Tax-Free Investments
Single Most Important Tax Tip
Recently, I was asked, “What was the most important year-end tax planning issue that professionals should be discussing with their clients this year.” For me, the answer was easy. I am a financial advisor who has developed a niche in tax-advantaged longevity and long-term care planning and funding strategies.
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Here is the Executive Summary:
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1. For Individuals and Couples: Consider purchasing HSA health insurance. Through your HSA, your long-term care insurance premiums are tax-deductible up to the Federal limits listed below.
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2. For Affluent Clients: Consider buying a fixed annuity or second-to-die whole life insurance policy with funds that equate to three years’ care in today’s dollars and add a rider that provides for long-term care costs up to a lifetime of coverage at guaranteed never-to-increase premiums, which allows clients to self-fund a portion of their long-term care costs and yet, still build a fence around the rest of their assets allowing assets preserved for other priorities. Clients only have to answer a minimum of questions and often, no exams.
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3. For Business-owning Clients: Consider purchasing long-term care insurance for owners, spouses, and other selected employees and deduct the tax-qualified premiums as a business expense. Business owners can offer long-term coverage to most anyone that they choose to qualify.
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How do I express all that I know and understand in just a few words? The experts say don’t quote statistics. Yet, it is those statistics that make it so compelling for most everyone to consider long-term care insurance. We insure our cars and our homes for couple of thousand dollars a year to protect against losses that may be in the tens of thousands. Yet, a couple thousand dollars a year could provide for long-term care costs that average hundreds of thousands of dollars. These statistics are if you need long-term care today. If you are in your 50s and need long-term care in your 80s, the costs could reach a million dollars. Today, less than 10% of Americans share this risk with an insurance company. Yet, it is said that over 40% of Americans will need this type of care in their lifetimes. For me, it begs the question why doesn’t everyone at least consider long-term care insurance? Working to retire and retiring well can be a challenge. Retirement planning should include a discussion about the role of long-term care insurance protection for all individuals, but especially affluent and business owning clients. It is said that like minds attract.
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At this point, if you are still with me, you see a future where we are living longer. When we become frail, we are going to need some extra help and that help costs money. With long-term care insurance, we can share those costs with an insurance company. The good news is that you can get coverage and tax deductions too.
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For Businesses
Businesses realize the most tax advantages of purchasing long-term care insurance (LTCi) for their employees. Businesses can deduct up to 100% of LTCi premiums. For me it is helpful to show it as a table:
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For Individuals
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Long-Term Care Insurance (LTCi) today is more than just tax deductions and nursing home coverage. Long Term Care Insurance provides a stream of benefits that allows you to live at home for as long as possible. LTCi protects retirement savings and income streams allowing fuller lifestyles longer. LTCi provides help to preserve your spouse’s and children’s physical and emotional health. LTCi premiums can be paid from Health Savings Accounts (HSAs). In addition, for everyone who purchases long-term care insurance, benefits paid are generally received tax-free. LTCi is difficult or expensive to buy after a major health change. LTCi offers better rates to individuals who are in good health. LTCi offers lower rates to younger people. LTCi allows you to choose how well and how long you live at home independently.
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It is All About Priorities, Health, and Choice and Control.
1) If you can afford long-term care insurance, you should buy it and buy it early in life while you still have your health to qualify. Although it seems young, 45-55 are the best ages to obtain this coverage because health issues generally start arising around 50. Children should consider purchasing insurance for their parents especially when you do not live close or have siblings that you would like to remain friends with through these health challenges.
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2) You are placing an undue burden on your spouse, children, and friends if you think that they will take care of you in your old age or after a crippling incident. This burden often:
a) makes them a prisoner in their home or yours.
b) greatly affects their health.
c) is often not shared by all family members and
d) is usually supported by the one person that you would least desire to ruin both financially and physically.
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3) The need for extended care can happen any time in our life with a serious illness or accident. If it happens today, how will you pay for the costs?
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It is said that most get into the extended care consulting business because of a life experience. It is true for me. My Marine fighter pilot, Aggie, research engineer father, Papa Joe to his grandchildren, was stricken on April 5, 2007 and given only days to live. When a local pastor and his wife were visiting my father’s bedside and were softly praying for him, my dad opened his eyes and said, “I am not dead yet.” Startling the couple and the doctors, Dad went from critical condition through a nursing home all the way back home over the next year. He is the most comfortable at home. He has dementia, which is a cognitive impairment. The doctor said after a brain scan that Dad was a man in a 72 year-old body with a 92 year-old brain. The good news is that for three years Dad was content, shuffling through his days. The tough news is that our brother, Michael (30), along with his pregnant wife, Ashlee, and their daughter, Ryann, had to move home to support his mom, who still works a full-time job, and to help Dad with his daily activities of living. The emotional and physical toll is high. However, the alternative of placing your loved one in a facility is heartbreaking.
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Summary:
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In Houston, nursing home costs can average $5,000.00 a month or $60,000 a year. If you need three (3) years of care, you will spend $180,000. In Massachusetts, the average can be over $8,000 a month or $96,000 a year. At-home care costs can be more costly. Statistically, there is over a 40% chance that you will need this type of care. At an increase of 5% a year, in thirty-five years from now, the same three years of coverage could cost you and your family $1 million dollars. Business owning, affluent clients, and individuals with HSA health insurance can take advantage of sharing this risk with an insurance company and the U.S. Treasury Department since you are allowed to deduct at least a portion of premiums paid and save on payroll taxes.
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If you needed the care today or 35 years from now, from where would the money come? If you would like to develop a strategy, we would like to help you. Call me, Katherine Nixon, at 281-370-6622 for more information. Our firm, Soaring Eagles Tax & Financial Services, LLC, is not a CPA firm. Insurance is offered as an independent agent. Securities are offered through J.W. Cole Financial, Inc., Member FINRA, SIPC. Investment Advisory Services are offered through Jonathan Roberts Advisory Group.
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Circular 230 Notice: In order for us to comply with certain U.S. Treasury regulations, unless expressly stated. Otherwise, any U.S. Federal tax advice that may be contained in this written or electronic communication, including any attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. Federal taxing authority or agency or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Tax-Free Tip
It is IRS Code Section 529 Educational Plans. The cost of a college education has increased. Knowing that costs will likely continue to rise, I would like to introduce you to a program that will allow you to save the money for higher education. In addition, you may also receive some special tax advantages. A 529 higher education savings plan, is a great solution!
Section 529 Plans offer many advantages that are unavailable in other higher education savings plan. Here are a few of the many benefits that a section 529 Plan offers:
Tax-free growth. There are no federal income taxes on investment earnings, when withdrawn3 for qualified higher education expenses4, which means your savings have the potential to grow faster with a Section 529 plan than with comparable taxable accounts.
Flexibility to meet most costs at private and public accredited schools. With a Section 529 plan, you may use your assets to pay for qualified expenses such as tuition, fees, room and board, and books and supplies at any accredited post-secondary school in the United States.
High contribution limit. Unlike Education IRAs, your contributions are not sharply limited in a Section 529 plan. For example, with Scholar’sEdgeSM , one Section 529 plan, you can contribute up to an aggregate of $251,000 including assets and earnings over the life of the account for each beneficiary.1
Low minimum investment. It’s easy to start saving in Section 529 plans today. There are low minimum account requirements.
Ability to control assets and beneficiaries. With a Section 529 plan, the account owner maintains control over the assets for the life of the account and may change beneficiaries2 at any time.
Advantages of special gift tax and estate tax treatment. Special gift tax exclusion for lump sum contribution of $50,000 ($100,000 for married couple filing jointly) per beneficiary. However, you will not be able to gift to that beneficiary again for five years. Also, contributions are excluded from the account owner’s estate.5
Variety of investment choices. Scholar’s Edge SM , one Section 529 plan, offers two distinct ways to invest your assets – via the Custom-choice or the Age-based portfolios. The funds within the portfolios are managed by two of the most trusted and experienced investment management companies in the country, Oppenheimer Funds and State Street Global Advisors.
Footnotes for article on Tax-Free Investment
1 All assets, including earnings, under all 529 plan accounts established for the benefit of a particular beneficiary must be aggregated when applying this limit. New contributions will not be allowed once this limit is reached. Earnings, however, will continue to accrue. Consult your tax advisor for how 529 tax treatment would apply to your particular situation.2 Please read the Scholar’sEdge Customer Agreement, Disclosure Statement and Privacy Policy for guidelines on changing a beneficiary. 3 Applies to qualified withdrawals after 12/31/01. State tax treatment varies. The tax bill exempting earnings on qualified withdrawals from federal income tax expires on 12/31/10, requiring the government to take somefurther action to secure these provisions prior to this date in order for them to remain in effect following 12/31/10.4 For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the account owner's rate plus a 10% federal tax penalty.5 If the account owner dies within five years of the funding date, the account owner's estate will receive only part of the deduction. Contributions are treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes. Selecting a state plan where you are not a resident may limit your ability to take advantage of any available income tax exemptions or state tax deductions for contributions that your resident state offers. This prospecting letter has been filed with NASD, Regulation, Inc.Scholar’sEdge is an IRC Section 529 Trust available to all U.S. residents and sponsored by The Education Trust Board of New Mexico. Scholar’sEdge is distributed by OppenheimerFunds Distributor, Inc. Schoolhouse Capital, LLC, a wholly owned subsidiary of State Street Corporation, is the program manager for Scholar’sEdge. This product and shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Please read disclosure agreements and mutual fund prospectuses prior to investing, available at www.scholarsedge529.com or by calling 1.866.529.SAVE. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc.498 Seventh Avenue, New York NY 10018©Copyright 2001 OppenheimerFunds Distributor, Inc. All Rights reserved.
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