If clients intend to pass along their home and other assets to heirs, they may want to consider long-term care insurance as part of overall estate planning.

Nursing home and adult day care costs are both rising. A 2012 MetLife survey found the average daily rate for a private room in a nursing home was $248, up from $239 daily in 2011, increasing at a pace exceeding inflation in 2012. The average monthly base rate in an assisted living community rose to $3,550 in 2012, from $3,477 in 2011. That cost was equivalent to more than $42,000 annually. And while hourly rates for home health aides remained unchanged, the rate for a homemaker, to provide non-medical services,increased 5.3% to $20 per hour in 2012.

Average monthly base rate in an assisted living facility

2012	$3,550
2011	$3,477

Source: MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, 2012.

Long-term care insurance may cover the costs of not only a nursing home, but also home care or adult day care services. Depending on the plan details, long-term care insurance may cover some of these expenses and help a client keep assets from being redirected to pay for nursing home costs.

The purchase of the insurance may also be considered a medical expense. Clients who have medical expenses that exceed 10% of adjusted gross income and who itemize tax deductions may be able to deduct a portion of the insurance premium. The IRS sets limits for the deduction based on age.The IRS also set an exemption for seniors. For taxpayers who are age 65 years old or older, the threshold remains at 7.5% of AGI through 2016.

In addition to health-care costs, clients may want to learn more about long-term care insurance and how it may benefit their individual financial situation.

Here are the top three issues being raised by clients:

1. Confusion over the new tax-related income thresholds
Clients were generally relieved that the impact of the “fiscal cliff” was largely averted with the passage of the American Taxpayer Relief Act in January. But confusion remains over how income thresholds are implemented. Many clients want information on when the thresholds kick in, which tax rates were changed by the law, and how their financial plan may be affected. New taxes resulting from separate health-care reform legislation that took effect this year also appear to add to the confusion about tax thresholds.

Here’s a summary view:

2. Not understanding the scope of the new 3.8% Medicare surtax
Some clients may be generally aware of the new 3.8% surtax on net investment income and understand that it may impact taxes on interest income, capital gains, and dividends. But most may not be aware of the broad scope of the tax. The 3.8% surtax may apply to a range of investment income types, including taxable annuity income, royalties, rental income, and income from passive business activities such as limited partnerships, LLCs, and S Corps.

In addition, the undistributed investment income within irrevocable trusts may be particularly susceptible to taxation since the income threshold for trusts is much lower than for individual taxpayers. For 2013, undistributed trust income in excess of $11,950 is subject to the new highest marginal tax rates as well as the 3.8% surtax. Advisors may want to share the following investor education piece with clients, “Planning for the new 3.8% Medicare investment income surtax.”

3. Concern about the possibility of future tax increases as federal deficit pressure mounts
Many clients appear to anticipate additional tax increases in the future as the federal government continues to grapple with budget deficits and growing national debt issues. Competing budget proposals on Capitol Hill for 2014 have fueled this uncertainty by including a range of provisions targeting new revenue sources.

Some of the most-discussed budget items at client seminar meetings include:

• Further reduction or loss of popular tax deductions like charitable contributions and mortgage interest
• Taxation of municipal bond interest
• Modifications to retirement account rules, including the lowering of contribution limits or new taxes
• Increased or additional taxes to fund health-care reform implementation

With continued confusion and uncertainty around taxes, there is an opportunity for advisors to connect with clients and prospects and provide information and perspective. The tax law also made certain provisions permanent, such as the exemption level for estate and gift taxes. These actions also present opportunities for clients to review their current financial plan with a financial advisor or tax professional, understand the impact of the current tax structure on their investments, and take advantage of tax-efficient planning strategies.

How the penalties may apply to business owners

*The total employer fine cannot exceed $2,000 per full -time employee based on the total amount of full-time employees, minus 30.

The following examples illustrate how the penalties would be calculated:

Example: ABC Manufacturing has 100 full-time employees and provides no insurance coverage.

The penalty would be assessed on the total number of full-time employees (100) minus 30 = 70 employees.

70 employees x $2,000 penalty per employee = $140,000

Example: XYZ Services with 200 employees provides insurance coverage but it does not meet the minimum standards as defined by the law.

Of those 200 employees, 30 decide to opt out of the employer-provided coverage and receive federal tax credits to obtain health insurance through a newly established health-care exchange program.

30 employees x $3,000 penalty per employee = $90,000

Tax credits for smaller businesses
The federal government is providing tax credits for smaller businesses to offset the cost of providing health insurance coverage. These businesses are defined as having 25 employees or fewer with average annual wages below $50,000. For 2013, the maximum tax credit is 35% of total premiums. This level increases to 50% in 2014. For more information, see the Internal Revenue Service.

Many business owners may need to make decisions about providing health insurance coverage to employees or reviewing where their current health insurance benefits stand relative to the law. The insurance mandate is an opportunity to discuss with current or potential clients who own businesses. Financial advisors may also want to network with local tax professionals and benefits consultants who have knowledge about these provisions and how they may affect business owners.

For more information on the health-care reform law, read “Health-care reform and its impact on investors.”

Several planning strategies may help investors mitigate the surtax

1. Consider municipal bonds. As tax rates increase, tax-free municipal bonds may become more attractive since the tax-equivalent yield or taxpayers in higher brackets increases. The tax-equivalent yield refers to the yield an investor would require in a taxable bond investment to equal the yield of a comparable tax-free municipal bond.

Tax-equivalent yield on muni increases in 2013

The tax-equivalent yield would increase for taxpayers who have experienced a rise in their tax rate as a result of the 3.8% Medicare surtax, or if they are subject to the 3.8% surtax and fall within the highest marginal tax rate set by the legislation. The tax-equivalent yield would not change for taxpayers in the lower tax brackets, who may not typically see any type of increase in their marginal tax rate on income. Tax rates reflect the highest marginal rate and incorporate additional taxes related to the health-care reform law and higher marginal rates with expiration of tax rates at the end of 2012. Municipal bond yields are hypothetical and used for illustrative purposes only.

2. Reduce taxable income. Contributing to retirement plans and IRAs, funding Flexible Spending Accounts, or contributing to a Health Savings Account, can help reduce the amount of income that is taxed.

3. Explore ways to defer income. Additional tax-favored strategies may be used to defer income, such as non-qualified annuities, charitable remainder trusts, life insurance, and installment sales.

4. Monitor transactions that create taxable events. Investors should be mindful of transactions that may increase overall income above the $200,000 ($250,000 for couples) income threshold, such as the sale of highly appreciated assets or a large Roth IRA conversion.

5. Take advantage of a Roth IRA conversion. If you are under the threshold, consider converting traditional IRA assets to a Roth IRA to create tax-free income for the future. In retirement, income from a Roth IRA does not negatively affect the calculation of your income threshold.

Investors may want to review planning strategies with a financial advisor or tax professional to understand the impact on their specific financial situation.

As of January, the Medicare payroll tax increased to 2.35% from 1.45%. In addition, a 3.8% surtax on “net investment income” was also introduced to help fund health-care reform. Both taxes affect individual taxpayers with income over $200,000 and $250,000 for married couples.* For trusts and estates, the income threshold is $11,950.

Specific investment income is subject to the surtax
Investment income subject to the 3.8% surtax includes: taxable interest, dividends, capital gains, rental income, royalties, taxable portion of income from non-qualified annuities, and income resulting from a business activity where the taxpayer is not considered an “active” participant.

Some income is not subject to the tax
Some investment income is not subject to the surtax, including interest income from municipal bonds and distributions from retirement accounts like IRAs and 401(k)s. However, income from retirement distributions may cause a taxpayer to exceed the income threshold and expose other investment income to the surtax.

It is important to consult a financial advisor or tax professional to understand the impact of these new taxes on your personal financial situation.

*The threshold for the 3.8% net investment income surtax is $200,000 ($250,000 for couples) in modified adjusted gross income (MAGI). The 0.95 additional payroll tax is levied once an individual exceeds $200,000 ($250,000 for couples) in taxable salary and wage income. MAGI is defined as adjusted gross income plus the net foreign income exclusion amount.

The $3.77 trillion budget, released this week proposes more than $1 trillion in savings from spending cuts, entitlement reforms, and interest savings. Additional revenue from reforming the tax code will be required for deficit reduction, the document noted.

A number of tax-preference items would be subject to limitations, and additional tax reforms are proposed.

• The proposal reduces the value of itemized deductions and other tax preference items to 28% for families with incomes in the highest tax brackets. The plan would limit the tax rate at which higher earners can reduce their tax liability to a maximum of 28%. The cap would apply to all itemized deductions, tax-exempt interest, employer-sponsored health insurance, retirement contributions, and selected above-the-line deductions.
• The plan would prohibit individuals from accumulating more than $3 million in tax-preferred retirement accounts. The cap would apply to an individual’s total balance across tax-preferred accounts, to an amount that would fund not more than $205,000 in retirement income per year in retirement.
• The “Buffett Rule” is also among the provisions, and would require those with an income of $1 million or more to pay a minimum of 30%, after charitable contributions, in taxes.
• The estate tax exemption and tax rate would revert to 2009 levels, effective in 2018. In 2009, the estate tax exemption level was $3.5 million and $1 million for the gift tax exemption. The maximum tax rate was 45%. The proposal would also eliminate a number of loopholes that allow individuals to use advanced tax planning to reduce their estate tax liability.

The budget also proposes implementing a chained CPI calculation for Social Security benefits. Currently, the program uses the standard Consumer Price Index to determine cost-of-living increases in benefits. The chained CPI accounts for a consumer’s ability to substitute between goods in response to rising prices.The chained CPI grows slightly more slowly, and the change is expected to reduce deficits and improve Social Security’s solvency, according to the White House budget.

Individual investors, as well as small business owners, have been monitoring proposals that have an impact on tax planning, particularly the limits on tax preference items including itemized deductions and retirement contributions. In addition, it is unclear how the proposed cap on tax-preferred retirement accounts will affect advanced legacy planning strategies such as the stretch IRA.

The President’s budget proposal will now be among the differing budget blueprints passed by the House and Senate that will form the budget debate over the coming months. To read more about the President’s budget, visit the Office of Management and Budget. To download the budget, click here.

Both corporations (C Corp and S Corp) and limited liability companies (LLCs) will shield personal assets from claims arising out of actions against a business. But there are differences between them.

What is charging order protection?
A key difference between corporations and limited liability companies is charging order protection, where actual ownership interests in a business are protected from creditors. For example, instead of receiving shares of the business as part of a legal judgment, the creditor can only access distributions from the LLC. If the LLC has been established properly, its members can have the flexibility of not making any distributions in a case where a creditor receives a charging order. This will generally prompt the creditor to enter into negotiations with the business owner on settlement terms that may be less desirable to the creditor. In this type of situation, the business owners (i.e., LLC members) have not avoided the risk entirely, but are essentially ready to negotiate from a position of relative strength versus weakness.

Charging order protection may also apply in the case of limited partnerships such as limited liability partnerships (LLPs) and family limited partnerships (FLPs). It’s important to note that state laws vary widely and that certain states will not consider charging order protection as the sole legal remedy in these types of legal disputes. Therefore, business owners must consult with a qualified legal professional with specific knowledge of state laws.

For more information, clients should also consult a legal advisor. To learn more about asset protection strategies, refer to Putnam’s investor education piece, “Asset Protection: Basic principles and strategies for safeguarding your wealth.”

Roth savings accounts were introduced to 401(k) plans by the Economic Growth and Tax Relief Reconciliation Act of 2001. This law allowed for the designation of a Roth 401(k) plan beginning in 2006. These plans were then expanded in 2010 when in-plan conversions were made available. But the Roth conversion was limited to participants who had a “distributable event,” such as reaching the age of 59½ or terminating employment.

The American Taxpayer Relief Act of 2012 made in-plan Roth IRA conversions available to all participants in the plan.

In order to take advantage of the Roth IRA conversion, a retirement plan, whether it is a 401(k), 403(b), or 457:

• Must offer the designated Roth account option for salary deferrals
• Must specifically make the in-plan conversion feature available

How the in-plan conversion works
The process of converting traditional, pre-tax 401(k) savings to a Roth account within a retirement plan is very similar to a standard Roth IRA conversion. The in-plan conversion is a taxable event, and participants are required to report the amount of the conversion as ordinary income on their tax return. However, unlike with Roth IRA conversions, there is no recharacterization option to “undo” an in-plan Roth conversion. IRA owners who convert assets to a Roth have until the tax-filing deadline to recharacterize a Roth conversion, or a portion of that conversion, back to a Traditional IRA, and incur no taxes or penalties.

Roth option can support tax diversification
The Roth IRA conversion option may be especially appealing to clients who hold the bulk of their retirement savings within a 401(k) plan and want to diversify the tax status of their retirement savings. Building tax diversification can provide more flexibility to manage taxes in retirement when taking income. To learn more about tax diversification and other tax-smart strategies for retirement, see our investor education piece, “Developing a tax-smart retirement income strategy.”

Not surprisingly, long-term deficit reduction is a priority in both proposals, with tax reform and the treatment of entitlement programs topping the list of differences between the two offerings.

Tax rates, entitlements at the core of differences
The two budget proposals are the Senate Democratic plan drafted by Senate Budget Committee Chairman Patty Murray (D-WA) and the House Republican plan drafted by House Budget Committee Chairman Paul Ryan (R-WI). The following chart compares the highlights:

Tax reform may emerge from debate
The Senate is expected to vote on its budget proposal in the next week or so. Typically, the budget process involves more detailed work by congressional finance committees, led by Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI). Potential tax reform as part of this process may result in a more simplified tax code and a reduction in overall tax rates. But investors will also be watching the debate closely for any scale-back or elimination of tax preference items.

Beyond the current budget debate, the nation is expected to again reach its debt ceiling of borrowing by early to mid-summer. This event will open up another debate on Capitol Hill around federal spending, and tax reform proposals will again be on the agenda.

In fact, the Small Business Administration reported in 2012 that more than 9 million self-employed individuals lacked retirement plan coverage, and that only 19.5% of workers in firms with less than 100 employees participated in a retirement plan.
One of the most common savings vehicles for self-employed individuals and small business owners is a Simplified Employee Pension, SEP IRA. The April 15th deadline for contributions leaves time to establish and fund a SEP IRA for the 2012 tax year.

It is an opportune time to contact sole proprietors and small business owners to discuss the benefits of funding a SEP IRA including the following:

1. Reduce the tax bite with deductible contributions
Investors may take a federal deduction equal to the amount of their employer contributions, up to a maximum of 25% of compensation paid during the year (or 20% of net earnings after expenses if the investor is self-employed.) Plans meeting certain requirements may qualify for a $500 start-up tax credit.

2. Maximize saving through contribution limits
There is a contribution limit of $50,000 or 25% of compensation for 2012, whichever is less ($51,000 for 2013). Self-employed individuals can contribute up to 20% of compensation.

3. Take advantage of flexible funding
Employers can decide every year what amount to contribute, which can vary, or to skip contributing altogether.

4. Benefit from tax-deferred compounding
All of the money contributed to a SEP IRA, as well as any dividends and/or capital gains on those holdings, grows tax deferred.

Improved outlook for retirement through tax-deferred growth of account assets*

5. Provide a win-win opportunity for you and your employees
A SEP IRA allows you to prepare for your financial future and to help your employees prepare for retirement.

Sole proprietors made up the majority of the nearly 28 million small businesses in 2010, the SBA found. Considering this segment of the business community, financial advisors have an opportunity to expand their client base by focusing on small business retirement planning needs. For more information on the benefits of a SEP IRA, download our Putnam SEP IRA fact sheet.

*Before-tax and after–tax saving assumes a hypothetical investment of $250 a month, with annual returns of 8% compounded monthly and earnings reinvested. The before–tax illustration does not reflect the effect of taxes, which are due upon withdrawal. The after-tax illustration reflects the effects of an annual 25% federal tax. The value of the tax–deferred account upon withdrawal will depend on the investor’s tax rate. Depending on an investor’s tax rate, the value of the taxable account upon withdrawal may be higher or lower than what is shown. Lower minimum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the
accounts shown. Investors should consider their personal investment horizons and income tax brackets, both current and anticipated, when making an investment decision; these may further affect the results of the comparison. The return is shown for illustrative purposes only and is not intended to predict the return of any investment in your plan, which will fluctuate. Regular investing does not ensure a profit or protect against loss in declining markets. Withdrawals are subject to income tax, and those made before age 591/2 may be subject to an additional 10% tax.