Sell in May?

The data shows slight progress, but not enough to take the Fed out of the equation. This continues to create an “all news is good news” scenario. Combined with the fact that most market pundits are in agreement that we are overdue for a correction, and the fact that the “sell in May” theory is getting a lot of air-time, it’s likely that the market will prove the majority wrong and continue to move higher.

In our 2013 forecast, we said that a retail rotation from bonds to stocks would likely take the market to new highs before setting a top. We are beginning to see the new highs in the Dow and S&P, and like the Ouroboros, new highs feed on themselves creating more new highs. In our forecast, we called for the 1620-1660 range on the S&P 500.

Mounting Risks

Unfortunately, geopolitical risks are mounting. We have seen a terrorist attack on our home soil in Boston and now Israel has issued airstrikes on Syria in response to one on them. The airstrikes open the possibility of wider issues in the Middle East. Syrian ally Iran warned of a “crushing response.” If the situation in the Middle East escalates, look for market volatility to pick up.

Jeremy Nelson serves as Chief Investment Officer for Pinnacle Trust.  You can reach Jeremy by emailing him at jnelson@pinntrust.com or by calling our office at 601-957-0323.

Farm inventories were a major contributor to growth. Without farm inventories, GDP growth would have only been 1.5%.

On the bright side, every other area of the economy contributed positively to GDP. Consumer spending increased, even with the reinstatement of the 2% payroll tax. Gasoline, food, and commodity prices have fallen, which should be positive for second quarter GDP data.

The continuation of less than stellar economic data just means an extension of loose monetary policy coming out of the Federal Reserve. We have been in an extended cycle of receiving bad economic news, only to have the Fed announce continued easing, thus propping markets up.

For now, the data illustrates an economy that continues to limp along despite all of the stimulus efforts.

We will look to this week’s personal income, manufacturing, and jobs numbers to give us further indications of our country’s economic health.

Maeve Wilson serves as Investment Officer for Pinnacle Trust.   You can email her at mwilson@pinntrust.com or call our office at 601-957-0323.

1. 0.9% additional Hospital Insurance (Medicare) tax on high income taxpayers.
   Under current law, an employee is liable for a Medicare Hospital Insurance (HI) tax equal to 1.45% of his or her covered wages. Self-employed individuals are subject to a HI tax of 2.9% of net self-employment income. Beginning in 2013, taxpayers with incomes above certain thresholds will pay an additional HI tax of .9%. For an employee, the additional .9% effectively increases the HI tax from 1.45% to 2.35% on income in excess of the applicable threshold. For self-employed taxpayers, the additional, tax of .9% effectively raises the HI rate to 3.8% of net self-employment income in excess of the applicable threshold. Also, for self-employed individuals, the additional .9% HI tax is not deductible.The thresholds are $250,000 in case of a joint return (the earnings of both spouses are considered) or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 for any other taxpayer.

2. 3.8% unearned income Medicare contribution.
   The new legislation imposes a 3.8% unearned income Medicare contribution tax on individuals, estates, and certain trusts. For individuals, the tax is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. This threshold is $250,000 in the case of a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. Investment income, generally, refers to (1) income from interest, dividends, annuities, royalties and rents; (2) gross income from a business to which the tax applies (such as income from “passive” activities); and (3) the net gain from the disposition of certain property. The term does not include distributions from IRAs and other qualified retirement plans.
3. Threshold for itemized deduction of unreimbursed medical expenses generally increased to 10%.
   Under current law, an individual is allowed an itemized deduction for regular tax purposes1 for unreimbursed medical expenses to the extent that such expenses exceed 7.5% of Adjusted Gross Income (AGI). Beginning in 2013, the new legislation increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of AGI to 10% of AGI. However, for the years 2013, 2014, 2015, and 2016, if either a taxpayer or spouse is age 65 before the end of the taxable year, the threshold remains at 7.5%.
4. New Tax Brackets and an additional 39.6% bracket for “high-income” earners.
   The former 10%, 15%, 25%, 33%, and 35% brackets are made permanent. A 39.6% rate will apply to taxable incomes above $450,000 (Married filing joint); 425,000 (Head of Household); $400,000 (Single); and $225,000 (Married filing separately).
5. 20% Capital Gains Tax Rate for High Income Earners
   For taxpayers in the 39.6% bracket, a 20% tax rate will apply to long-term capital gains and qualified dividends. For those in the 25%, 28%, 33%, or 35% brackets, a 15% rate will apply. For those in the 10% or 15% brackets a 0% rate is applicable.
6. Personal and Dependent Exemption Phase-Out.
   This provisions requires taxpayers whose income exceeds certain limits to phase-out their personal and dependent exemptions. For 2013 these limits are: $300,000 for Married filing joint; $275,000 for Head of Household; $250,000 for Single; and $150,000 for Married filing separately. The thresholds are subject to adjustment for inflation.
7. Itemized Deductions Phase-Out
   Taxpayers whose incomes exceed specified limits must reduce certain, otherwise deductible, items on Schedule A. The same threshold amounts applicable to the personal exemption phase-out (see above) apply to the itemized deduction phase-out. These threshold amounts will be subject to adjustment for inflation in future years.

 What should you do now?

1. Schedule a meeting with your CPA. Because there are many other provisions of these major tax acts, just how they will ultimately impact you depends on many factors. The best thing you can do over the next few months is to schedule a meeting with your CPA or tax advisor to do some advance calculations as to how your tax liability might change. Don’t wait too long to do this as it could result in you needing to increase your tax withholding or estimated payments.
2. Implement a tax efficient investment plan. Your investment plan should be tweaked to minimize taxable investment income and high-turnover capital gains distributions. This will be a major theme for the next few years as investors seek to maximize after-tax returns on their portfolios and thus avoid some of these new taxes.

Tax rates will likely not head lower until our federal budget deficit and overall debt picture has improved. Nevertheless as Federal Judge Learned Hand once remarked,

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Continued quantitative easing polices from the United States, Japan and Europe, directly benefit emerging markets countries. In the early stages of QE, loose monetary policies caused massive inflows of capital into emerging markets counties, such as Russia, South Africa, Thailand, Brazil, and many other Asian and South American countries. In the first quarter of 2013, we saw inflows turn to dividend paying US stocks. Investors are now beginning to look at dividend paying stocks as bond substitutes, so this trend will likely continue through the first half of the second quarter. But with valuations looking a little stretched in defensive sectors such as consumer staples and with limited earnings growth potential, investors will soon have to find a new home for capital.

Emerging markets have not participated in the equity rally this year, and they tend to be faster growing and high yielding assets. With valuations and long-term growth prospects looking attractive, we are looking for another round of capital inflows into emerging markets. It may not happen immediately, but look for emerging markets to benefit as loose monetary policy stays in effect for the unforeseeable future. – Maeve Wilson

Maeve Wilson serves as Investment Officer for Pinnacle Trust. You can reach Maeve by emailing her at mwilson@pinntrust.com or calling 601-957-0323.

To the extent that this includes your home, be aware that you will need to re-file for your homestead exemption from your property taxes. This is because filing a deed to your home to a trust gets picked up as a new owner by the Tax Assessor’s office. The Assessor will then send you a notice to come in to re-establish the exemption. Yes, it is another step, but there is a valid reason for it.   Under the law, you only have to do it once and the savings are worth it.

The notice from the Hinds County Assessor asks you to bring (1) the notice, (2) your deed, (3) your SSN, (4) any mortgage information and (5) your car tag number (sorry, I have no idea why). I would be sure to bring my last tax bill or receipt or something that shows the parcel number and exemption. The clerk there fills out the application online and will have you sign it and then give you a stamped copy. You will be notified if a problem arises in its approval.  You must file the application before April 1st of the year after you deeded to the trust.

One last thing: not all the personnel at the various assessors’ offices may be familiar with trusts. Do not be deterred by any confusion or resistance on their part. Ask for someone higher up. Mississippi statute 27-33-17 clearly authorizes qualified trust beneficiaries to maintain this important exemption.  – Warren Wiltshire

Warren Wiltshire serves as Chief Legal Counsel for Pinnacle Trust.  You may reach him by emailing Warren at wwiltshire@pinntrust.com or calling him at 601-957-0323.

The Patient Protection and Affordable Care Act (PPACA) was signed into law by President Barack Obama on March 23, 2010. A companion package of “fixes to PPACA, the Health Care and Education Reconciliation Act (HCERA), was signed by the President on March 30, 2010. Taken together, these two bills make the most profound changes to our country’s private-market health care system in 50 years.

Many provisions of the new health reform law will impact American employers and private health consumers very soon, while others take effect over the course of the next eight years. For a number of provisions, the actual application and operation of the new law will remain hazy until the federal government creates and issues detailed regulations.

Most people I know have health insurance through their employers. However, these same people have college age or older children who are not finding employment that includes health benefits. Also after age 26, dependent children of covered employees are no longer covered on their parents’ health plans, so the coverage options, and the penalties for not getting coverage under these options, is something to pay attention to. – David Russell

To read more about the PPACA and how it might affect you or your family, click the link below.

At is March 6th meeting, the Pinnacle Trust Board of Directors approved a dividend of $1.23 per share, payable March 15, 2013, to shareholders of record as of March 15, 2013.  The dividend represents a +34% increase over 2012.

Chartered and regulated by the State of Mississippi Department of Banking and Consumer Finance, Pinnacle Trust is one of Mississippi’s largest and fastest growing wealth management companies, and its only independent trust company.  The company offers integrated financial solutions in three primary areas: asset management, financial planning and trust services.  This month marks the 16th anniversary of its founding in 1997.

For more information, email info@pinntrust.com or call 601-957-0323.

A more indicative unemployment number, which includes workers no longer looking for jobs and those working part-time for economic reasons, moved down to 14.3%. This is still much higher than we would like to see. The labor force participation rate, which measures workers and those looking for jobs, fell to 63.5%. This is a 32-year low. The decline in the participation rate provides us with another reason to be weary of the rising stock market, which has broken through to new all-time highs.

It will be hard to sustain this job growth going forward this year. The first quarter is historically the best for hiring. In addition, job growth may be affected by the sequester and the Affordable Care Act (Obamacare). In the Federal Reserve’s most recent Beige Book, published on March 6, they expressed concern that the Affordable Care Act could hurt employment. The Beige Book is a report published by the Federal Reserve Board eight times per year that gathers information from each Federal Reserve Bank about the economic conditions in each district. Their findings reported “Employers in several Districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff”.

We are still looking to see wage growth, an increase in the labor participation rate, and a decrease in the unemployment number that includes workers no longer looking for jobs and those working part-time for economic reasons. Until we see this, in additional to other economic factors, we will not be jumping on the secular bull bandwagon and will continue to be weary of the exuberance in the markets. – Maeve Wilson

Maeve Wilson serves as Investment Officer for Pinnacle Trust. You can reach Maeve by emailing her at mwilson@pinntrust.com or calling 601-957-0323.

The images below display two of the oldest wills ever discovered. Dated to around 1797 BC, the wills were discovered by archaeologist William Mathew “Flinders” Petrie (1853-1942), in 1890.  Their discovery made legal historians review their theories about the evolution of law.  Not only do these documents demonstrate the practice of leaving property to another at death, but the 2nd will validates a woman’s right to inherit property; restricts the wife from tearing down the houses; names guardians for children; and bears the inscription of two witnesses.

Copy of the title to property made by the devoted servant(?) of the superintendent of works, Ankh-ren. Year 44, month Peyni, day 13. Title to property made by the devoted servant of the superintendent of works, Shepset’s son, Ahy-senb, who is called Ankh-ren, of the Northern uart. All my property in marshland(?) and town(?) is for my brother the uab in charge of the corps of Sepdu lord of the East, Shepset’s son, Ahy-Senb, who is called Uah; all my associated persons(?) (are) for this brother of mine. These things were deposited in copy(?) at the office of the second registrar(?) of the South, in the year 44, month Paophi, day 13.

Title to property made by the uab in charge of the corps of Sepdu lord of the East, Uah: I am making a title to property to my wife,  the woman of Ges-ab, Sat-Sepdu’s daughter Sheftu, who is called Teta, of all things given to me by my brother, the devoted servant of the superintendent of works, Ankh-ren, as to each article in its place of everything that he gave me. She shall give it to any she desires of her children that she bears (has borne ?) me. I am giving to her the eastern slaves, 4 persons, that my brother, the devoted servant of the superintendent of works, Ankh-ren, gave to me. She shall give them to whomsoever she will of her children. As to my tomb, let me be buried in it with my wife, without allowing anyone to move (?) earth to it. Moreover, as to the apartments that my brother, the confidential servant of the superintendent of works, Ankh-ren, built for me, my wife dwelleth (shall dwell ?) therein, without allowing her to be put (forth) thence on the ground by any person. It is the deputy Gebu who shall act as guardian of my son (lit. “be child-educator for my son”).

One legal scholar has commented that these wills are so well drafted that they would likely be viewed as valid even today!  However, I’m not sure how many chancery courts are familiar with hieroglyphics.

Question: Have you prepared or updated your will or do you prefer the state to divide your assets and determine the legal guardianship for your children? No one is too young, or possesses too small an estate to neglect this ancient and noble act. If you would like to discuss your estate plans, or need a referral to a qualified estate planning attorney, give us a call. – David Russell

David Russell serves as Senior Vice President of Pinnacle Trust.  You can email David at drussell@pinntrust.com or call him at 601–957-0323.

First, what is long-term care policy? It is a policy that pays benefits to an insured if that person is unable to perform certain normal daily living activities on their own, such as bathing, dressing, eating, toileting, or getting in and out of a bed or chair, or have a severe cognitive impairment. They must be under a plan of care approved by the insurance company. It is estimated that about 70% of people over age 65 will require some form of long-term care services.² Age, living alone, lifestyle, and family history, are a few of the factors that may increase the likelihood you will need long-term care in the future.

The need for long-term care can be an unexpected financial burden and can cause an emotional toll on you and your family. The average costs of long-term care services for a private room in a nursing home is now up to $229 a day, or $83,580 annually.³ The additional cost to a family can be a devastating event to an otherwise well-planned investment portfolio.

Persons with a policy who are concerned about the possibility of rising premiums need to see a qualified financial consultant for a policy review. Your policy may have an option to take reduced benefits in exchange for a guaranteed level premium. A long-term care rider as part of a life insurance policy is another strong option. An LTC Rider can provide monthly benefits to help pay for long term care expenses while the life insurance policy can provide a death benefit whether you need long term care or not. If LTC benefits are not fully used, a federal tax-free death benefit is still paid when the insured dies. The Long Term Care Rider is an acceleration of the base policy’s death benefit. Benefits paid under the rider will reduce the policy’s death benefit and policy value. Consideration should be given to whether your life insurance needs are met if rider benefits are paid out in full.  - Randy Shell

¹ California Department of Insurance.

^{2, 3} National Clearinghouse for Long-Term Care Information, U S Department of Health and Human Services, June 2012 and September 2012.

Randy Shell serves as Senior Vice President of Pinnacle Trust.  You can reach Randy by emailing him at rshell@pinntrust.com or calling 601-957-0323.