Advisor Q4 2015

AGLOBAL VIEW:

THE ADVISORInsights for Integrated Wealth Planning

Q4 2015

ATLANTIC TRUST

Helping Families with “Moral Imagination”

The Finality of

“Obergefell”

Taxes and Your Wealth:

It’s Complicated

WHAT DOES CHINA’S SLOWDOWN MEAN?

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Helping Families with “Moral Imagination”:Q&A with Matt Wesley......................... Page 2

A Global View: What Does China’s Slowdown Mean?....Page 4

Your Wealth and Your Taxes:Don’t Overlook Year-End Tax Tactics ..... Page 8

Q4 2015 CONTENTS

ALSO IN THIS ISSUE:

Takeaway: No More Special Planning for Same-Sex Couples ............................... Page 13

NOW: New On the Web

Visit Our Enhanced Wealth Strategies

Resource Center at atlantictrust.com.

Press Releases See atlantictrust.com to access the latest expert commentaries and news. Include Digital Assets and Accounts in Estate Planning Discussions, says Atlantic Trust

Choose a Trustee That Combines Experience with Empathy, says Atlantic Trust

AT In the NewsBloomberg, Puerto Rico Leaves Creditors Wanting More as Protests Hit Banks

The Wall Street Journal, Stocks Gain After Fed Statement

Healthcare Finance News, Healthcare Stocks Having a Banner Year

Family Wealth Report, Why Digital Assets Are Now Part of the Wealth Management Lexicon

CNBC’s Power Lunch, Key Issue for Stocks

Socialize With Us Read featured blogs at blog.atlantictrust.com:

W. Scott Thompson III: Lifetime Gift Planning

Matthew Wesley, JD, MDiv.: The Autopoiesis of Preparation

Melissa Donohue: How to Gain Confidence in Investing—in Any Market

H. Arthur Graper, CFP®: Supporting Education for the Next Generation

Listen to latest podcasts at podcast.atlantictrust.com:

Fed’s Patience: What We’re Watching

Trustee Selection: A Matter of Trust

Supporting the Next Generation’s Education

Look for daily updates on LinkedIn, Twitter and Facebook—follow, interact and socialize with us.

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Your Wealth and Your Taxes

Q4 2015

If you’re in your 20s or 30s, you’re called a “millennial.” You’re also called “Generation We,” “the Global Generation,” “Generation Next,” “the Rising Generation” or “Echo Boomers.” You’re also about one-third of the U.S. population.1 The world has great expectations for you, especially considering that your generational cohort is going to be the recipient of one of the most significant wealth transfers in history, estimated at about $16 trillion,2 from your parents and grandparents.

We believe you also have high expectations for your generation and for yourselves individually. Our G2G (Generation to Generation) Impact initiative not only supports that view, it supports your needs. “Many of the children, now in their 20s and 30s, of our ‘first-generation wealth creator’ clients have told us that they want to be well-equipped and knowledgeable about wealth and all of its responsibilities and opportunities,” says Sam A. Adams, associate vice president and associate relationship manager for Atlantic Trust. “And our first-generation clients want to bring together their families around something that is bigger than just ‘the numbers.’ Our G2G Impact events, such as the biannual G2G Impact Family Summit and the G2G

Impact After Hours series, provide very special opportunities for families and the rising generation to speak candidly to each other about stewardship of family wealth and to allow the next generation to have a voice in shaping the family’s legacy.”

Our first G2G Impact Family Summit was a multi-generational gathering that offered numerous ways for members of the different generations to consider, as a family, ways to make their mark on the world through a collective vision for the family’s wealth, leadership and legacy. Our next gathering, a mini-summit scheduled for October 23 in Chicago, will offer similar topics. And our G2G Impact After Hours events, specifically for the rising generation, offer an evening of networking and discussions designed to help you become a stronger participant in wealth management—your own and your family’s. “The financial decisions made in your 20s and 30s set the tone for your financial future,” says Katie M. Bullen, senior associate and senior client service manager at Atlantic Trust. “We’re finding that the next generation has a very strong interest in the family’s values around wealth and they want to be involved in their family’s wealth planning.”

Bigger Than “the Numbers”

In his book Fast Future, author David Burstein describes millennials’ approach to social change as “pragmatic idealism,” a deep desire to make the world a better place, combined with an understanding that doing so requires building new institutions, while working inside and outside existing institutions. “Millennials are part of the quiet progression toward significant, scalable and lasting change, and they are learning that they can do extraordinary things when they mobilize their peers.”

Whether you’re a next-generation wealth holder or a first-generation wealth creator, and whether your need is for conversations that strengthen family wealth stewardship or intentional ways to practice “pragmatic idealism”—or many other topics relating to sustaining “family wealth” in all of its various definitions—Atlantic Trust is honored to walk with you on this journey and help you and your family maximize your impact . . . from generation to generation.

To learn more, please visit the G2G Impact Resource Center at AtlanticTrust.com or ask your family’s advisor for details on upcoming G2G Impact events.

1. 15 Economic Facts About Millennials, whitehouse.gov, October 2014.

2. Huge Wealth Transfer of $16 Trillion Estimated in Next 30 Years, thinkadvisor.com, 01.13.2015.

ATLANTICTRUST.COM | 1

Our G2G Impact philosophy

also includes supporting other

groups that offer what the rising

generation is seeking. Atlantic

Trust is happy to have been a

sponsor, for the second year in a

row, for the Nexus Global Youth

Summit, an event designed for

young wealth holders, social

entrepreneurs, philanthropists

and movement leaders.

Q You talk a lot about “great” families. Completely disregarding money, what makes a family great?

It’s critical to focus on what makes a family different from any other organization. We do hear a lot these days about families and their “structure, organization, governance and process.” Those terms sound somewhat clinical. What makes families different from other organizational structures is their powerful tribal nature. A family operates as a kinship system—births, deaths, marriages, stories and the flow of ordinary life. It’s primal. Great families understand themselves as tribes with tribal culture—and that culture has to be intentionally developed and nurtured to be sustained. These tribes are often driven by stories. In families that don’t do this well, powerful narratives about individuals can be damaging, as people can get locked in to their role in the narrative—the golden child, the black sheep, the artistic one, the only one

Q&A with Matt WesleyFounder of The Wesley Group

with a head for numbers and so on—and the family expects these roles to be played out whenever they’re together. Great families recognize that life stories and roles aren’t tightly scripted forever.

Q Much of your work revolves around helping families define “wealth” and get beyond the knee-jerk answer of a “number”—such as: “We’ll feel wealthy and financially secure when we have [fill-in-the-blank] millions in our portfolio.” Please discuss.

Families who define wealth purely in financial terms are likely to lose it over the course of a generation or two, whereas families with a more nuanced view of wealth are likely to sustain it for generations. Wealth can be seen as having four dimensions. Of course, there is the financial dimension, and it must be stewarded, but the other dimensions are at least as important

to sustainability. The human dimension includes the skills, abilities and emotional maturity of all of the individuals in the family. Broadly considered, the human dimension is most fully reflected in the high competence and high connectivity of individual family members. The third is the social dimension, which includes how connected the family is in its communities—its philanthropic, business, social and professional networks—the way the family is organized and connected to the larger world. The fourth is the cultural

Helping families with their “moral imagination”

Q&A

Q4 2015

Matthew “Matt” Wesley, M.Div., J.D., brings to his practice working with multi-generational families a rich background in law,

ministry and consulting work. Before establishing The Wesley Group, Matt was a respected estate planning attorney with more

than 20 years of experience in both Seattle and the San Francisco Bay Area. He graduated from Stanford University Law School

and Fuller Theological Seminary.

Investing in Family Capital

Human

Financial

Cultural

Sustainability

Social

2 | ATLANTICTRUST.COM

Q4 2015

Q&A

dimension—the tribal identity a family has. What are their collective values? How do they communicate with one another? How do they make decisions together? Cultural capital is often overlooked, but it is frequently here where success or failure is determined.

Finally, what ties the dimensions of wealth together is a “glue” I call moral imagination—it’s the driving moral purpose of a family that allows it to weather transitions, the “why” underlying the commitment to developing the human, cultural and financial dimensions of wealth. It is a visceral shared commitment that galvanizes action—a rallying cry and a living, breathing force.

Q You define “legacy” somewhat differently than many people. Can you explain how you see it?

Traditional legacy planning has been a controlled process—and often a very controlling one. It goes like this: Parents tell children, “This is what we’ve put in place and here’s how I want you to act to preserve my dreams or live within structures I have created for you.” Another way to view legacy is to see it

Atlantic Trust’s Family PhilosophyAtlantic Trust has made a serious commitment to helping families meaningfully address sustaining wealth, in all its forms, through generational transitions. It has developed a comprehensive G2G Impact strategy that includes an educational experience in the G2G Impact Summits and After Hours events, as well as an online resource center with white papers, blogs, podcasts and reading lists. These efforts are centered on three core principles that Atlantic Trust believes make for successful transitions—develop a healthy family culture, integrate family wealth planning and prepare the rising generation.

To learn more about Atlantic Trust’s G2G Impact program, visit the Resource Center at atlantictrust.com.

as the past history that the family carries with it. It’s certainly important, because when a family comes under stress, their history is what they will turn to for guidance. But the sustainable family is not looking to the past—they are actively engaged in co-creating a future that builds the skills to meet the challenges of today and tomorrow. Sustainable families are learning families. Legacy is an important piece of the family’s cohesiveness, but it isn’t the only piece.

Q You write a lot about the importance of matriarchs and the frequent contrast with patriarchs. Can you explain?

Often, the decision to cohere as a family is somewhat rooted in the father’s entrepreneurial desire for his children, but more frequently finds its real roots in the matriarch’s tenacious commitment to the endurance of her family. This matriarchal commitment to not only the independence of her children, but also the connection of the family tribe can be downright fierce. When the external commitment of the patriarch to build something of value that produces wealth meets the internal commitment of the matriarch to create an enduring family,

powerful things can happen. Put in simple terms to which we can probably all relate, Mom is the glue. I experienced this many times doing estate planning. When Dad died, the family was, of course, grief-stricken and they missed him, but things typically didn’t fall apart. But when Mom died, too often, the family began to totally unravel. Unfortunately, most planning today is focused on patriarchal concerns (planning and power) when the real action rests in matriarchal succession (preparation and practice).

Q So what happens then, when the matriarch is gone? How does the family right itself and continue forward?

In virtually all families that succeed for multiple generations, there are two great things that occur. The first is the creation of substantial wealth. The second, quieter act is the forging of a common dream that unites the family. That second act is the work of the family champion and happens in the second or third generation. This is not something the wealth creator can do—it is not his or her work—but he or she can bless it. The second- or third-generation family champion first elicits the family dream—not to declare it, but to reveal it. This requires leadership not from the front or from behind, but from the center. The family leader sits at the center of all of the “tribe’s” circles and holds up a mirror, which reflects back to the family their dream. The family champion remains true to that dream by doing the gritty work of forging agreements, generating systems of accountability, mediating conflict and so on. This is the continuation of the matriarchal role. Understanding this role of leading from the center becomes a powerful tool in the development of family culture, which can make all the difference in generational transitions.

Sustainability


Q4 2015Q4 2015

Investments

China: A country that defined the word “growth” until recently. Its economic

expansion during the last three decades was about 10% a year. The majority

of China’s population saw double-digit wage growth for the past decade,

with the minimum wage in many cities doubling in less than five years. The

country’s near-insatiable demand for natural resources led to thousands of

infrastructure projects—roads, port facilities, buildings, airports, bridges—

in the last decade, with plans for 21 new supersize projects that total $115

billion. Almost 300 million people moved out of poverty and joined China’s

middle class.1


AGLOBAL VIEW

WHAT DOES CHINA’S SLOWDOWN MEAN?

Q4 2015

spend more, at least the type of spending that would keep pace with what we saw the past several years. In addition, there’s the old ‘one-child’ policy and the aging demographic factor. Older people aren’t as likely to buy new cars or take expensive trips when faced with the need to self-insure for health and retirement.” Exports dropped by 8.8% during the period July 2014 through August 2015, even though a move away from over-dependence on exports is part of the government’s economic makeover.4 Amid slowing consumer purchasing and an oversupply of housing, there’s also been talk of a real estate crash. “It bears pointing out, though, that the Chinese are still likely to buy about 10 million new urban homes this year, almost double the number of combined new and existing home sales in the U.S. last year,” says Rothman.

In early August, nerves continued to be rattled as the government devalued China’s currency by almost 2%, setting off speculation that the government, desperate to halt slowing economic growth, believed that a devaluation would help the recent export slump. “The recent currency devaluation got a lot of attention because there’s no real consensus on what it means,” says Gary E. Pzegeo, CFA, managing director and head of fixed income for Atlantic Trust. “There are multiple views on the devaluation: It’s a sign of weakness, it’s merely procedural, it’s just China continuing to prepare for more liberalization of its markets, it’s a highly political move, it’s a protectionist measure. It could be a combination of several of those things. It’s certainly being felt by other Asian exporters, because the

Investments

hina has been the world’s best consumption story in recent years, says Andy Rothman, investment strategist for Matthews Asia, a San Francisco-based asset management firm that has been investing in China and other Asian markets since 1991. “Ninety percent of what is produced in China’s factories is consumed at home and only 10% exported. Ten years ago, more than 20% was exported. China’s government has essentially adopted the Henry Ford model: They want their citizens to be able to afford what their own citizens are making. This is all part of the massive systemic restructuring underway in China, relying less on investment and more on domestic consumption.”

Recently the China story has taken a slight detour. Growth in the world’s second-largest economy has slowed to an annual rate of “only” about 7.3%—growth that, it should be noted, would be welcomed by almost any other country, including the U.S. (These are the government’s “official” figures, which are often viewed skeptically. In fact, a consulting firm in London puts China’s growth at only 3.1%, based on indicators such as electricity use and rail freight volumes. And concern about the accuracy of the government’s numbers was a big contributor to the significant pullback in global stock markets in late August.2) In addition, the average Chinese household saves about 30% of its disposable income, in part because of the lack of a social and health safety net.3 “They save for a disaster, the most likely being illness,” says David L. Donabedian, CFA, chief investment officer for Atlantic Trust. “Because of the lack of a public safety net, it’s hard for the government to get its citizens to


currency devaluation just made China more competitive in certain export markets.”

China is in the early stages of massive structural reform to reset the country on a more sustainable path of consumption- and service-led growth, says Jingyi Li, investment analyst for Harding Loevner, a global asset management firm. “The new administration has taken some very meaningful steps in the last two years—liberalizing financial markets, reforming state-owned companies and opening capital markets. If well-executed, all of this could be positive for the long-term, but there’s no doubt that the path of reform has many obstacles, which has made many investors outside China concerned that this huge economy and daunting systemic reform can’t be adequately managed. We must always watch closely to see if the communist government remains faithful to the long-term goal.”

A CONTAGIOUS ILLNESS?

With recent headlines trending mostly along the lines of this one—“China’s economy is getting sick. Will it infect America?”5—it’s impossible to ignore China. Nor should we, says Donabedian. “What happens in China is absolutely important to investors everywhere, if only for the reason that it’s the second-largest economy in the world. So yes, what goes on in big economies is a ‘big deal,’” says Donabedian.

But beyond its sheer size is what China has contributed to world economic growth—one-third of all growth during

C

Q4 2015

beginning to slump in 2014, the firm’s Asset Allocation Committee reduced its emerging markets equity position in late 2014 and shifted that allocation into developed international equities.

“We’ve had a growing unease with emerging markets for a while,” says Bryan G. Reilly, senior vice president and senior investment analyst for Atlantic Trust. “Many of the stocks are quite inexpensive on a historical basis, but are also facing strong headwinds.” Exposure to China has also come in U.S. mid-cap and large-cap stock portfolios, which include many multi-national companies. Reilly points out that for many U.S.-based multi-nationals, China is no longer a lowest-cost producer because of recent wage growth and higher shipping costs. “Take a big consumer products company like Procter & Gamble, which has followed its customers all over the world, often building manufacturing plants in-country, typically because of cheap local labor. However, if your end consumer isn’t Southeast Asia, that equation has now changed. Many multi-national companies are ‘nearshoring’ their facilities closer to the U.S., including in Mexico.” A business environment perceived as slightly hostile to non-Chinese companies and increased regulation are other issues. “In some sectors that the government considers highly important, such as rail transportation and aerospace, it appears they want 100% of the output to be from Chinese companies,” says Reilly.

Despite the short-term shakiness, U.S. companies are still largely optimistic about China as a business opportunity—looking out two to three years, they believe China (25%) and Mexico (22%) are the top two “hot spots” for their future growth, with Brazil and India (13% each) also showing promise.9

Investments

the last decade; more, in fact, than the U.S., the eurozone and Japan combined.6 A slowdown does have many implications; certainly one area that’s seen a big effect is commodities—fire-sale prices have been in effect during most of 2015 as China, which has been the world’s largest importer of commodities, has pulled back. The ripple effect from China’s stall includes countries that have relied on exports to China as a big part of their own economic engine—South Korea, Taiwan and Australia, notably.

Because of China’s contribution to slowing global growth, the Federal Reserve decided in late September to wait for more evidence of strength in the U.S. before raising rates—at least for now. “We’ve certainly seen the Fed make more comments recently about international developments,” says Pzegeo. “Their concern over financial market conditions appeared to offset an otherwise strong domestic economic assessment. The Fed’s Summary of Economic Projections does show that 13 of the 17 members surveyed expect at least one rate increase by the end of 2015, so market stability between today and the next 2 FOMC meetings should invite more discussion of higher interest rates.”

Trade between China and the U.S. may slow if Chinese consumers lose their appetite for American-made products, but total U.S. exports make up only about 13% of our GDP, with consumer spending here accounting for more than two-thirds.7 But what about that stock market crash all over the news in July and August? Does that mean it’s time to be bearish on China?

No, according to Rothman. For one reason, because of the nature of the market’s makeup in China—only about 4% of Chinese citizens invest, with 73% of individual investors having less than

the equivalent of US$15,000 in their accounts—its stock market doesn’t reflect the country’s economic health in the way that the market does in the U.S., London or Tokyo. For another, “China’s A-share index, the Shanghai Composite, was down 37% as of August 31 from its June 12 peak, but up 47% from a year ago,” says Rothman. “That’s not a level of correction to seriously depress economic activity. More important, almost no outsiders are exposed to the A-share market. With foreigners making up less than 3% of that market, it’s the rare U.S. investor who has any direct exposure. Typically, U.S. investors in Chinese companies are investing through Hong Kong, which has much less volatility than the A-share market. But for investors such as Atlantic Trust clients, we’re not investing in ‘the market.’ We’re investing in carefully selected individual companies.”

Rothman points out that the median forward price-to-earnings (P/E) ratio of Matthews’ China holdings is 13 as of August 31—“Compare that to the S&P 500’s median forward P/E of 16.6. What this shows is that if we’re looking for a universe of about 60 Chinese companies across various strategies, we can still find reasonably priced companies that represent a sound, long-term investment.”

U.S. COMPANIES: STILL OPTIMISTIC

While it’s important to be aware of and to understand what’s going on in China and globally, it’s equally important, as always, to go beyond the headlines. Companies in the S&P 500 receive only about 2-3% of their revenues from China, which is just one country of the emerging markets’ asset allocation slice in Atlantic Trust portfolios.8 With other emerging markets


Q4 2015

Investments

A significant business opportunity for U.S. companies in the years ahead will be helping China clean up its environmental mess, a casualty of the decades-long full-speed-ahead growth policy that was heavily dependent on energy- and pollution-intensive industries—before slowing its use in 2014, China burned 47% of the world’s coal. Today, one-fifth of farmland is too polluted to grow crops, nearly 60% of groundwater is unfit for human use and air pollution is 20 times the recommended safe levels.10 Without much internal expertise, China will be relying on the rest of the developed world to help with its environmental initiative, which the government has said is one of its top three priorities for the next 10 years.

Li says that if there’s a simple sound bite on China, it’s that it is the best of times and the worst of times. “The issues everybody is hearing about—the real estate bubble, heavy dependence on fixed assets investment, vestiges of

a ‘command and control’ government mentality, an aging population, awful pollution—those are real and represent difficult challenges. On the other hand, the younger generations are much better educated, more productive and have a more global view than their parents, and much of the population, regardless of age, really does believe in a market-based economy, primarily because they’ve seen so many lifted to a better standard of living. I do believe the government is taking the painful steps necessary. Many mistakes will be made along the way, but they’re moving in the right direction.”

Worries that China’s slowing growth and government miscues will “infect” the U.S. are understandable, says Donabedian. “But there are numerous positive economic developments here in the U.S., especially the growing health of our job market,” he says. “Unemployment is now at 5.1%, down from 6.1% one year ago. Housing starts are also strong.


We’ve certainly experienced some unusual volatility in our markets in the last couple of months, as have other countries. Much attention will be paid to future policy moves and market conditions in China. We also need to remember that the recent market volatility—much of which was blamed on China—followed a lengthy period of unusual calm.”

1. Bloomberg Business, Matthews Asia, The New York Times. 2. “Five Reasons to Be Worried About the Chinese Economy,” TheGuardian.com, 08.14.2015.3. “The Chinese Can’t Kick Their Savings Habit,” Bloomberg Business, 04.30.2015.4. The Wall Street Journal, 08.10.2015.5. Money.cnn.com, 07.26.2015.6. World Economic Outlook, IMF, 08.26.2015.7. The World Bank, 2013 data.8. J.P. Morgan, 08.25.2015.9. Wells Fargo International Business Indicator, Wellsfargo.com, 04.01.2015.10. “China has reached its environmental tipping point,” TheGuardian.com, 05.19.2015.

“INSIDER” VIEWS

“

”

The official name of the government in power is still the Communist Party of China—that hasn’t changed, even though you could call them ‘capitalist communists.’ Like many other countries, it’s important to note what they do, or allow, rather than the official party line. If you look at the changes that have taken place, well, I would argue that over the last couple of decades, China’s economy has become one of the most entrepreneurial ones in the world. When I started working in China 30 years ago, there were no private employers—everybody worked for the state. Today, 80% of employment in China is in small, privately-owned companies—‘private’ meaning owned by individuals. All of the new job creation today is coming from private companies. This is an enormous change in just about two decades.

– Andy Rothman, Investment Strategist, Matthews Asia

Rothman is responsible for research on China’s economic and political developments. In addition to his career in the private sector, Rothman spent 17 years in the U.S. Foreign Service, including as head of the macroeconomics and domestic policy office of the U.S. Embassy in Beijing, China. Matthews International Capital Management, founded in 1991, is an external manager on the Atlantic Trust Multi-Manager Investment Platform. Matthews has $31 billion under management, about 30% of which is in Chinese equities.

“

”

China is going through a huge transformation from its old economy, much of which was based on ‘cheap’: cheap money, cheap resources, cheap labor. As the economy evolves, those factors just no longer work. The new model the government is pushing is trying to be more sustainable—more dependent on consumption and certainly more environmentally friendly—in order to address all the unsustainable issues in the ‘old’ economy. All of this structural change comes at a price to be paid now, but will have very positive long-term results. We certainly do need to pay close attention to the government’s interference in the free operation of the equity market and hope that it’s transitory.

– Jingyi Li, Investment Analyst, Harding Loevner LP

Li covers China, as well as industrials and utilities, for Harding Loevner. A native of China, he began his career with Accenture Consulting as a consultant focused on China. Harding Loevner, established in 1989, manages global, international and emerging markets equity portfolios and is an external manager on the Atlantic Trust Multi-Manager Investment Platform.

Wealth Strategies

Q4 2015

When the American Taxpayer Relief Act of 2012 (ATRA) was passed on January 1, 2013, people took note of the good—the first permanent set of estate, gift and generation-skipping transfer (GST) tax provisions in 12 years—and the not-so-good—a new Medicare surtax of 3.8% for those with adjusted gross income of $250,000 and above. But it wasn’t until April 2014 that the new tax began to hit home—when people actually had to pay Uncle Sam.

“With the surtax, increases in income tax rates, a low threshold for taxes on trusts and a cap on deductions and credits for those at upper income levels, it was a perfect storm of higher taxes for many people,” says Catherine L. Schnaubelt, managing director and senior wealth strategist for Atlantic Trust. “And it is a good reminder as 2015 nears a close: taxes—they’re really back.”

Your Wealth and Your TaxesTRUTH: It’s more complicated than ever. And newly “permanent” tax rates could be changing . . . again.


The Tail and the DogTaxation has been a highly debated topic since the Scottish economist and moral philosopher Adam Smith wrote The Wealth of Nations in 1776, espousing the four principles of proportionality, transparency, convenience and efficiency. While there are those who are always debating tax policy, for many people there was a lull in excessive focus on taxes during the administration of President George W. Bush. “During that period, taxes were low enough that their impact did not drive planning,” says H. Arthur Graper, CFP®, managing director and senior relationship manager for Atlantic Trust. “More recently, we’ve entered a period during which the government needs to catch revenue up with increased spending, and we now have higher taxes. [See chart below.] Bracket management now revolves around six dimensions: ordinary tax rates, capital gains tax rates, the alternative minimum tax, the new ‘supertax,’ limitations on deductions and the 3.8% net investment income tax. It’s quite complex now to analyze how all of our current taxes affect clients’ investments, cash flow, retirement planning and estate planning.”

Wealth Strategies

Q4 2015

That 3.8% Surtax: How Does It Really Work? The “new” Medicare surtax has now been in effect for two years, but many people still don’t quite understand it and how it may apply to their situation. If you want to discuss ways to “plan around” it, you first need to understand how the tax is calculated and on which income. Here are several examples:

EXAMPLE 1: Dave, a single taxpayer, has $100,000 of salary income and $50,000 of net investment income. The 3.8% surtax would not apply because his Modified Adjusted Gross Income (MAGI) of $150,000 is less than the threshold amount for single taxpayers ($200,000).

EXAMPLE 2: Jenny and John, married filing jointly, have $200,000 of salary income and $100,000 of net investment income. They will be subject to the surtax on the lesser of NII ($100,000) or the excess of MAGI over the $250,000 threshold amount for married filing jointly taxpayers ($300,000 – $250,000= $50,000), so the amount subject to the 3.8% surtax is $50,000.

EXAMPLE 3: Donna and Bob, married filing jointly, have $500,000 of salary income and $50,000 of net investment income. They pay the 3.8% surtax on $50,000 since their NII ($50,000) is less than the excess MAGI over the threshold amount of $300,000 ($550,000–$250,000).

EXAMPLE 4: The Burke Family Trust has investment income of $100,000 and has made no distributions during the current tax year. The Family Trust will pay the 3.8% surtax on the amount that exceeds the applicable threshold amount of $87,700 ($100,000–$12,300), yielding $3,333 in surtax.

Source: Adapted from Employee Benefits & Retirement Planning Newsletter #552, leimbergservices.com.


Take just one example: investment planning. Tax-aware investing demands considering tax structure—determining the most effective mix of taxable, tax-deferred and tax-free investments—tax-sensitive asset allocation and asset location, or identifying which assets to place in certain investment vehicles. “We need to be very vigilant about the constantly evolving paradigm regarding taxes,” says Schnaubelt. “Almost every decision has to be sensitive to the effects of so many different taxes. That said, it is still a fundamental premise of sound wealth management that taxes should not be the ‘tail that wags the dog,’ so to speak. You should not make decisions in a tax-only vacuum.”

Sometimes a short-term tax-driven decision can hurt. But in some cases, it can hurt worse by not making a decision in the short-term. Recent history underscores that truth. “A great example would be people with a concentrated position in a highly appreciated security,” says Graper. “They could have serious hesitation about paying federal income tax, the surtax and state income tax if they liquidated or reduced their concentration. In California,

Source: Strategas as of August 30, 2015.

Federal Government Spending

12-Month Rolling, $ in Trillions

1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9

'01 '03 '05 '07 '09 '11 '13 '15

Government Shutdown & Ryan Murray Budget Deal

Q4 2015

Wealth Strategies


Q4 2015

because of their state tax, the total tax bill could be close to 35%. That is a serious bite. On the other hand, focusing solely on this short-term pain can cause people to run the risk of seeing their wealth evaporate overnight if their concentrated position gets wiped out. We saw plenty of that in the last several recessions when businesses turned into empty shells. Remember Bear Stearns? In February 2008, their stock was worth $93 a share. By the middle of March, it was $10 per share. A large, concentrated holding can both build and destroy wealth, just as significant risk-taking can.”

Schnaubelt adds that while tax deferral for as long as possible is generally a guiding mantra, it is not always good for every long-term decision. “When we look at the brackets for some people, it may make sense to look at distributions from an IRA in the current year if they have a reasonable certainty that in the coming years they’ll be in a higher tax bracket. It comes down to making decisions, even ‘tax decisions,’ that are right for you.”

The Tax Clock Is TickingSame song—and same verse. Most years, that is the case with year-end tax-planning tactics, although obviously some provisions do change in some years—witness the significant changes in 2013, including the 3.8% Medicare surtax. There are certain tried-and-true year-end tactics that should always be considered, says Graper. “A very frequently overlooked one is gifts of appreciated securities to charities. These donations may let you claim a charitable deduction for the full fair market value of the asset and avoid the capital gains tax and 3.8% net investment income [NII] tax had the assets otherwise been sold.” Converting an IRA to a Roth IRA is always

appropriate for year-end consideration, especially if you have come off of a few years with high income but have much less income this year. And you may want or need to re-characterize a Roth IRA if you’ve already converted to one. Tax-loss harvesting is also a sound year-end tactic and could be especially important this year because many investors have had significant losses in the commodity marketplace. Notes Graper, “Short-term volatility in the markets in the fourth quarter can be a byproduct of investors realizing their losses for year-end tax planning.”

Don’t forget also that in June the Supreme Court legalized same-sex marriage nationwide, simplifying the federal and state income tax filing requirements for same-sex married couples living in states that previously did not recognize their marriage. Finally, several tax provisions—frequently referred to as “tax extenders”—expired at the end of 2014. One of the most popular was the ability to make a tax-free distribution up to $100,000 directly from an IRA to a charitable organization as a qualified charitable distribution (QCD), distributions that typically were excluded from taxable income and not subject to the limitation of charitable contribution percentage. The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act does include these provisions again, but may not be passed by Congress before year’s end. “The watchword on these provisions is ‘wait and see,’” says Graper.

As far as taxes go, it’s hard to close out one year without looking ahead to possible changes in tax law for the next year. As part of his fiscal year 2016 budget, President Barack Obama

proposed a net tax increase of $1.55 trillion, with the additional revenue used for infrastructure spending and the growth in other government spending programs. The president’s proposal would increase the top capital gains tax rate from 23.8% (including the 3.8% surtax for some people) to 28% and eliminate stepped-up basis—a change that would potentially create a 68% tax on capital gains upon death. The Buffett Rule—or “fair share tax”—also shows up again: The Buffett Rule would require a 30% minimum tax on high-income earners. Of great importance to clients is that the president once again proposes a return to 2009 estate tax rules, which would increase the estate tax rate from 40% to 45% and lower the exemption (something written about only as recently as two years ago as “permanent”) from $5.34 million to $3.5 million.

Outside of the administration’s budget proposal is another significant change likely to be enacted soon, and which certainly may impact many clients: limits on the availability of discounts in valuing interests in family entities, such as family limited partnerships. “The administration included this in budget proposals for a number of years, but it was always rejected by Congress,” says Schnaubelt. “Now, the change is proposed as part of new regulation, rather than new legislation. Even when there was only initial talk about it back in the spring, we had clients who moved forward and transferred additional family interests so that they could lock in the discounting. For them, it was right because of their personal family situation. This is really always the overriding goal of decisions around taxes—what makes sense for you and your family, in both the short-term and the long-term.”

Wealth Strategies

Q4 2015


Year-end tax planning should be a part of everyone’s financial routine. Our Wealth Strategies Group’s checklist below serves as a starting point. As always, we encourage you to speak with your Atlantic Trust and outside tax advisors to help ensure that you are taking full advantage of all year-end tax savings opportunities.

Year-End Tax Planning Checklist

Income Tax o Harvest capital losses to offset realized gains. The tax

rate for long-term capital gains for those who are in the highest tax bracket is 20%, plus the Net Investment Income (NII) tax1 of 3.8%. Taxpayers should review unrealized loss positions within investment accounts as well as other assets, such as business assets or gains on the sale of a residence.

o Consider donating appreciated capital gain assets that have been held for more than a year, rather than cash. Such a donation may allow you to claim a charitable deduction for the full fair market value of the asset and avoid the capital gains tax and 3.8% NII tax had the assets otherwise been sold.

o Plan for IRA and 401(k) distributions. Individuals 70 ½ or older must take required minimum distributions from their IRA or 401(k) plans by year's end. In recent years, such individuals could generally make tax-free distributions from their IRAs of up to $100,000 directly to a charitable organization as a qualified charitable distribution. These distributions typically were excluded from taxable income and not subject to the limitation of charitable contribution percentage. This provision has not yet been extended for 2015, but on February 12, the House passed legislation (H.R. 644) that would make permanent the IRA charitable rollover. On July 21, the Senate Finance Committee approved legislation (S. 1946) that would

Ordinary Income Tax Rate 39.6%2

Qualified Dividends 20%3

Long-Term Capital Gains Tax Rate 20%3

Short-Term Capital Gains Tax Rate 39.6%3

Net Investment Income Tax 3.8%1

Estate and Gift Tax Rate 40%

2015 Top Federal Tax Rates

reinstate, for the 2015 and 2016 tax years, a package of expired tax provisions, which includes the IRA charitable rollover. However, as of this publication the IRA Charitable Rollover has not been extended. You may want to wait until after the bill has been passed before making gifts to charity directly from an IRA.

o Consider converting to a Roth IRA. If you have limited taxable income for 2015 and the thresholds for the higher taxable income brackets do not apply, then a conversion may be beneficial. Conversely, considering market volatility, it may be advantageous to review your Roth IRA conversion to determine if it makes sense to recharacterize your converted Roth IRA.

o If you are a trustee, consider whether it is appropriate under the terms of the trust agreement to make distributions to current beneficiaries. In general, trusts are subject to the top tax bracket, 39.6%, and NII tax if the trust earns more than $12,300. Beneficiaries may have a lower adjusted gross income below the threshold amount and not be subject to the NII tax.

o Maximize retirement plan contributions. If you have an IRA or an employer-sponsored 401(k) or equivalent plan, consider making a contribution before year’s end if you have not yet reached the limit. In 2015 taxpayers with IRAs can contribute up to $5,500 ($6,500 if over 50) and those qualified can contribute $18,000 ($24,000 if over 50) to their 401(k), 403(b) and 457(b) plans. The 2015 deferral limit for a SIMPLE IRA plan is $12,500 ($15,500 if over 50) and $53,000 for a SEP plan.

o Be mindful of the Alternative Minimum Tax (AMT) trap. With proper planning, you may be able to avoid the

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Wealth Strategies


The tax information contained herein is general and for informational purposes only. Atlantic Trust does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisers.

1 The Net Investment Income (NII) tax went into effect on January 1, 2013, and is imposed by Section 1411 of the Internal Revenue Code. The NII tax applies at a rate of 3.8% to certain net investment income, such as interest, dividends, capital gains, royalties, net rental income and certain passive activity income items, of individuals, estates and trusts that have income above statutory threshold amounts. The threshold amounts are $250,000 for joint filers, $200,000 for single filers, and $12,300 for estates and trusts. 2 This 39.6% rate applies only to joint filers earning income above $464,850 and single filers earning above $413,201. On top of this stated rate, joint filers earning in excess of $250,000 and single filers earning over $200,000 may be subject to an additional 0.9% Medicare Hospital Insurance tax on wages and self-employment income and a 3.8% surtax on net investment income (e.g., interest, dividends, capital gains, royalties and net rental income) and certain items of passive income. 3 This 20% rate applies only to joint filers earning above $464,850 and single filers earning above $413,201. On top of this stated rate, joint filers earning in excess of $250,000 and single filers earning over $200,000 may be subject to an additional 3.8% surtax on net investment income (e.g., interest, dividends, capital gains, royalties and net rental income) and certain items of passive income.

AMT or reduce its impact through accelerating income and deferring state and local income taxes or real estate taxes. However, if the AMT will not apply to you in 2015, but could apply in 2016, you may want to prepay some of these expenses to lock in a 2015 tax benefit.

o Consider the impact of the Kiddie Tax. If you have dependents with unearned income, you may consider having the dependent file his or her own income tax return. Even though the dependent’s income will generally still be taxed with reference to your tax rate, that additional income will generally not be included in your taxable income, thereby reducing the possibility of pushing you into a higher tax bracket along with being subject to the 3.8% NII tax.

o Plan around itemized deductions. Timing of certain deductions may have a material impact on your tax burden considering phase-out thresholds, the marginal tax brackets and the NII tax that is now in effect.

o Review the use of annual exclusion gifts. The annual gift-tax exclusion for 2015 is $14,000 per gift recipient. Gifts can be made outright to the beneficiary, in trust, or to a Section 529 Plan as education funding vehicles (5-year accelerated gift option to 529 Plans allows an individual to make a $70,000 contribution [or a joint $140,000 contribution with your spouse] to any beneficiary without incurring federal gift tax).

o Review the use of the gift exclusion for payment of tuition and medical expenses. Tuition and medical expenses must be paid directly to the providers and the exclusion includes payments to health insurance providers.

o Consider intra-family loans. The October applicable federal rates (AFRs) for these types of loans continue to be low, with a rate of 2.58% for a long-term loan over 9 years, 1.67% for a 3-9 year loan and 0.55% for a 1-3 year loan.

o Revisit Grantor Retained Annuity Trusts (GRATs). These trusts use the AFR to determine the value of the annual annuity payment back to the grantor. The October AFR for GRATs is 2%. If the assets transferred to a GRAT appreciate at a rate above the AFR, there is a tax-free gift of the appreciation to the trust’s beneficiaries, who are typically children.

Business Deductions

o U.S. Tax Code Section 179 depreciation deduction. This deduction for qualifying assets acquired in 2015 is $25,000, which is a considerable drop from the 2013 limit of $500,000, and is phased out once total depreciable assets purchased during the year exceed $200,000.

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Takeaway

Takeaway

In June, the U.S. Supreme Court again addressed the issue of same-sex marriage in a series of cases collectively known as Obergefell v. Hodges. The court also addressed this issue in 2013, in United States v. Windsor, in which the Supreme Court held that a marriage between a same-sex couple shall be recognized for purposes of federal law if the marriage was legally authorized in the state in which it was performed. As part of the court’s holding, Section 3 of the Defense of Marriage Act (DOMA) was deemed to be unconstitutional. However, the ruling stopped short of addressing state laws prohibiting same-sex marriages. This result left many same-sex couples facing a conundrum: their marriages respected at the federal level, but disregarded at the state level.

The decision in Obergefell resolved this matter—the Supreme Court ruled that the 14th Amendment requires all states to recognize same-sex marriages when the marriage was performed in a state that authorizes same-sex marriages. Moreover, the court held that states cannot deny marriage licenses to same-sex couples. According to Gordon Stone III, special counsel with Kramer Levin Naftalis & Frankel, LLP, as a result of the Windsor and Obergefell decisions, legally married same-sex couples now have all the rights and privileges afforded opposite-sex married couples under

both federal and state law, including the opportunity to utilize the marital deduction for tax purposes, spousal survivorship benefits under state pension and retirement plans, spousal inheritance under the intestacy statutes, the right to legally divorce, the right to file joint tax returns and the right to own marital or community property, to name a few.

“Married same-sex couples, irrespective of their state of residence, can now take advantage of the favorable transfer tax benefits that are the foundation of wealth transfer planning for married opposite-sex couples,” says Stone. “While a number of rights are now automatic under federal and state law, it is important that couples—or families with a child or grandchild in a same-sex marriage—engage in wealth transfer planning just as any other married couple, including considering the opportunities shown below.”

n Legally marry and take advantage of the various protections and benefits of marriage.

n Review existing estate planning documents to ensure the marital deduction is utilized if you wish to now take advantage of the marital deduction laws.

n Review beneficiary designations for IRA/401(k)/retirement plan accounts to

ensure they take advantage of any spousal opportunities.

n Review beneficiary designations for life insurance and, if life insurance is part of an estate tax replacement program, consider a survivorship policy that provides that the death benefit is paid at the death of the surviving spouse.

n Consider gift splitting, which allows for gifts to be sourced from one spouse’s assets but to be treated legally as if the gift were made equally from both spouses.

n Review planning for incapacity to take advantage of spousal priority. Make sure that those named to serve on your behalf continue to meet your objectives.

n For those in a community property state, review property ownership and consider converting separate property to community property, which may allow for additional tax benefits at the first spouse’s death.

n Non-citizen spouses may wish to consider becoming U.S. citizens.

All married couples should review their existing estate plans regularly to ensure they meet the couple’s current goals and objectives.

The Obergefell Supreme Court Decision: Now, Just “Any Married Couple”

Q4 2015

Atlanta404 881 3400

Austin512 651 7800

Baltimore410 539 4660

Boston617 357 9600

Chicago312 368 7700

Denver720 221 5000

Houston832 941 5760

Newport Beach949 660 0080

New York212 259 3800

San Francisco415 433 5844

Washington, D.C.202 783 4144

West Palm Beach561 515 6043

Wilmington302 884 6775

Atlantic Trust Private Wealth Management, a CIBC company, includes Atlantic Trust Company, N.A. (a limited-purpose national trust company), Atlantic Trust Company of Delaware (a Delaware limited-purpose trust company), and AT Investment Advisers, Inc. (a registered investment adviser), all of which are wholly-owned subsidiaries of Atlantic Trust Group, LLC.

This document is intended for informational purposes only, and the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of the date of this document only and may change without notice. Such concepts are the opinions of our investment professionals, many of whom are Chartered Financial Analyst® (CFA®) charterholders or CFP® professionals. Chartered Financial Analyst® and CFA® are trademarks owned by CFA Institute. The Chartered Financial Analyst® (CFA®) designation is a globally recognized standard for measuring the competence and integrity of investment professionals. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. The tax information contained herein is general and for informational purposes only. Atlantic Trust does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisers. To the extent that information contained herein is derived from third-party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. Approved 1007-15. For Public Use.

Investment Products Offered are Not FDIC-Insured, May Lose Value and are Not Bank Guaranteed.

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