Quarter-End Snapshot: Q3 2017
from J. Carter Tolleson, Chief Executive Officer
We consider ourselves very blessed to be in a business where every day is spent serving families and helping them simplify the complexities of wealth. Since the very beginning, we have been committed to taking incredible care of our client families by treating them the way we ourselves want to be treated. We believed that if we remained focused on our clients, served their best interests and strived to eliminate any conflicts, the business would thrive – and it has. We have grown steadily and thoughtfully since 2000, and done so in a way in which the only client impact was better service. Our growth has been largely attributed to client referrals – for that, I am humbled and deeply appreciative.
Every year, we focus on new initiatives to improve the client experience, further professionalize our services and invest in technology. This year, we have completed multiple projects focused on delivering more relevant and timely information to you. Over the next few months, you will begin to see the results of these improvements, starting with this quarterly update. The update is intended to keep you informed of what’s happening at Tolleson Wealth Management and introduce current topics of interest from our senior leaders. Over the next few weeks and months, you can expect a newly designed and more dynamic website, quarterly reports that will clearly show your portfolio’s performance compared to your risk tolerance and investment goals and, ultimately, real-time reporting along with the introduction of an online client portal. We are excited about these changes and hope you like them.
As always, thank you for your support. We are extremely honored to serve you and your family.
Tax Legistation Update
from Amy Armstrong, Managing Director of Tax
Taxes are at the forefront of Congress’ upcoming agenda. While the actual tax legislation has yet to be released for discussion, President Trump and Congressional GOP leadership have released an outline of proposed tax reform. The proposal provides a window into the issues likely to be included in the upcoming legislation.
Of the proposed changes, the most significant to high-wealth individuals include:
- Lowering the maximum individual tax rate from 39.6% to 35%.
- Elimination of all itemized deductions but for mortgage interest and charitable contributions. This eliminates the widely used property tax, state income tax and investment fee deductions.
- Implementing a maximum tax rate of 25% on all pass-through income (partnerships, s corporations, LLCs).
- Elimination of the Estate Tax.
The lack of specifics of the tax law changes, as well as the contentious atmosphere in Washington these days, makes forecasting likely outcomes impossible. Regardless, the tried-and-true “delay income recognition and accelerate deductions” is even more important in the current uncertain environment.
Time for Making Gifts
from Richard Joyner, President
In recent years, uncertainty around taxes and fiscal policy have set the tone for year-end planning. “Hurry up and wait” has been the order of the day, followed by a year-end scramble to minimize (or maximize) the impact of anticipated tax changes. October and November, though, can be a great time to start taking steps to avoid that year-end rush even when there is uncertainty.
Individuals may limit the growth of their taxable estates by making annual lifetime gifts to individuals. The 2017 limit on such gifts is $14,000 per donor, per year. By making annual gifts to multiple beneficiaries, individuals may transfer significant wealth over time. Whatever changes to the federal estate tax may be made next year, this type of planning makes sense for individuals who want to start passing their wealth to the next generation.
Gifts made to charities enjoy the dual benefits of reducing estate tax exposure and yielding current income tax deductions. For individuals who have not reached the maximum limits on their charitable contribution, direct contributions to charity before year-end may make sense. When income tax rates are higher, charitable income tax deductions are more valuable. As proposed income tax reforms could reduce income tax rates and deductions, charitable contributions may be less valuable in 2018. Whether or not those proposed changes are enacted, a current contribution could benefit the individual and the charity to whom the gift is made.
The third quarter of 2017 is characterized by a familiar story: equity prices rose and bond yields fell amid modest economic expansion. While this narrative has continued for the last 8.5 years, you may have heard investment managers, other investors and the press suggesting that the current bull market is entering the “late innings” of the game. These prognosticators imply that we should expect a change in the market cycle or a correction in the near term. Given that the summer months are now turning to fall, the prospect of continued growth in an already long economic expansion can be likened to October’s post-season in Major League Baseball (MLB).
Each of the eight teams that made it to the MLB playoffs were uncertain when they would play their last game, but they knew that what led them to a winning record in the regular season could increase the probability of a longer post-season run. These ingredients of success include a diversified and deep lineup, good defensive play and experienced managers with sound game plan execution.
Similarly, certain “winning” domestic factors have facilitated the extended period of U.S. economic growth and market appreciation including corporate earnings growth, low interest rates and increasing disposable income. Not only do these positive signs remain in place today in the U.S., we are seeing a more synchronous economic expansion globally as well.
With these tailwinds still in play, the U.S. economy could feasibly continue to grow into its own post-season, while the global economy could be characterized as still in its regular season.
As the physicist Niels Bohr said, “Prediction is very difficult, especially if it’s about the future.” This is especially true of the capital markets. Just as each of the remaining MLB teams’ post-season will come to an end at some point, we remain cognizant that the same will eventually happen in this market cycle. However, empirical evidence has shown that attempting to predict the exact timing of a cycle will be a losing proposition more often than not.
With this in mind, we tend to fall back on the core tenets that remain the bedrock of our investing philosophy for the past 17 years: balanced, diversified portfolios with an emphasis on capital preservation and a long- versus short-term lens. Remaining convicted in this philosophy has historically proven to provide a nice return on capital for patient investors.
We will continue to monitor global events closely and your advisor will contact you with any recommended changes to the portfolio we feel are appropriate to help you meet your long-term financial goals.