Family Wealth Advisors Insights Knowledge at Your Fingertips

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1 Family Wealth Advisors Insights Knowledge at Your Fingertips A Message from Steve Prostano, Head of Family Wealth Advisors I am pleased to share with you the first in a series of monthly Family Wealth Advisors (FWA) newsletters developed by our team of dedicated specialists. The FWA Insights will include thought leadership pieces addressing the complicated issues and distinctive needs of ultra-high net worth individuals and multigenerational families. Topics will include wealth strategies, impact investing trends and other relevant topics affecting families with significant wealth locally and abroad. Future issues will also highlight information about our distinct service offering, global expertise from BNP Paribas and opportunities for collaboration. At Bank of the West, we believe that we have a great responsibility when serving our ultra-high net worth clients, especially those who are concerned about the successful transfer of their wealth and/or business, as well as preserving a family legacy for generations to come. It s an exciting time for individuals, families, and family offices with more opportunities than ever before to choose from here and around the globe. We look foward to working together and providing best-in-class services, through our One Bank approach and our extensive networking, nationally and globaly. Steve Head of Family Wealth Advisors Bank of the West Wealth Management

2 The Money in the Middle Maximizing your foundation endowment fund for social impact Many people advise and work towards deploying a private foundation s 5% distribution allotment. But what about the remaining 95% investment capital? This middle money should be put to good use to leverage the foundation s goals, encourage entrepreneurship and promote sustainability. An endowment investment portfolio managed as responsibly as the grant making portfolio could put billions more capital to work for social good. Misconceptions Some misconceptions are preventing foundation finance committee board members from deploying their endowment capital towards more active, blended and impactful investment approaches. Most board members state their responsibility and/or desire for market rate or above returns. Fair enough. But this argument loses sight of important facts. Foundation endowment capital is committed capital. It cannot be returned to the original donor. This unique lock up should allow for more creative use of the philanthropic dollars. Within most investment portfolios, the goal is to achieve a proper risk/return ratio. We know foundation capital is committed and this should encourage endowments to move to a higher risk profile while maintaining healthy fiduciary duties. To ignore the opportunity to balance endowment capital with social good (leveraging the foundation mission and goals) is simply a missed opportunity. While past performance is not indicative of future performance, during the financial downturn a socially balanced portfolio held more steady than traditional asset management and at times even outperformed other funds. Today we have solid measurement and evaluation tools to guide committee members, foundation staff and investment advisors in making the best choices for the foundation in terms of social and financial return. Money with Purpose This middle money can also act as critical support for entrepreneurial activities and start-ups. Again, by taking advantage of the risk capital in the endowment, foundations can provide seed stage funding and venture capital through PRI s (program related investments) or MRI s (mission related investments). These investments help social entrepreneurs and others build and scale their companies by filling the gap between grants and traditional investments. The need for scalable social innovation has brought an explosion in the number of startups but financing these ventures is lagging. Institutional investors see these ventures as too small to support. Philanthropists might view the investment as too large for a grant. The hybrid solution unlocks more private capital at a time when philanthropic giving may be in decline and social support is being severely restricted. In Conclusion Many investors recognize the opportunity to build valuable, sustainable companies that will have tremendous positive impact on society. But these same investors are not yet accepting that the financing required may not look like traditional funding models. Investors and entrepreneurs must be open to a more creative blend of financing from grants to PRI s to traditional investment and they must learn to combine business acumen with social outcomes.

3 S-CO (S-corporation) C-CO (C-Corporation) Taxable Company Earnings $1,000,000-20% qualified $1,000,000 income deduction = $800,000 Corporate Federal Income Tax $210,000 Shareholder Distribution $1,000,000 $790,000 Distributions taxed as dividends or $0 $790,000 capital gains rates Distribution taxed as ordinary $800,000 income Tax paid $300,000 $150,800 Net Funds after Tax $700,000 $630,200 Source: Public Law Taxes What a Business Owner Needs to Know The 2017 Tax Act Issue Due to the passage of the 2017 Tax Act, many business owners are trying to decide whether to change from a pass-through entity to a corporation, or to check the box and be taxed as a corporation to get the benefit of the reduced 21% corporate tax rate. While every situation is unique and should be discussed with a qualified tax professional, in many circumstances, the 20% Qualified Income Deduction for Qualified Pass-Through Entities may result in less taxes owed if those same circumstances are applied to corporate taxation. Case Study Let s assume an S-Corporation being taxed as a Pass- Through with $100,000,000 annual revenue is trying to determine whether to change to corporate taxation for Also assume the S-Corporation currently distributes all its profits annually to the shareholder and would continue to do that even if a C-corporation. The S-Corporation shareholder has an effective tax rate of 37.5%. Effective corporate tax rates are 21% and dividend rates are 20%. Lastly assume the S-Corporation qualifies for the 20% deduction under the 2017 Tax Act. What might the end game of taxes paid look like? The example at the top of the page is simplified with the intent of stressing the need to work out the individual numbers for a company before deciding if it makes sense to change an entity structure. Where might it make sense to switch to corporate taxation? Where the company does not zero out earnings but keeps earnings in the company and manages distributions Where you have more than 100 shareholders or want to Where you can utilize the employee benefit deductions to your tax advantage If you want to bring in private equity partners If any of these apply to your situation be sure to discuss with a qualified tax professional For more information and a detailed summary of the 2017 Tax Act click here.

4 Expertise from our Partners Around the Globe: Sisterhood is Powerful And Now It s Also Wealthy America s women have long had a prominent role in philanthropy. Well-known figures such as Melinda Gates and Peggy Dulany (of the Rockefeller dynasty) have helped to guide their fortunes towards good causes and persuaded others to give away theirs. However, many of these female billionaires were either born into wealth or acquired it through marriage; the self-made female billionaire is a much rarer breed. But this is changing. While selfmade women make up only 2.7% of all billionaires globally, their number is growing. More women are stepping into high-profile careers, such as Facebook COO Sheryl Sandberg and Hewlett Packard CEO Meg Whitman, and more are accumulating large fortunes on their own, such as American media proprietor and talk show host Oprah Winfrey, or as equal partners with a spouse, such as Laura Dangermond, the co-founder of mapping software firm Esri. This year s Forbes self-made women billionaires list counted 56 members, more than in any previous year, 17 of whom hail from the US. And there is evidence of this cohort s growing heft: the number of self-made women billionaires has doubled since 2009, and wealth held by them has increased by 50% in the past five years, according to Forbes. 1 They hold 16% of the assets owned by all female billionaires. What does a growing number of self-made women billionaires mean for the future of philanthropy in the US? While there is generosity in both genders, some research finds that there may be more among women. Research by the Women s Philanthropy Institute (WPI) at Indiana University found that the likelihood of giving in households with an annual income over US$103,000 was higher in female-led households (96%) than in those led by a male (76%).2 These women also gave more on average: US$1,910 a year, compared with US$984. The self-made women billionaires on the Forbes list are active in philanthropic circles. Of the 17 in the US, 80% have their own foundation. Independently wealthy women have gained confidence about giving, says Melissa Durda, director of US-based Synergos Institute s Global Philanthropists Circle, a philanthropists network founded by Peggy Dulany. Women such as Oprah Winfrey, Sheryl Sandberg and Sara Blakely, the founder of US shapewear company Spanx, have helped to thrust highnet-worth women s giving into the spotlight. It was a roles issue that we saw with some of our families. Where the husband had made the money, the woman didn t feel like it was hers, so she played a much quieter role in philanthropy, explains Ms Drda. Some [women] didn t feel confident to speak up or name something after themselves. To read the full report written and produced by The Economist Intelligence Unit, click here.

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