We hope you had a wonderful time with your friends and family during the holidays, as we all experienced the closing of the wild, but successful, year of 2012.

As you may recall, we compared the economy last year to Charles Dickens’ classic A Tale of Two Cities, which began “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness….” Well, it seems like the saga continues.

Could you have imagined that during 2012 we would face the challenges of an economic meltdown in Spain, the political and economic problems in China, the uncertainty of changes to our tax laws, the drag of an impending fiscal cliff, and the angst of a polarizing, albeit spirited, presidential election cycle? Yet, in the end, 60% of our largest companies beat their earnings estimates, leaving the S&P 500 with a 16% return.

The 2012 year was also an exciting time at Carolinas Investment Consulting. We hired Lauren Olson to manage the new Family Organizer program, Kitt Kirchner as a Relationship Manager, Gloria Johnson as my personal assistant, and Wade Austin, who will dedicate his time to marketing our firm in the Carolinas and beyond.

The firm also shared in the joy of Laurel Stewart Lawrence getting married, Kristen Montgomery having her second child, and Angela Fiala and Oliver Cross each welcoming their first. As you can see, we continue to grow in many ways.

Looking forward into 2013, we are expecting a continued volatile environment. Extended fiscal cliff dealings will exert pressure on U.S. growth, European problems will persist well beyond the next 12 months, and China’s new leadership must settle into their roles. These are just a few of the challenges we will experience. However, housing in the U.S. is showing signs of life after being a drag for five years, the private sector has deleveraged, monetary policy remains accommodative, and the energy and manufacturing sectors are resurfacing with real long-term potential.

While optimistic on the whole, we are watching interest rates and inflation very closely as both will have a meaningful impact on the capital markets at some point in the future. Even though we know that trying to time these markets is a fool’s game, we will continue to actively manage the risk of your portfolio as one of our primary objectives.

Thank you for bestowing on us your trust as we serve you, your family, and the institutions you support.

We are honored.

George H. Edmiston, Jr.

Unemployment remained elevated around the globe, economic growth was anemic, confidence remained at recessionary levels, and looming tax changes created great uncertainty. However, the global stock markets surged higher in 2012. Once again, we were reminded that the economy and the stock market, while interrelated, are not the same.

Some of the most commonly-sited economic variables are Gross Domestic Product (GDP), Unemployment, Taxes, and Consumer Confidence. In a 2010 research paper, O’Shaughnessy Asset Management concluded that all of the aforementioned economic variables “seem like they should matter for your portfolio, but 110 years of history says they do not.”

Recently, Vanguard published a terrific piece, labeled “Forecasting stock returns: What signals matter, and what do they say now,” which also concluded that a number of commonly-accepted metrics (see graphic below), such as consensus GDP growth, have virtually no predictive value on future stock market returns (anecdotally, rainfall has substantially more predictive value than most economic variables in the study).

“The first point to understand about stock returns is their relationship with GDP growth. In short, there isn’t one,” wrote Ben Inker, co-head of GMO’s asset allocation team, in his most recent 2012 white paper.

Take Sweden and Denmark for example. As two of the slowest-growing developed market economies between 1980 and 2010, they actually had two of the best-performing stock market returns during that same time period.

In his current best-seller, The Signal and the Noise, Nate Silver asserts the secret to forecasting is distinguishing a true signal from a universe of noisy, ever-increasing data. While the economy will always be an important issue, we, as investors, are better off focusing on valuations when making investment decisions. According to the aforementioned O’Shaughnessy and Vanguard studies, valuations (represented by Price-to-Earnings (P/E) ratios) have the only meaningfully predictive value for future stock market returns.

Investors seem to be much more concerned about economic data than how much they are paying for corporate earnings, which is a mistake. P/E ratios, which simply quantify how much investors are willing to pay for corporate earnings, remain relatively attractive when compared to historical levels. While the current global economy is far from inspiring, “keep watching the companies rather than the countries,” Nick Murray reminds us in his January 2013 newsletter. The economy does not equal the stock market.

Lauren Olson and Kitt Kirchner

The American TaxpayerRelief Act of 2012

After months of debate that threatened to make major increases for nearly all taxpayers and estates, Congress passed the Taxpayer Relief Act of 2012 (on New Year’s Day 2013!). The belated act raised income tax rates only above $450,000 of taxable income for married couples ($400,000 single), and raised estate tax rates only for estates above $5,250,000. But as all of us who have opened a paycheck so far this year have discovered, Congress did allow the payroll tax to increase 2% back to its previous level of 6.2%. Below are some charts that summarize the changes:

Estate and gift taxes

• Permanent $5 million exemption and 40% rate
• Estate tax exemption portability
• All provisions from 2001 and 2003 bills retained:
• - Deductions for family owned businesses
• - State death tax deduction

It comes up all the time. It wasn’t that long ago when our clients felt they knew which trust companies were the best and who were the best trust officers. Today, that may not be the case. Even those of us in the business have had trouble keeping up with the dramatic changes among trust providers and their people.

Our goal is to create a client experience like the robust relationship our client would have had with those great trust officers of the past. In the same way that Carolinas Investment Consulting (CIC) has access to countless money managers in our investment consulting role, we are able to partner with many of the regional and national trust companies. This ability allows us to help our client engage the one that best fits their needs.

Even though CIC is not a trust company – some might even say because CIC is not a competitor in the trust arena – we have access to a number of trust service providers with whom we can work, alongside our client and their attorney and CPA, in a smooth, seamless partnership.

Understandably, many clients are overwhelmed by the sense that trusts are complicated and mysterious. It is true that the field is daunting, to say the least, given techniques with names like “intentionally defective grantor trust” and “shark fin CLAT.” We can help navigate through the technical matters by organizing, maintaining, and analyzing our client’s personal estate documents. Our team helps explain what these documents mean and can assist in coordinating any necessary changes with our client’s attorney.

Even though our middle name may refer to “Investments,” we take a planning approach to all client relationships. The same independent process used for investing is used to ensure that our clients are not limited to one prospective trust company. We leverage our knowledge of each client’s financial situation to handle communication and to make sound, reliable trust services easier for our client to deal with, providing confidence and peace of mind.

R. Christopher Gammon, CFA, CFP®
Consultant

A trust has been compared to a shoe box. You can put money in the shoe box and you can take money out of the shoe box, but you can’t get rid of the shoe box. Although this is only partially true – some types of trusts are revocable – it points to the fact that a trust is a separate legal entity and the trust document controls how the trust functions.

A trust is generally established to hold property for the benefit of someone else. There are three parties to the trust arrangement:

• The grantor, who creates and funds the trust;
• The beneficiary, who holds equitable title, the right to enjoy the benefits of the trust property; and
• The trustee, who holds legal title and administers the trust with the duty to act in the best interest of the beneficiary.

In addition to the parties of a trust, there are two additional key elements of every trust – the trust property and the intent of the trust.

Trusts are among the most versatile of financial and estate planning tools. Trusts have many powerful advantages. They can be used to:

• Manage your assets in the event of incapacity;
• Manage assets for your family in the event of death;
• Protect assets from creditors;
• Minimize estate taxes;
• Avoid the expense and delay of the probate process, while maintaining privacy.

You can contribute many types of assets – stocks, real estate, art, homes, etc. – to a trust. However, as with all good things, trusts also have their drawbacks. Some disadvantages may include:

• Costs of establishing and administering the trust;
• Potential loss of control over assets in some trust arrangements;
• Potential for increased tax rates to apply to income retained within certain types of trusts.

Trusts should not be established in a “vacuum”. The decision to establish a trust is part of a complete review of your financial and family situation. We are available to help you start this review.

In future newsletters, we will preview different types of trusts. If you would like to discuss a particular type of trust and understand how it functions or fits within your financial and estate plan, please call your CIC consultant or a member of our Financial Planning team.

Employee Spotlight

Please join us this month in celebrating Brenda McRae’s tenth anniversary with our firm. Brenda began her CIC career in 2002 as our cage/wire operator before transitioning to operations manager for the firm. Always looking for a challenge, she obtained her securities licenses and moved into the Relationship Manager role several years ago. In this position, Brenda is integral in helping two of our consultants, Chris Gammon and Chris Grogan, serve and take great care of their clients.

Brenda is married with two sons. She is also the proud grandparent of Emma and Chloe. She has served as Commissioner for the Town of Mint Hill since 2005. Brenda and her husband, Mike, are charter members of the Mint Hill Scottish Society and can often be found attending Scottish Highland games on weekends.

Brenda’s commitment and dedication to her family, her friends, her community and our firm is to be admired. We feel fortunate to have had her as a part of our firm for the past ten years and look forward to many more.

Elections, PresidentialTerms & the Markets Part II

By the time you are reading this, the elections will have been decided. Given the growing political polarization in Congress, the below average approval ratings, and the record spending on negative advertising, many people are frightened. Some are convinced that a certain victor could make or break the economy and the markets. While politics certainly matter to an extent, investors would be wise to realize that they are investing in companies rather than a political party. As a result, it is important to focus more on the fundamentals rather than politics. Furthermore, going to cash in response to a disappointing election will only serve to lock in a negative real return (when current yields are adjusted for inflation).

However, it is encouraging to be aware that average stock market returns are positive regardless of the party in the White House or controlling Congress.

Just when the market looked like it was regaining its sanity in the first quarter of 2012, Q2 hit. The month of May brought back those terrible memories of last summer. Macro once again dominated micro as headlines about the European Debt Crisis, continued concerns about mounting debt loads at home in the United States, and our upcoming presidential election took center stage. Yet, through the end of June, the S&P 500 was up 9.5% for the year. Many were left scratching their heads asking how this could possibly be when it truly felt so much worse.

One simple explanation is the market volatility that resurfaced in Q2. When you compare the past decade to the preceding 50 years, the answer is obvious. We’ve experienced 115 days in which the S&P 500 had daily moves (both positive and negative) that exceeded 3%, compared to 81 days in the preceding five decades combined.

We could easily fill the entire newsletter with different views and opinions on what has led to this extreme volatility in the markets – high frequency trading, globalization, instantaneous information flow through the web, excessive risk taking by financial institutions…the list goes on and on. While volatile markets are not necessarily here to stay, it sure feels that way as we sit here today. Confidence is low, the economy is slowing, unemployment remains elevated, so how could this possibly be a good time to invest, you may ask? We certainly can’t predict what will happen during the remainder of the year or what 2013 will have in store, but we can try to understand the here and now and make some sense of it.

Equity valuations around the globe seem reasonable and trade at discounts to their historical averages on almost every metric (price to earnings, price to book, price to cash flow, etc.). When you compare equities to fixed income, they look even more attractive. However, we know that markets that look cheap (or relatively cheap) can get even cheaper, so what is an investor to do? Maintain balance! The “lost decade” that many investors experienced wasn’t as bad for the diversified, disciplined investor. While a balanced approach has worked in both good and bad times over the past 60 years, will it work for the next 60? We wouldn’t bet against it!

Sincerely,

Oliver R. Cross III
Director of Research & Consultant

Our Mission Statement at CIC is “to help clients accomplish their financial goals through independent, thoughtful advice and solutions.”

While investment consulting is a critical part of our mission, our clients present us with a wide variety of financial questions throughout the year covering areas such as income tax, estate planning, long-term care insurance…the list goes on. We examine developments in these areas and try to bring them to the attention of clients who may find them of interest.

Sometimes there are special windows of opportunity where planning ideas can be particularly helpful to families. We will be in one of those periods for the next six months or so.

Why?

1. Interest rates are at historic lows. Many estate planning ideas – such as intra-family loans and GRAT’s, work best when the IRS allows low rates to create more leverage. If you have not considered a low-rate loan to your children, grandchildren’s trust or some other family arrangement yet – now is the time.

2. Asset values for real estate and businesses can be appraised at lower values. Gifting and estate planning work best for families when the value of what they want to transfer is currently low and likely to get higher in the future. While much of the stock market has recovered, there is still great opportunity around family property and businesses.

3. Tax rates are low and exemptions are high, but this may be changing. Most people drafted their Wills and Trusts when the tax rules allowed only $600,000 per spouse to pass estate tax-free to heirs. It was complex, and any excess was taxed at 55%. Until the Bush tax cuts are allowed to expire at the end of this year, the exemption is now $5.12 million per person ($10.24 million per couple) and the rules are much more flexible.

Now that we have covered some planning opportunities, let’s take a quick look back at how the capital markets fared during the first quarter of the year. For the period ending March, 31, 2012, the DJIA was up +8.8%, the S&P 500 was up +12.6% and the Barclays Aggregate Bond Index was up +0.3%. Many parts of the U.S. economy are now showing signs of life, while others seem to have at least stopped deteriorating. Stock valuations and fundamentals remain favorable. The forward P/E multiple for the S&P 500 is 13.0, compared to its historical average of 16.2. It appears that most of the stock market gains have been earnings-driven, not the result of excess investor optimism. In fact, mutual fund flows for stocks were actually negative during the first quarter, indicating that investors are certainly not experiencing irrational exuberance.

Seeing this window of opportunity that is open – our hope is that the relative calm in the investment markets so far this year will allow families time to reflect on and consider their future planning objectives.

Sincerely,

David A. Perkins, J.D., CPA, CFP®

Exemption portability

Under prior law, the gift and estate tax exemption was effectively “use it or lose it.” In order to fully utilize their respective exemptions, married couples often implemented a bypass plan: they divided assets between a marital trust and a credit shelter, or bypass, trust (this is often referred to as an A/B trust plan). Under the 2010 Tax Act, the estate of a deceased spouse can transfer to the surviving spouse any portion of the exemption it does not use (this portion is referred to as the deceased spousal unused exclusion amount, or DSUEA). The surviving spouse’s exemption, is then increased by the DSUEA, which the surviving spouse can use for lifetime gifts or transfers at death.

Example: At the time of Henry’s death in 2011, he made $1 million in taxable gifts and had an estate of $2 million. The DSUEA available to his surviving spouse, Linda, is $2 million ($5 million – $1 million +$2 million). This $2 million can be added to Linda’s own exemption for a total of $7 million ($5 million + $2 million).

Wealth transfer strategies through gifting

Because of the larger exemptions and lower tax rates, the rest of 2012 provides an unprecedented opportunity for gifting.

By making gifts up to the exemption amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests offer the best tax savings opportunity.

Tip: In addition to this limited opportunity to transfer a significant amount of wealth tax-free, it is important to remember that you can still take advantage of the annual gift tax exclusion of $13,000 per person per year for 2012. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax-free and can be made at any time.

Qualified Limits

Medicare Premiums

For 2012, the basic Medicare Part B premium rose to $99.90 per month. Higher-income seniors will pay a significantly larger Part B premium if their modified adjusted gross incomes for 2010 exceeded $170,000 for couples and $85,000 for single persons. Modified AGI is AGI plus any tax-exempt interest, EE bond interest that is used for education and excluded foreign earned income. These seniors will also owe a surcharge on Part D premiums for coverage of their prescription drug costs. The below table summarizes the impact:

We are delighted to send you the 2012 first quarter publication of The Consultant, our new quarterly newsletter. With all of the events that have come to define 2011 as one of the strangest years ever, many of our clients have asked us to give our thoughts on the year and what lies ahead. Last June, I had the opportunity to take my family to Europe. While in Paris, my daughter and I visited Versailles where she heard the story of Marie Antoinette, Louis XVI, and the French Revolution. After a long discussion, we decided to read together Charles Dickens’ A Tale of Two Cities, a classic I read at her age. As we began this great novel, Dickens’ famous first line read:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…”

Dickens could have been writing about the year 2011. Last year was “the best of times” for some, and “the worst of times” for others. It was a year when governments and politicians showed both “wisdom” and “foolishness.” We didn’t experience a French Revolution as Dickens wrote about, but we did witness revolutions in Egypt and Libya, and political unrest in many other places. In 2011:

• We experienced a major earthquake and tsunami on the northeastern coast of Japan, killing over 20,000 people.
• We observed “financial earthquakes” across Europe due to mounting debt burdens.
• At home, we witnessed the downgrade of our own U.S. debt from AAA to AA+, while our national debt eclipsed $15 trillion.

The following stock returns illustrate companies that experienced the “worst of times:”

Yes, the “worst of times” and “the age of foolishness” can easily be seen in 2011. So where is Dickens’ “best of times” and “age of wisdom?” For one, many U.S. companies did very well. Over 70% of the companies in the S&P 500 beat their projected earnings in 2011. This leaves the trailing price-to-earnings ratio for the S&P at approximately 13.6, which is fairly cheap by historical standards.

Second, many domestic corporations had great equity returns during 2011:

Third, in 2011, we experienced an 8.4% return with the Dow stocks and a 2.1% return with the S&P 500 stocks.

Can you believe that after everything that happened in 2011, the domestic large capitalization markets were up?

Yes, 2011 was a year that we will never forget. Only time will tell if we will experience the “wisdom” that Charles Dickens refers to.

Take care and God bless!

Sincerely,

George H. Edmiston, Jr.