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June 3, 2018 | Wealth Planning

Quarter-End Snapshot: Q4 2017

Quarter-End Snapshot

Q4 2017

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Firm Update

from J. Richard Joyner, President

J. Richard Joyner, President

Even though we rang the bell to kick off 2018, I can’t help but take a minute to talk about some of the amazing things that happened in 2017: massive changes to income and estate tax rules, financial markets that exceeded almost everyone’s expectations and a U.S. economy that seems stubbornly committed to continued expansion. Who would have guessed this 12 months ago?
2017 was a notable year here at the firm, too:

  • Executing our long-term leadership strategy, Carter Tolleson became Chief Executive Officer and I was named President, while John Tolleson became Executive Chairman – and remains very involved in the company.
  • We welcomed Eric Bennett back as our Chief Investment Officer. Eric was our first CEO, left for a time to pursue non-profit goals, then returned in a different role. He’s been a member of our Board of Directors and Investment Committee continuously since 1997, and will continue to add an experienced voice to our investment decision-making.
  • We upgraded our financial reporting and bill payment services, and have almost completed a major improvement in our investment reporting system. Upgrades like this are designed to help our client families add clarity and context to their financial decision-making.
  • The Tolleson Donor Advised Fund, created to facilitate sophisticated and sometimes complex charitable giving strategies for our client families, doubled in assets.
  • In 2017, Tolleson Wealth Management was named to the Financial Times list of the 300 Top Registered Investment Advisors in the U.S., named a Top Wealth Manager by D Magazine and listed among top the 50 firms in the Registered Investment Advisors Ranking in Financial Advisor Magazine. Carter Tolleson was also recognized as one of the 500 most influential business leaders by D CEO Magazine and I was grateful to be named one of Barron’s Top 100 Independent Advisors in 2017.

We never forget, however, why we are here. This year will bring its share of financial and family challenges as well as opportunities. No one is better positioned than we are to work with you, side by side, to make your family stronger and more successful. No matter how you define success, that’s our commitment and our passion, every single day.

Ingredients for Investing


“Food is about making an interaction with ingredients. If you talk to them, they will always tell you a story.” – Chef Jose Andres

The financial markets told us quite a story in 2017! As with any great meal, you need all the right ingredients to bring it to the table. Similarly, 2017 was a tasty and highly unique year for investors as the economic and financial climate blessed us with many favorable ingredients: low interest rates, low volatility, steady inflation, pro-business government sentiment and dramatic tax reform optimism, strong corporate earnings growth, improving job markets and synchronized global growth.

The confluence of these factors created unusually broad and strong investment returns. In fact, 2017 was the first time in history that the S&P 500 recorded positive returns in all 12 months of the calendar year. The mixture of all these “ingredients” in the same calendar year is rare, and investors were rewarded.

Like with any good meal, ingredients do not stay fresh forever. People may start to take all this good momentum for granted. Two key economic factors that could become possible headwinds are interest rates and inflation. As the U.S. Federal Reserve continues to move forward with raising the Federal Funds rate and unwinding the unprecedented bond-buying program, we wonder if – or when – this might put pressure on economic growth. If the U.S. unemployment rate remains low (4.1%), higher wages may result, causing inflation to rise. Even though inflation is a sign of a healthy economy, the financial markets historically do not respond well to unexpected inflation.

In addition to the factors above, there are two key questions on our mind: 1) are prices too optimistic today, and 2) when will the optimism around the economy end? We will not try to predict the timing of when we might see a market downturn, but we believe there lies inherent risks to this level of optimism. Thus, we manage portfolios to still provide yield and upside as our investments benefit from the fresh ingredients of 2017 while we also provide downside protection in the event of a downturn.

A key tenant of our investment approach is in designing balanced portfolios that invest in a variety of asset classes. These asset classes don’t always move in the same direction at the same time, providing a smoother ride for the broader portfolio over longer time periods. Within equities, we own stocks with valuations that are lower than the market, avoiding “hot” stocks like Netflix, Facebook and Amazon, which trade at unsustainable valuations. We also own more floating rate securities and fewer traditional high yield corporate bonds than our bond benchmarks, which protects against rising interest rates and inflation. By purposefully differentiating our portfolios from the general market approach, we have designed a strategy intended to give clients more peace of mind by taking less risk to achieve their goals.

Although we are thrilled with how 2017’s recipe came together to support the economy and markets, we look to identify how other ingredients – or lack of – may affect the portfolio. Just like any great chef, we constantly challenge the status quo and seek new investment opportunities to help craft a portfolio for the ever-changing market environment.

Tax

from Amy Armstrong, Managing Director of Tax

Amy Armstrong, Managing Director of Tax

The Tax Cuts and Jobs Act was recently signed into law by President Trump and is effective with the 2018 tax year. While the law will simplify the tax system for numerous Americans, wealthy families’ tax returns will become increasingly complex.

The most significant tax law changes impacting wealthy individuals include the decrease in maximum tax rate from 39.6% to 37% and the elimination and/or significant limitation of several itemized deductions. With the elimination of these deductions, it is unlikely taxpayers will be subject to the Alternative Minimum Tax (AMT) of 28% and, thus, may pay a higher marginal tax rate going forward.

There was also a change in methods of taxation for the following categories of income:

  • A deduction is now allowed against a new category of income, the qualified business income (QBI). This is also referred to as the pass-through deduction. At most, a 20% deduction is allowed to offset business income from partnerships, s corporations or sole proprietorships. The calculation of this deduction is quite complex and numerous limitations and exclusions from this treatment exist depending on the type of income and industry generating the income. Application of this deduction will need to be determined on a taxpayer-by-taxpayer basis.
  • Active trade or business losses were previously unlimited. Beginning in 2018, these losses are only allowed to offset up to $500,000 of non-business income on a married filing joint tax return
  • Future net operating loss carryforwards (NOLs) will only be allowed to offset up to 80% of ordinary taxable income.

The nuances of the tax law changes are complex and impact individual taxpayers in unique ways depending on the individual’s primary source of both income and deductions, with some seeing tax savings and others experiencing increases. We are currently studying each client’s tax situation in order to identify opportunities for tax planning under this new evolution of tax law.

Trusts & Estates

from Christine Finn, Senior Vice President and Director of Private Trust

Christine Finn, Senior Vice President and Director of Private Trust

To continue the discussion around the Tax Cuts and Jobs Act, there are several changes to the federal gift and estate tax in the Act. Beginning in 2018, the Act doubles the estate and gift tax exclusion amount from $5 million to $10 million. The $10 million amount is indexed for inflation and is expected to be approximately $11.2 million per individual, or $22.4 million per married couple, in 2018. Generation-skipping transfers should also see an increased exemption amount.

In 2026, the exclusion amount will revert back to the $5 million base, indexed for inflation. Even though the future return to 2017 amounts makes these changes temporary, individuals should review their estate plan to ensure that it will achieve the desired result during the next eight years. Individuals should also consider taking advantage of the temporary increase in the gift tax exclusion amount.

For those who wish to pass wealth to their children or grandchildren, the best plan is to make additional irrevocable gifts to one or more generation-skipping trusts. This type of gift will shift future appreciation and lock in the use of the added exclusion amount and GST exemption. This is also the time to think about additional funding of life insurance trusts and forgiveness of intra-family promissory notes. For individuals who live in high income tax states, this is an opportunity to re-evaluate grantor versus non-grantor status of current and future trusts.

Family Education & Governance

from Jeff Strese, Family Learning Consultant

Jeff Strese, Family Learning Consultant

With the New Year upon us and resolutions beginning, it's the time of year when people set goals and habits for themselves and their families. It's also a great time to start talking to your children about money.

We are often asked two questions as it relates to parenting and navigating the complexities of wealth:

  1. When is the best time to start talking to our children about money?
  2. How do we educate them in a way that reduces the probability of entitlement and overspending?

We advise starting the conversations early and investing in fun and creative ways to teach them about financial responsibilities. Just as many of us set personal and business goals at the first of a calendar year, it is also a good time for parents to help their children do some goal-setting that reflects their family values. Financial well-being starts with values and proceeds from there.

Creating some focused time and fun exercises to emphasize the important sequence of giving, saving and then spending, paves the way for responsible money skills prior to adolescence and young adulthood – minimizing the allure of overspending, materialism and, ultimately, entitlement. Remember, children emulate what we do more than what we say. Resolve to walk the walk, talk the talk and ask others to assist in the process.

General Performance Information: The performance results in this presentation have been compiled by Tolleson Wealth Management (“TWM”). Past performance is no guarantee of future results. No representation is being made that any account will or is likely to achieve profits or losses. All investments involve risk, including the loss of principal. A client’s return will be reduced by the advisory fees and other expenses. TWM’s advisory fees are described in Part 2a of our Form ADV. This information discusses general market activity, industry or sector trends, or other broad-based economic market or political conditions and should not be construed as re-search or investment advice. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Opinions expressed are current opinions as of the original publication date appearing in this material only. Any opinions expressed are subject to change without notice and TWM is under no obligation to update the information contained herein. TWM disclaims responsibility for the accuracy or complete-ness of this report although reasonable care has been taken to assure the accuracy of the data contained herein. This material has been prepared and is distributed solely for informational purposes only and is not a solicitation or an offer to buy a security or instrument, to participate in any trading strategy, or to provide tax, legal or other investment advice. TWM is not a CPA firm. You should consult your own tax, legal and accounting advisors before engaging in any transaction. This report may not be reproduced, distributed or transmitted, in whole or part, by any means, without written permission from TWM. If you have any questions regarding this presentation, please contact your TWM representative.

 

Tolleson Donor-Advised Fund: Tolleson Private Wealth Management (“TPWM”) offers a philanthropic option to its clients through the Tolleson Donor-Advised Fund. This program is administered by National Philanthropic Trust (“NPT”). Each donor-advised fund is subject to a charitable administration fee, which is paid to NPT to cover operating expenses, such as grantmaking, recordkeeping, annual audits, tax filing, quarterly statements, and other legal and fiscal responsibilities. NPT has engaged TPWM to provide investment advisory services and manage the underlying assets in the donor-advised fund in which TPWM receives a fee. For a further description of all fees received by TPWM, please see Part 2a of Form ADV.

 

Awards & Recognition: The Financial Times list The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times (June 2017). The FT 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research. The listing reflected each practice’s performance in six primary areas: assets under management, asset growth, compliance record, years in existence, credentials and online accessibility. This award does not evaluate the quality of services provided to clients and is not indicative of the practice’s future performance. Neither the RIA firms nor their employees pay a fee to The Financial Times in exchange for inclusion in the FT 300. D Magazine named Tolleson Wealth Management a 2017 Top Wealth Manager in their November issue. For the award, D Magazine asked every wealth management firm and team in the Dallas-Fort Worth Chapter of Financial Planning Association®, Chartered Financial Analyst Association®, and the Investment Management Consultants Association® to describe their practice. The final list was selected based on these criteria: top firms or teams must have total assets under management for clients of at least $50 million, average assets under management per client of at least $75,000, a 93 percent client retention rate over the last two years, no current disciplinary action and been in existence for at least five years. A panel of local wealth managers reviewed the final list to name the winners. Financial Advisor’s 2017 Registered Investment Advisors Ranking listed Tolleson Wealth Management at #49. The list ranks RIA firms from across the U.S. on the basis of assets under management (AUM). This is the fifth year the firm was listed in the top 50. To be eligible for the Financial Advisor Magazine RIA ranking, firms must be independent registered investment advisors and file their own Uniform Application for Investment Advisor Registration and Report by Exempt Reporting Advisor (ADV statement) with the SEC. They need to provide financial planning and related services to individual clients. Firms were measured and ranked by year-end 2016 assets, which included both discretionary and nondiscretionary AUM reported on form ADV. There are no fees or other considerations required of RIAs that apply for the FA RIA ranking. D CEO Magazine featured J. Carter Tolleson in the banking and finance section of the D CEO Magazine Dallas 500 special edition issue. He was nominated and chosen by their editorial team after months of research and personal interviews. This personal and engaging look at powerful business leaders is highly selective and encompasses more than 60 business categories. To qualify, executives and other influential leaders must be based in the Dallas-Fort Worth region. The Dallas 500 is not an awards program or a vote-based list. All decisions are made by the editors, and the number or recommendations an individual receives is not a consideration factor. The Barron’s ranked Tolleson Wealth Management’s Richard Joyner at #17 nationally on their Top 100 Independent Wealth Advisors. This ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors’ practices. The scoring system assigns a top score of 100 and rates the rest by comparing them with the winner. To view more about awards and recognition, please visit our website.