dsmWealth: September 21, 2023

BY STEVE DINNEN

Is ESG real? Very much so. Is it here to stay? Very much so.

Despite some naysaying, mainly from politicians (noted below), “environmental, social and governance” criteria can be a useful tool. Regular investors can’t seem to get enough of them and are pouring their money into companies, exchange-traded funds and mutual funds that abide by ESG guidelines. The consulting firm PwC forecasts that by 2026, total investment in American ESG funds will top $10.5 trillion, double its current total.

It’s useful to think of ESG as a successor to CSR — corporate social responsibility — though its scope is much wider. While CSR focuses on companies that strive to behave in an ethical manner, ESG looks at the criteria used to measure a company’s sustainability. And shouldn’t we all want our investments to be made in a business that can sustain itself over the long term?

Matt Davis, the director of tax credit investments at Monarch Private Capital, said "almost every company is paying attention to ESG."

And why wouldn’t they? Why wouldn’t Coca-Cola be concerned about the amount and quality of the water it uses? Why wouldn’t an energy company be concerned about flaring off natural gas that it might be able to sell to consumers? We’re consuming more and more energy, so why not look into renewable sources rather than continue to drain finite sources? If you operate your business in a responsible, ethical manner, doesn’t that give you a better shot at sustaining it? And shouldn’t you communicate this to your owners and competitors?

Since Wall Street likes to keep score, “there are direct, measurable ESG attributes that we can use to our advantage,” Davis said.

Bloomberg, for example, has a proprietary scoring system that investors can use to assess opportunities from an ESG perspective. The highest scores don’t necessarily go to companies that are “green” non-polluters. The steel fabricator Worthington Industries, for example, currently tops the rankings from Investor’s Business Daily, while the truckline J.B. Hunt ranks second. No Iowa firms are among the top 100, although Moline-based Deere & Co. ranks 60th.

Several prominent mutual funds and ETFs also focus on ESG criteria (including Vanguard ESG U.S. Stock ETF, ESGV, and Nuveen ESG Dividend ETF NUDV). Some are beating the market, and some are not — just like the rest of the investing world.

So as with everything else on Wall Street, the proof of ESG is in the pudding. “Without performance, it’s a non-starter,” Davis said. But “it’s not going away.”

Politicians squabble over ESG rules
BY STEVE DINNEN

ESG has its detractors. Congress tried to ban 401(k) and other workplace retirement plans from offering ESG funds, but President Biden vetoed that plan.

Here in Iowa, Gov. Kim Reynolds went the other direction, spearheading a drive to adopt anti-ESG rules. She called environmental, social and governance principles "financially reckless" and legally suspect. Iowa joined 17 other states in adopting anti-ESG rules.

Politicians have waded into the investment arena before. BDS — boycott, divestment and sanctions — is not an investment tool but rather an effort to put pressure on American companies that do business with the Israeli government, which some people believe is mistreating Palestinians. Iowa and other states have banned their governments from doing business with firms that support BDS.

The U.S. Department of Labor recently eased the path for fiduciaries that consider ESG factors while managing ERISA-regulated retirement plans. But the broader investing industry still awaits a final rule from the U.S. Securities and Exchange Commission about requirements for ESG disclosure.

Uncertain times call for creative estate-planning strategies
BY PAULA NANGLE FOR KIPLINGER

Does the thought of estate planning trigger a surge of anxiety? If so, you’re in plentiful company.
Estate planning can be one of the most intimidating, complex and emotionally charged financial necessities a family takes on together. There is little room for error, as savers look to safeguard their legacies and protect their families for generations to come. And while money and emotions are always entangled with one another, those feelings intensify as people face their own mortality during the planning process — and revisit the idea often as they seek to maximize long-term opportunity.

Those stressors are present even if everything else is calm and stable outside the boundaries of our lives and families. In reality, families now have to piece together effective estate planning strategies inside a tempest of political volatility and tax law uncertainty. In this climate, households need creative and sophisticated strategies that stand the test of time, while remaining flexible in the face of ongoing legislative and environmental changes.

Tax changes are always on the ballot

While it may seem dizzying to keep tabs on the endless proposed changes discussed on Capitol Hill, there are some tax legislative changes that bear greater impact on your financial and estate plans.

The estate planning landscape has seen significant transformation over the past few years, as legislators respond to the ever-changing challenges and needs of Americans. One important change happened via the Tax Cuts and Jobs Act of 2017. This increased the estate tax exemption from $5.6 million to $11.18 million, adjusted for inflation. In 2023, that amount is $12.92 million per decedent. For a married couple, that means the estate tax (aka the “death tax”) wouldn’t kick in until their total assets exceeded $25.84 million. As recently as 2008, the estate tax exemption was only $2 million per decedent (or $4 million per couple).

Recent passage of the SECURE Act 1.0 and 2.0 implemented changes to inherited IRAs, required minimum distributions (RMDs), trusts and more. One key change was the elimination of the “stretch IRA” for non-spousal beneficiaries (some exceptions apply). Under pre-SECURE Act law, a child of the IRA owner could stretch distributions out over their lifetime, effectively reducing or delaying income tax on those distributions. Under current law, they must withdraw the entire account within 10 years of the original account owner’s death. Rightfully so, this had led to a rise in converting traditional IRAs (tax-deferred) to Roth IRAs (tax-free) during the owner’s life.

The 2024 presidential election is already heating up, and each party’s platform could have implications on your estate plan. Every year, the president releases the administration’s budget plan, known as the Greenbook (it gets its name from its distinctive green cover), which includes proposed tax law changes.

While all these proposals won’t pass, it’s important to take note of what the administration is thinking.
For example, the current Greenbook would eliminate certain grantor trusts, eliminate the step-up in basis upon death and limit the annual gift tax exclusion to $50,000 per donor, rather than $17,000 per donee. In fact, even without any congressional action, the estate tax exemption is scheduled to roll back to a projected amount of $6.8 million to $7 million ($5 million indexed for inflation from 2017) after 2025.

This gives individuals only a few years to take advantage of the higher exemption unless the president and Congress agree to extend this provision. Extending at the current level will depend on who is in control of the White House and Congress after the 2024 election. When it comes to navigating these changes, strategic and advanced planning makes all the difference.

Creative strategies and advanced planning protect your legacy

While navigating these tax changes can be a challenge, they also present real opportunities for strategic planning. For instance, the estate tax exemption changes could drive higher-net-worth individuals to set up some kind of grantor trust, like a spousal lifetime access trust (SLAT). Another strategy, and one that works best in our current higher-interest-rate environment, is a qualified personal residence trust (QPRT). This involves gifting a property to a trust but allows you to retain effective ownership for a period of time (e.g., 10 years).

At the end of the term, the property passes to the trust beneficiaries. By retaining control for a period of time, the value of the gift is reduced below fair market value. Think of it as making a gift at a discounted value. The ideal individual is someone who has a family vacation home that they want to pass to the next generation but isn’t ready to give up complete control.

A lot of tax-advantaged estate planning strategies involve giving up control of some of your money to protect it. After years spent accumulating wealth, it can be difficult to trust in the process enough to relinquish control. Particularly in times of market turmoil, emotions are even higher, and individuals who are already watching their account balances go down due to the markets and economy don’t necessarily want to give more money up by funding their trusts.

It is important to think opportunistically about where your money is going and not panic just because the market is down. One approach to calm the waters is to revert to long-term planning — focus on the signal (e.g., markets steadily rise) and not the noise (e.g., daily market fluctuations).

Be flexible and diligent

When you are going into the estate planning process, flexibility is key. You should be clear about what your goals are and ensure your documents are drafted in a way that will offer your future self some flexibility to adjust the plan for changes in those goals, or external factors such as legislative changes.

One way is by providing broad distribution standards in your documents. This gives the trustee greater ability to make distributions as times and lives change.

A few other ways include providing powers of appointment, which allows the beneficiary some control over who receives money in the future; naming a trust protector; providing the power to change the trustee; or providing reimbursement provisions for grantor trusts, which allows the trust to make distributions back to the grantor to cover tax liabilities paid for by the grantor on the trust’s income. As Congress and the IRS continue to see individuals taking advantage of tax loopholes, laws will continue to change.

It is also important to be aware that many of the acts and changes that are proposed or talked about may not ever come to fruition. This is where it is important to work closely with a trusted adviser who will know when, or when not, to make a move and can filter through what is “media noise” and what actually needs to be addressed.

Finding a balance between being proactive in adjusting your estate plan, but not overly reactive to news that you hear, is crucial.

Many individuals think of estate planning as a once-and-done event, but that could not be further from the truth. It is crucial to revisit all of your estate documents on a regular basis to ensure they are consistent with not only your overall goals, but with the current laws that are in place as well. Staying informed and in contact with your financial adviser will put you in a better position to protect your legacy and your loved ones now and into the future.

Some ex-workers at Bed Bath & Beyond face 401(k) losses
BY ANN CARRNS FOR THE NEW YORK TIMES

Federal law generally protects savings in workers’ retirement plans when a company files for bankruptcy protection or goes out of business. Yet there may still be situations when employees lose money, as some former workers at Bed Bath & Beyond have discovered.

Bed Bath & Beyond, a home furnishings retailer, filed for bankruptcy protection in April and has been closing up shop and selling off assets. It also terminated its 401(k) retirement plan as of Aug. 1.

Some former workers, who had invested in a “guaranteed interest account” that they believed was low risk, saw losses of about 10% related to the plan’s termination. One saver shared a financial statement showing he had lost about $10,000 in his guaranteed interest account, while another said he had lost more than $2,000. The two former workers spoke on the condition of anonymity, saying they were still determining what recourse they may have.

“It’s a shame and a real slap in the face, especially since it was likely the more conservative participants who chose that option,” said Cheryl Costa, a certified financial planner in Framingham, Massachusetts.

Corporate bankruptcy filings have risen in recent years because of challenging economic shifts. Even if your employer is stable, it’s wise to spread your retirement savings among diverse investments to reduce the risk that a loss in one holding will have an outsize impact on your nest egg, said Norman Stein, senior policy adviser and acting legal director at the Pension Rights Center, a nonprofit advocate for retirement security.

It’s unclear how widespread guaranteed investment accounts, like the one offered to Bed Bath & Beyond workers, are in company 401(k) plans because that label may be applied to different types of investments, according to a spokeswoman for the Plan Sponsor Council of America, an industry group.

Such accounts are a type of insurance contract. An insurer typically invests funds in a mix of bonds and pays a fixed rate of return for a certain period. But if a retirement plan terminates the contract, the accounts may be subject to “adjustments,” or penalties — somewhat similar to what happens with a certificate of deposit that is closed early.

To find out about how to protect workplace retirement savings when a company is struggling or where to get help with concerns about a retirement plan, continue reading the story here.