits will be poised to get in step with the new landscape and further their mission. Spring 2016 Page 5

6 Glenmede and Women: An Alignment of Values and Vision We recognize women investors know the road to financial well-being encompasses more than investment returns and are committed to providing women the financial tools, guidance and education they require, tailored to their personal needs. Glenmede is uniquely positioned to offer women a high-quality investment and wealth management experience. Two key factors are the large number of women in key leadership roles and a culture that values collaboration and personal service. GLENMEDE BY THE NUMBERS 2 of 4 of Glenmede s founders were women 55%+ of Glenmede s Senior Management Committee are women 50%+ of employees are women 1/3 of client-facing staff are women 2-3 women on the Board of Directors since years average tenure of women employees Women in Leadership ABBY ZIELINSKI Wealth Advisory CASEY C. CLARK, CFA Investment Strategy Diversification has been a sacred tenet of the investment world for decades. History has shown that asset-class diversification can help investors enjoy higher returns with lower risks. In recent years, investment professionals have identified a more nuanced category of diversification specifically, gender diversification within workplace leadership. Data shows that leadership diversity tends to provide the same benefits as asset-class diversification: higher returns and lessened risk. Given this research, investors, particularly those committed to ESG investing environmental stewardship (E), social impact (S) and responsible corporate governance (G) are allocating funds to companies with strong female leadership. This article will examine the business case for weighing leadership diversity as a factor in investment analysis. It will also explore the potential impact of utilizing women in leadership as an investment strategy within a growing field called gender-lens investing. Field Data: Companies with Women in Leadership May Outperform The benefits of gender diversity have been traditionally understood in moral terms. But, armed with a decade of data, the investment industry is now beginning to understand that there may be economic benefits to be gained from leadership diversification as well. Studies from various disciplines have investigated the correlation between female leadership and financial performance. These seem to show that companies with superior diversified leadership characteristics outperform their less-diversified peers. For instance, companies with more women in leadership defined as women board members, senior managers or in executive roles tend to outperform those with lower representation by certain standard metrics of financial performance such as return on sales, return on equity and return on invested capital. 1 These companies, therefore, may have greater potential to outperform their benchmarks. Perspectives Page 6

7 Our research supports the findings that the gender-diverse companies do better than their peers. 5 Looking at the Russell 1000 between July 2009 to October 2015, roughly 300 companies had at least one of our women-in-leadership attributes. These firms outperformed the 700 companies that had none by 0.9% annually with less risk. Women in Leadership (WIL) Companies Outperform with Less Risk* 0.9% Annualized Excess Return Relative Risk In addition, companies with these characteristics seem to experience less volatility. 2 It is believed that these results may be attributable to a link between the presence of women on boards and corporate reputations; 3 female directors could serve as role models, improving female employees performance, and boosting their companies images. Other studies suggest that because women are responsible for 80 percent of decisions related to consumer purchases in U.S. households, female leaders may be more closely aligned with the customer s view and therefore better able to drive successful product and service development. 4 It would also appear that companies benefit from enhanced decisionmaking and problem-solving when leadership roles are gender-diverse. Glenmede s Distinct Approach to the Data Previous studies on women in leadership have focused on one discrete variable female board representation or women in senior management or female executives. What would happen if we included all of these factors? Glenmede embarked on this type of analysis using the companies in the Russell 1000 with one of the following characteristics: Women represented more than 20% of the board members; Women represented more than 25% of senior management; A woman is the CEO; A woman is the chair. Source: Glenmede -1.9% *Within the Russell 1000, we compared the 300 companies with WIL attributes relative to the 700 companies without WIL attributes from 7/09-10/15. The Russell 1000 is a large-cap, unmanaged index which investors cannot invest. Results are based on historical performance, which may not be repeated. Risk is measured by standard deviation. Women in Leadership: Finding Value Glenmede believes that stocks with attractive valuations, strong financial fundamentals (e.g., profitability), good earnings growth, and positively trending technical factors have a greater probability of outperforming the markets. As a complement to these traditional factors, Glenmede research efforts consider a fourth attribute: uniqueness. Typically, we measure the uniqueness of our sample by calculating the correlation coefficient with the other Spring 2016 Page 7

8 Women in Leadership CONTINUED FROM PAGE 7 ranking methods. In this case, our findings show the calculated correlations are relatively close to zero, suggesting that the selection of companies based on women in leadership provides a new and distinct form of value-added. While gender criteria are commonly incorporated into broader ESG analysis, our research indicates that leadership diversity captures additional attributes heretofore unobtainable by broader ESG strategies. The analysis of our sample with other ESG factors presents only a small composite ESG score correlation of 0.13, with even smaller correlations with the individual ESG rankings. This suggests that while ESG strategies may integrate gender criteria, women in leadership specifically represents a value measure not otherwise found by more common measures of social impact. Alignment of Value and Vision This review underscores the business case for diversified leadership. Investors individuals, families, foundations may seek opportunities to incorpo- rate gender-lens investing, and specifically leadership diversity, in their investment decisions. Whether motivated to generate measureable, beneficial social impacts alongside financial returns or by the opportunities associated with diversified leadership, these investors can rely on research, including our own, as support for the possible economic advantages of women in leadership. As the number of women in leadership continues to rise, 6 we expect that investors will continue to benefit, both socially and financially, from women in leadership. This article is not a recommendation to invest in any security or strategy. Research is conducted in good faith, but accuracy is not guaranteed. 1 Nancy M. Ph.D., and Harvey M. Wagner, Ph.D., The Bottom Line: Corporate Performance and Women s Representation on Boards ( ), Catalyst, (2011). 2 Andre Chanavat and Katharine Ramsden, Mining the Metrics of Board Diversity, Thomson/Reuters, (June 2013). 3 Catalyst, Why Diversity Matters, Catalyst Information Center, p. 9-10, (July 2013). catalyst_0.pdf 4 Yilmaz Arguden, Why Boards Need More Women, Harvard Business Review (June 7, 2012). 5 Data from September 2009 through October In 2014, the percentage of women serving on corporate boards of S&P 500 companies was 18.7 percent up from 15.6 percent in 1995; Edward Kamonjoh, Gender Diversity on Boards, Institutional Shareholder Services, p. 7 (September 25, 2014). Perspectives is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. Advice is provided in light of a client s applicable circumstances and may differ substantially from this presentation. Glenmede s affiliate, Glenmede Investment Management LP, may conduct certain research and offer products discussed herein. Opinions or projections herein are based on information available at the time of publication and may change thereafter. Information gathered from other sources is assumed to be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss the applicability of any matter discussed herein with their Glenmede representative. Nothing herein is intended as legal advice or federal tax advice, and any references to taxes which may be contained in this communication are not intended to and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promotion, marketing or recommending to another party any transaction or matter addressed herein. You should consult your attorney regarding legal matters, as the law varies depending on facts and circumstances. Cleveland Morristown New York Philadelphia Princeton Washington, DC Wilmington GlenmedeCommunication@glenmede.com Visit: