Carolinas Investment Consulting // Winter 2015 // The Consultant

In This Issue





Chris GammonFriends don’t let friends donate cash. That’s catchy, if not entirely accurate. But there is something to it.
Want to put more fuel in your philanthropy? Here, at this time of year when taxes are top of mind, are five ideas to discuss with your tax advisor and your CIC Consultant:


Giving, instead, appreciated securities or property can be just as beneficial to the receiving charity but spare the giver from having to pay taxes on the gain from selling the asset. Consider:

charitable gifts

See how giving $10,000 in cash had an ef- fective cost of $6,040 to the giver, whereas had she donated $10,000 worth of stock in which she had a zero basis her effective cost would have been $3,660, not even consider- ing state income taxes? Plus, with income tax deductions and surcharges increasingly tied to ones Adjusted Gross Income, think about the benefits of keeping income out of the taxpayer’s AGI.


Today there are many inexpensive, trouble-free, low-minimum providers of a Donor Advised Fund that have many of the advantages of your very own charitable foundation. Not only are you donating to a public rather than private charity, but it functions much as having your own ‘charitable checking account’ would. A great benefit is de- coupling the timing, for tax purposes, of when you give to charity (your Donor Advised Fund) versus when you direct your fund to make disbursements to charities. And you can donate many unusual types of appreciated assets to your donor advised fund.

Continued on page 4


Oliver Cross2014 marked the sixth year in the recovery following the Financial Crisis. The S&P 500 marched to new highs, while the bond market surprised seemingly everyone in light of the tapering and eventual end to Quantitative Easing 3 (QE3) in October.
However, all was not rosy in the financial markets. We experienced a fair bit of volatility throughout the year due to some choppy economic data as well as the annexation of Crimea by Russia, the uprising of ISIS, the spread of Ebola, a rising US dollar, and the precipitous decline in oil prices from well over $100 to below $60 (now $45). Yet, few of these global events were the topic of conversation as we entered 2014. As famous physicist Niels Bohr once said, “Prediction is very difficult, especially if it’s about the future.”
Prognosticators in the investment business had it no easier in 2014, as was highlighted by a Bloomberg survey in which 72 of 72 economists predicted
higher rates and falling bond prices in 2014.1 All
were wrong. How about chief strategists at 13 major Wall Street investment banks? They were lukewarm
on U.S. stocks, while ebullient on Japanese stocks
and European stocks.2 Wrong again. The folly of forecasting continues despite hindsight’s reminder that what “everyone knows” is usually unhelpful at best and wrong at worst.
BlackRock Predictions

2 BlackRock – 2014 Predictions

Global Performance 2014Interestingly, despite the general aversion to both asset classes by the experts, U.S. stocks and bonds were two of the few bright spots in the markets in 2014. Josh Brown, investor and author of The Reformed Broker blog, even recently penned an article in Fortune entitled “2014: The year that nothing worked.” Developed International stocks were down 5% on the year and Emerging Markets down 2%. Even International bonds were down 3%, while commodities fell by nearly 20%, largely due to energy. There were far more losers than winners in 2014.
So, what are we to do? Sell everything in favor of U.S. large cap stocks? Not a great idea. Remember 2000- 2002? Or 2008? If predicting the top performers year in and year out is impossible, it’s no surprise that diversification remains as the essential tenet of any sound portfolio.
However, staying patient with your long-term investment plan and remaining diversified can be
a tough pill to swallow, especially when your home country (the U.S. for most reading this) is the star performer…once again. While owning International stocks has been a drag on performance recently, our memories are short. They have actually outperformed U.S. stocks 5 out of the past 10 years…and 8 of the past 15. And, most International stock markets
are trading at much lower valuations than the U.S. market. Patience will be rewarded… and likely tested, especially if market volatility increases to more normal levels in 2015, as expected.
As my mother taught me long ago, “what is popular isn’t always right and what is right isn’t always popular.” If you can remember this along with William Bernstein’s quote, “Investment wisdom begins with the realization that long-term returns are the only ones that matter,” you’ll be well ahead of the game!

Community ServiceCIC employees enjoyed a recent Saturday volunteering at Loaves & Fishes, a nonprofit emergency food pantry program in Charlotte.

Community Service


Dave Perkins
Your IRA will be inherited by the person you name as beneficiary. But what if that person is a minor child, or is someone who may
not be comfortable or capable of managing
the money well?

You can name a Trust as Beneficiary of your IRA. If the IRA owner wants to control how the funds are paid out after they die, a “See-Through” Trust can be designed for that.
There are special requirements. The IRS will still require a certain minimum amount to be paid from the Inherited IRA into the Trust so income taxes are due. Also, the life expectancy of the trust’s beneficiary (or the oldest if multiple beneficiaries) is used to calculate the RMD or Minimum Distribution each year. The Trustee then determines, based on the specific provisions in the Trust, how much of the Trust money the beneficiary needs for living expenses and other purposes. It is important to work with an attorney familiar with these special rules.

An individual may take a distribution from a Traditional IRA without being taxed if the same amount of money is re-contributed to that IRA or another Traditional IRA within
60 days of receipt.

This can be done only once in any 12-month period. There had been some question whether this could be done from multiple IRAs within a 12-month period if each one met the rules. However, the IRS clarified in 2014 that the 60-day rollover can only be done once per 12-month period regardless of how many separate IRA accounts an individual may have.

Creditor Protection is another issue – are your IRA accounts protected from lawsuit creditors who might win a judgment against you? What if you declared bankruptcy
– can creditors still collect from your IRA

The Supreme Court ruled in the 2014 Clark case that inherited IRAs are subject to bankruptcy claims. North Carolina passed a statute in 2013 providing full protection of IRA assets including Roth IRAs and inherited IRAs from bankruptcy and from other creditors, but very few states have such extensive protection. Children or grandchildren who are beneficiaries living in a state outside North Carolina would not have this protection. It is important to consult with an attorney regarding the law in your state and to consider the use of Trusts as beneficiaries.



Talk to your tax and financial advisors about a Qualified Charitable Distribution, or QCD. In this move, you can direct that as much as $100,000 of your IRA distribution be given directly to a public charity or charities. The beauty is that the amount so donated to charity is then not counted as part of your income, whereas RMD income is taxable at ordinary income tax rates. As we said above, managing your AGI lower is smart tax planning. Now, be aware that the QCD is one of those tax provisions that seems to keep expiring and being renewed retroactively around year-end. But its several benefits are worth exploring as a cost-effective, tax-effective currency for charitable giving.

4. IF YOU THINK YOUR ESTATE WILL BE EXPOSED TO THE ESTATE TAX UPON YOUR DEATH, CHANGE YOUR BENEFICIARY DESIGNATION NOW TO LEAVE YOUR IRA (and other qualified retirement plan assets) to your donor advised fund, your private foundation, or charities. This is perhaps the most powerful strategy of all for avoiding multiple layers of taxation otherwise (assuming you haven’t converted your IRA to a Roth IRA).

5. KEEP BEING AS GENEROUS AS YOU ARE, BUT TAKE THE TIME TO LEARN THE ROPES AND HOW TO GIVE SMARTLY. Your advisors can help you optimize your charitable giving by teaching you the limitations and documentation around (a) your income level, (b) the type of property you are donating, and (c) whether the receiving charity is a private foundation or a public charity.

Interpreting Unrealized Gains and Losses

Your monthly First Clearing or Schwab statement contains a wealth of information providing both a snapshot of your financial picture and detailed listings
of activity and positions within each account. Our custodians’ statements are designed to be logical and easy to read, but the portfolio detail section can often be a source of confusion regarding the actual performance of your individual holdings.

Specifically, it is easy to mistake the ‘Unrealized Gain/ Loss’ column for your actual gain/loss. Instead, it represents your current taxable position, a potentially very different result. The ‘Adj Cost’ or ‘Cost Basis’ column (subtracted from the ‘Current Market Value’ in deriving the ‘Unrealized Gain/Loss’) includes not only the total dollar amount paid for shares, but also shares purchased via reinvested dividend and capital gain distributions, as well as sales charges (if any).

The distinction is especially noteworthy for bond funds given that reinvested dividends accrete to your cost basis. And in 2014, equity funds experienced their largest capital gain distributions in over a decade.

For visibility into actual gains and losses, First Clearing clients should focus on the ‘Client Investment’ and ‘Gain/ Loss on Client Investment’ amounts centered underneath the totals for each individual security. In the example below, this bond fund holding may appear to have lost $9,955; however, closer inspection reveals an investment gain of $54,311, a cumulative return of 24.6%.

Schwab Statements

Schwab statements include an Activity section listing Reinvested Shares collectively but do not segregate Client Investment Gain/Loss figures at the individual fund level. If you have any questions regarding your statement or your portfolio, please give us a call.

Your statement’s Unrealized Gain/Loss totals are helpful in identifying potential tax-related opportunities, while CIC’s sophisticated performance reporting system produces a detailed accounting of your true investment performance.

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R. Wade Austin
Oliver R. Cross III
R. Christopher Gammon, CFA, CFP®
Christopher K. Grogan
Thomas E. (Ted) Highsmith
David A. Perkins, J.D., CPA, CFP®
and George H. Edmiston, Jr., President & Founder

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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