Federal Reserve actions: A "Q & A" to explain recent events

Our goal is to provide our clients with comfort and security.  To achieve this, providing clarity and understandable explanations about financial matters is important.

What is the mission of the Federal Reserve?

The Federal Reserve has a legal dual mandate: to foster maximum employment and price stability (which they have defined as keeping inflation around 2% annually). The Federal Reserve feels inflation is currently running below 2% and longer term inflation expectations remain stable. The Fed wants to bring the unemployment rate to at least below 6.5%, from its current level of around 7.5%.

What occurred at the Fed meeting on June 19th?

Last Wednesday, the Federal Reserve held their regular meeting, which concluded with their written press release regarding interest rates and the economy. Fed Chairman Ben Bernanke then held a press conference and further elaborated on Fed policy.

The Fed's statement following their June 19th meeting did not change significantly from their May meeting. To meet the above goals, the Fed plans to continue their current asset purchase program (referred to as QE, for quantitative easing). They will continue to purchase $40 billion per month of mortgage securities and longer term US Treasury securities of $45 billion per month. The Fed feels these steps are needed to maintain downward pressure on long term interest rates, support mortgage markets and "make broader financial conditions more accommodative."

How have interest rates been changing?

Interest rates, as defined by the 10 year US Treasury note, have risen dramatically over the past year and since the Fed meeting in particular. The 10 year rate was around 1.6-1.7%% during June-September 2012.  In January 2013, it had risen to around 2.0%. From June 3 to June 24, 2013, the rate rose from 2.13% to 2.5-2.6%.

What is our view of future interest rates?

While we do not have a crystal ball and do not make interest rate predictions, a few things are clear. Interest rates have been historically low due to the long time it has taken for the economy to recover. We think the bond market may have over-reacted to Bernanke's comments.  There was initial fears that the Fed was going to influence long term rates to rise higher and sooner than many on Wall Street had anticipated prior to June 19th.

We think short term interest rates will be still be very low for the next year, and maybe longer, based on the Fed's comments. The vast majority of Fed governors expect short term rates to continue very low until 2015 or 2016. The Fed has a harder time "controlling" longer term interest rates, such as mortgage rates and the 10 and 30 year US bonds. The Fed's intent is to hold these rates low until either the unemployment rate has declined to 6.5%, or even lower, and/or inflation expectations are greater than 2%.

What do we think of the recent rise in longer term interest rates?

As shown above, rates have been rising for a year, though not in a straight line. The rise did not begin just in the past few weeks. As many economic indicators show, the economy has improved from 2008-2009 levels (such as car sales, housing starts and sales, housing values, employment growth). We think the rise in interest rates is a gradual process that is good and healthy for the economy, as long as the increase is not too fast or high. We do not anticipate this occurring.

What actions should you take or consider, based on these events?

As interest rates rise, the prices of bonds and bond funds will drop in value. For nearly all of our individual clients, we have recommended to hold individual bonds for this reason. While a bond's price may temporarily decline, it will not be a permanent loss upon the bond's maturity. If you hold a bond fund, you will incur a permanent loss in value as interest rates rise. If you own a bond fund or know someone who does, particularly intermediate to long-term funds, please contact us to review whether a change in your portfolio is in your best interest.

If you have not refinanced in the past few years, and you can qualify, you should begin the process immediately.  Though mortgage rates have risen, they are still historically low and refinancing still makes tremendous sense.

Given the very low historical interest rate levels that currently exist, we do not recommend paying additional principal on mortgages and other low interest rate debt. We think debt at these interest rate levels will be viewed very positively in the next 3, 5 and 10 years. So, it generally does not make sense to pre-pay these debts at this time.

What is the impact on the stock market of the recent events?

The stock market in the US has been quite strong for the first 6 months of 2013, up over  10%. We think volatility will increase, as Wall Street tries to understand and predict future Fed actions. Wall Street will also have additional anxiety over the naming of the next Federal Reserve Chairman, which will play out through the remainder of 2013.

We continue to be long term investors and have a long term positive view of companies and countries' general resilience and ability to adapt and innovate. It is not possible to accurately time the stock market. Thus, we will continue to adhere to our core investment principles, which are not affected by the rise in interest rate increases.

Please contact us if you would like to discuss these matters further.

The Value of an Expert, for Planting and Investing

What a success. Or so I thought.

 Last summer, I planted a number of Canna Australia plants on my front porch in two large pots. I watered them diligently. As the summer was extraordinarily hot, many days I watered them before work and again in the evening. As I was enjoying their progress and growth it was well worth the effort.

I was thrilled with the results. When I purchased them, the little marker said they would grow to 4 – 6 feet and a colorful flower would develop at the very top. And grow they did, as both sets seemed to be my own “Jack and the Beanstalk.” Their deep purple stalks and leaves reached well over 6 feet tall. And near the end of the summer, a few beautiful orange flowers appeared from some of the shoots of the plants. A glorious success!

This weekend, I went to purchase the same plants for the same pots. I told the "salesperson" at the gardening store about my success of last year. She asked if the plant flowered all summer, as she told me this was the real highlight of Canna Australias. “No,” I told the woman, as mine only flowered a few times toward the end of the season. She was quickly going from a salesperson to a "plant expert." She asked a series of questions, mostly about how much sunlight the plants received.

I learned the lesson of receiving good advice from a knowledgeable expert. I thought I had done well. However, I was like many investors who think he or she has done well, but do not really know how well they have done.

• Most investors do not track and monitor their performance against proper benchmarks over a long period of time. Your portfolio may have gone up, but could it have done better with the assistance of a skilled advisor?
• Could an advisor have reduced your costs or minimized your taxes by selecting tax efficient stock funds?
• With rebalancing, could your portfolio have done the same or better, with less risk (which is even better)?
• Would you have had more money or a more successful investment experience as a result?

My plants needed to be placed in full sunlight. Due to trees in my front yard and the porch which extends above the plants, they did not receive adequate sunlight last summer. Thus, while the plants grew well, they did not blossom and reach their full potential.

With good advice, I purchased the plants and placed them in my backyard over the weekend, where they will receive full sunlight. They should grow even better and orange flowers should bloom throughout the entire summer, not just in August.

This morning, thanks to a caring plant expert, the first orange flower blossomed. An expert advisor can provide many benefits.

Great Relationships, Advice and Wine

To strive to provide better guidance and service to our clients, both Brad and Keith have participated in “study groups” for many years. Since 2005, Brad has participated with approximately 25 advisors in the BAM Masters Forum, meeting at least twice a year with advisors nationally affiliated with The BAMAlliance.

Brad’s Masters Forum group met in Napa, CA last week. A highlight of this meeting was spending Monday afternoon and Tuesday morning with David Booth, CEO of Dimensional Fund Advisors (DFA).  http://www.dfaus.com/ David very openly shared his views with us on a wide range of topics and we had an excellent Q and A session with him.

David provided perspective on being in the financial business since 1981, the market downturn in 2008-09 and the increases in the financial markets since then. He stressed the importance of investor behavior. A key to investor behavior is a client's relationship with a good financial advisor, as the advisor can assist the client to adhere to their financial plan and stay in the market.

David made complex topics simple. Structure a globally diversified portfolio. Rebalance it. Have a long term perspective. Do not be jumping in and out of the stock market. DFA's strategy of stock investing should outperform most "active" money managers due to less frequent trading and lower fees charged to clients.

To reap the rewards of the long term upward trend of the stock market, one must remain invested. Booth noted that only DFA and Vanguard, of all major mutual fund companies, had positive stock market fund inflows during the downturn in the financial markets. These investors who added to their portfolios, or stayed the course and did not sell, have been rewarded for doing so. The lesson is that while the stock market has risks, which often appear, the stock market provides rewards to those who are able to be patient enough to reap these rewards.

With this consistent philosophy and methodology, DFA has grown to become the 9th largest mutual fund company in the country, managing $290 billion.

Monday evening, Booth then hosted us on a visit to his Booth Bella-Oaks vineyard and the neighboring Staglin Family Vineyards. http://staglinfamily.com/ We met with the two vineyards' winemaker. The winemaker, a former hedge fund manager, explained how technology is used to monitor the development of the grapes. With computer networks and current technology, he can now monitor the vines and grapes continuously. The improved technology allows him to have more information and improved decision making as the grapes develop. Even with this technology, there are still many factors beyond his control which affect how successful the wine will eventually become. As we cannot control or forecast the financial markets, they cannot control the weather or other important factors which are key to producing great wine.

David explained some of the structural changes he has made to his vineyard since purchasing it in 2010. He has uprooted and will replace many acres of vines to grow better quality grapes. This means that no grapes will be harvested from these acres for at least a few years. He is investing for the long term, with the expectation of a greater return per acre in the future.

Booth is changing the direction of the new vines, from vertical to diagonal, so the grapes will get more balanced exposure to the sun. The vineyard used to be planted with only one type of grape. He is planting numerous varieties of Cabernet Sauvignon grapes. The winemaker will then combine these grapes in various combinations after the harvest to optimize the taste of the resulting wine. Like a financial portfolio, he is restructuring his investment to give it the best chance to produce a good outcome, but the actual result is not guaranteed.

David has a vineyard, but his property lacks equipment to actually make wine. However, he has developed a close relationship with his neighbors, Shari and Garen Staglin of the Staglin Family Vineyards. After seeing David's vineyard, we went to the Staglin's winery. We entered into their vast, spotlessly clean caves built into a mountain where hundreds of barrels of Chardonnay and Cabernet Sauvignon are stored. They will produce thousands of cases annually. As the Staglin's had excess space and production capability, as well as a winemaker who could efficiently share his services between the two vineyards, Booth's grapes will be made into wine at the Staglin facility.

This neighborly relationship (and good friendship) will benefit both Booth and the Staglin's, just as our clients benefit from the close relationship we have with DFA and my fellow advisors in the BAM community. As we had dinner at the Steckter House on the Staglin property, we learned more. Shari and Garen Staglin explained how they renovated the house, built in the late 1800s. They added solar panels on the grounds, which now produces power for the house and its executive kitchen. We toasted a family ancestor, who provided the inspiration for one of their wines. The Staglin's talked passionately about their charitable values and efforts. The family has raised and donated nearly $725 million, primarily to mental health research. All the proceeds of their Salus Chardonnay and Cabernet Sauvignon brands are donated to this cause. http://staglinfamily.com/philanthropy.html

Shari Staglin talked to me about the houses and properties near their winery, all dating back over 100 years. Like their neighbors, the Staglin's view themselves as stewards of this land, which they will maintain and improve, then pass on. Their vineyard is now certified organic, as Booth's is planning to become. The Staglins were gracious and warm as they educated us about wine, their property and their personal values.

Opposite from the entry to the Staglin caves, was a large bench. On the bench’s huge backing, is the following inscription:

Staglin Family Vineyards: where shared values are the keystone of relationships.

The meetings I had with my fellow advisors and the time spent at the two vineyards shared a common message. Having shared values with our clients will produce great client relationships. Having great business partners that we can trust and interact with, like the BAMAlliance and DFA, will benefit our clients. It will enable us to provide our clients with a successful lifetime of integrated financial experiences, so our clients can be comfortable and secure.

Wealth, Sports and One Shining Moment

I was the student. I paid for college on my own with 4 years of work-study and other jobs and 10 years of student loans, which I proudly repaid. I didn’t have time for extra-curricular activities.

He is now the student, a junior, a writer and is passionate about sports. He is my son, attending my alma mater, the University of Michigan, 25+ years later.

Money can’t buy happiness

My business is now the business of money. Investing. Financial planning. Relationships. Helping people fulfill their dreams and wishes with solid financial guidance.

When he was young, starting at birth, his mother and I saved $200 a month for his college education. Grandparents and great-grandparents also contributed to his college education fund. He does not have to “work” to pay for college, as we have provided that for him.

Since he didn’t have to work to pay for college, he was able to join the Michigan Daily sports staff as a freshman. He covered wrestling and baseball. He took advantage of the opportunity and made the most of it. He drove to Philadelphia and captured the pain and thrill of a Michigan wrestler overcoming an injury to win a national championship.

“Wealth is more about discretionary time than money” from Thrive, by Alan Weiss

While he does not yet have financial wealth, he has made the time to continue reporting, writing and being named as one of the sports editors. His skills enabled him to cover the Michigan basketball team as a sophomore. He traveled to Hawaii for a 2011 tournament, with financial assistance from the Daily and his family. He met Coach K. He created memories. He covered their excitement as they exceeded expectations in 2012, only to be eliminated early in the NCAA tournament.

While not getting the glory of Trey Burke or Tim Hardaway, he traveled by car to games in New York, Minneapolis, Bloomington, IN and other Big Ten locations to report for the Daily. He attended every home game, to “work,” as he says. He is not part of the “Maize Rage,” as he surely would be. He sits in the press area. He would not head out to the bars immediately after a Saturday night victory, as he would be writing for hours after the game ended.

He wants to write. He wants to cover this team. Because he does not have the financial pressures that I had, he is able to allocate the time to write for the Daily. He used this “wealth” and the related discretionary time to create memories, for him, and for others. While money can’t buy happiness, money can buy experiences. Money can create memories that will last a lifetime. Memories which make parents, grandparents and teachers proud.

“One Night and One More Time”

On his March break, my son conducted interviews and transcribed them for hours. He wrote a fitting, lengthy tribute of the senior captain of the basketball team, Josh Bartelstein, a player who was not in the limelight but spent hours dedicated to Michigan and provided leadership to a young team. They both care, are diligent and determined.

I have questioned the time he spent writing and editing for the Daily. The many long road trips. Was it taking too much time away from his academics? But deep down, I knew it would be worth it.

Last Wednesday, he traveled to Dallas to cover the Michigan basketball team, as they began the Sweet Sixteen weekend. While I was watching with friends in Michigan Friday night as the game progressed, I knew he had his game story written, to tell of defeat and a valiant effort against a stronger Kansas team.

Then, within minutes, it all changed. Michigan made a heroic comeback, grasping victory from an assured defeat. And it brought out the best in my son the writer. He rewrote his game story. He wrote a separate column until 5 am the next morning, capturing the emotions of players and non-players alike. He would not stop until it met his very high standards. He wrote One Night and One More Time I could not have been prouder.

One shining moment

On April 1, his game coverage of Sunday's Elite Eight victory by Michigan over Florida is the only article on the front page of the Michigan Daily, along with pictures of a triumphant team with their trophy. As a former Daily editor tweeted to him over the weekend, his words documented Michigan history.

I’m not sure whether Michigan will win in the Final Four this weekend. I'm not sure what my son will write, but I know he will capture the story and the emotions. He will have a memorable experience. He has earned it.

I’m not sure where his future and career will lead. Through diligence and hard work, he has created great opportunities for himself. He has taken the “wealth” of discretionary time, and put it to good use. Those are lessons that I hope will always remain with him.

How Did You Handle Apple Stock? Our View.

I love my iPhone. I love my iPad. But loving Apple’s products and loving it’s stock are two very different things.

After a phenomenal period of rapid rise over many years, Apple’s stock has taken quite a tumble, from its all-time high of $705 in mid-September, 2012, to its closing price of approximately $450 per share on January 24, 2013. That is a decline of $255 per share, or 36%.

The decline in Apple’s stock is a reminder of some important investing lessons:

• Discipline is required in buying and selling
• The lack of value of Wall Street “analysts”
• There is a better way

Discipline in buying and selling:

It takes great discipline to sell a stock like Apple, which has terrific business prospects and success. Why sell when it had only continued to go higher? What will the top be? Won’t it just keep going higher, as more phones and iPads continue to be sold? Unfortunately, as with many other high growth companies in the past, the growth eventually slows, margins begin to decline, and the stock tumbles very quickly.

It is difficult to be accurate twice, identifying both the right time to buy and the right time to sell individual stocks. It is even harder to be able to do it on a consistent basis over a long period of time, which has led us to some of our core stock investment philosophies.

For the majority of your investment portfolio, we do not recommend purchasing individual stocks, as it is too hard to consistently predict the right time to buy a stock and the right time to sell that stock. For an Apple shareholder who purchased shares years ago, they should still have significant profits. However, there are many others who may have purchased the stock above the current $450 price or even worse, those who had huge gains, but did not sell some of their shares as the stock seemingly rose unabated, towards $700.

The lack of value of Wall Street Analysts:

We do not feel Wall Street analysts add value. Observing the two days surrounding Apple’s most recent earnings release very clearly re-enforces this.

Wall Street analysts provide advice to retail clients of their brokerage firms, as well as to mutual fund and hedge fund managers, who pay for their advice. If Wall Street analysts were providing real value, you would think they should have recommended selling Apple stock sometime prior to the earnings release on January 24, 2013. During this period of time, the stock had fallen from $705 to $500.

Before the earnings release, Apple stock closed on Wednesday afternoon at around $500 per share. The stock opened the next day at $460 and closed at $450. This shows clear evidence of the difficulty of predicting a company’s earnings and its stock direction, as well as the analysts’ reluctance to recommend selling a popular stock, such as Apple. If it is their full time job to track the company, shouldn’t most analysts have anticipated the earnings report correctly and recommended selling the stock at some point in the last 6 months or at least recommended to stop buying more shares?

However, before the market opened the day after the earnings release, 25 Wall Street analysts had issued new opinions (“refreshed their calls”). What did they say? Twenty one (21) of them still had buy, overweight or outperform ratings on the stock. Four analysts had neutral or hold ratings. None recommended selling the stock.

It is also important to note that it is impossible to “beat the market” once new information is released, as the price dropped $40 per share immediately at the open after the new data (the quarterly earnings report) was made public.

The impact to you: there is a better way

For most investors who desire a long-term, positive investment experience, we recommend a different approach.

• We structure a globally diversified set of mutual funds for our clients, and provide the discipline to monitor and rebalance these funds to remain in accordance with your personal asset allocation target.
• This removes the guesswork of when to buy or sell an individual stock, or how to select the next hot money manager or mutual fund.

This example of Apple stock, with its tremendous growth as a company and of the stock, followed by the recent huge stock price decline, is very representative of many “growth stocks.” Based on many years of academic research, this has led us to favor “value” stocks (stocks that are out of favor and not “loved” by Wall Street).

• Value stocks have outperformed growth stocks over the long term, and we structure our clients’ portfolios with this in mind.

Our approach has more aspects to it, such as tax-efficient investing, broad diversification and very low costs. But most importantly, we strive to provide our clients a greater sense of security and comfort through our approach to investing. Without the guesswork.

Guidance on New 2013 Tax Law

The following are highlights of the major provisions of the “American Taxpayer Relief Act,” which was negotiated and passed over the past few days (and nights!).

While the top federal income tax rates will increase only for those earning greater than $400-450,000, there are other measures that were previously enacted as part of the Health Care reform legislation that will cause nearly all working taxpayers to pay more Social Security taxes effective January 1, 2013.

Tax rates:

• Tax rates remain the same, except for taxable incomes above $450,000 for married taxpayers and $400,000 for single filers. A new top rate for taxable income above these levels is raised from the current 35% to 39.6%.
• Note that someone’s income can be well above $450,000 before the 39.6% rate is effective, as that rate is after itemized deductions, such as mortgage interest and charitable contributions. 
• For those with taxable incomes of less than $400-450,000, there will be no increase of current federal income tax rates.  
• As part of the health care reform passed in 2010, an additional Medicare tax of 3.8% will apply to unearned income (investment income, such as interest and dividends; capital gains and rental income), for married couples with income above $250,000 and single taxpayers above $200,000. This is already law, and is not part of the recent legislation.
• Also as part of the 2010 health care legislation, income from self-employment and wages will be subject to an additional FICA tax of 0.9% (employee portion only). This applies to the combined compensation of married couples in excess of $250,000 and single individuals in excess of $200,000.

Payroll Tax Cut not extended: There was NOT an extension of the Social Security payroll tax cut. This represents a tax increase for all workers as of January 1, 2013, from 4.2% to 6.2%.


Capital Gains and Dividend Tax Rates:

The capital gains and dividend income rate will increase from the current 15% to 20% (plus the above 3.8% tax rate increase from the health care reform act), only for taxpayers with incomes that fall into the 39.6% rate (as stated above). For married taxpayers, if your taxable income is less than $450,000, then the capital gains and dividend rates will remain at 15%.

AMT (Alternative Minimum Tax): The legislation provides a permanent fix by enacting AMT indexing for inflation. This has been an issue for years, and has frequently been temporarily extended. This provides needed clarity and corrects a measure that Congress usually fixed anyway.

Itemized Deductions and Personal Deductions:

There will be a phase out of these benefits, for incomes above $250,000 - $300,000, which is an indirect tax increase.

Estate taxes: The estate and gift tax exclusions were retained at $5 million, indexed for inflation. The top tax rate increases from 35% to 40%, effective January 1, 2013. This is a significant compromise by both sides, as it permanently (at least for now) increases the exemption amount, so most estates will not be affected by the estate tax, in exchange for a rate increase on those who are impacted. The portability “election” provision, which allows an unused exemption amount to be used by the surviving spouse, was made permanent.

Other items:

• Tax credits were extended for 5 years, such as college tuition, child and dependent care and the child credit.  
• Tax free distributions will be permitted for 2013 from IRAs to charitable organizations (one year extension, not permanent).

Impact on Investment Strategy: The increased tax rates on top income levels, in addition to the Medicare tax of 3.8% on investment income (such as capital gains), makes our firm’s investment strategy, which is very tax efficient, even more valuable.

If you would like to discuss any of these matters further, please contact our office.

Also, please feel free to forward this post, or a link to this post, to others who may find this information valuable.

Fiscal Cliff Negotiations: Our View Today

Important note:  This post is based on media reports from The Wall Street Journal and The New York Times, as of December 18, 2012. Fiscal cliff negotiations are very fluid, and until an actual deal is reached, and the fine print is released, a complete analysis is not possible.

The purpose of this post is to provide information and clarity, where possible, based on the information available as of this morning. It appears that concessions have been made by both sides, Democrats and Republicans, so basic concepts of a deal appear to be taking shape.

Tax rates: 

• The White House has proposed permanently extending the Bush-era tax rates (current rates) on household income below $400,000. Above $400,000, they are proposing an increase from the current 35% to 39.6%.
• While they are using a $400,000 figure, they probably mean "taxable income" of $400,000. So, after deductions, someone could actually earn well above $400,000, before the 39.6% marginal rate becomes effective.
• For those with household or taxable incomes (to be clarified) of less than $400,000, it appears that there will be no increase from current federal income tax rates.
• It is possible this $400,000 level will increase, as part of negotiations, but likely not to decrease.
• As part of the health care reform passed in 2010, an additional Medicare tax of 3.8% will apply to unearned income (investment income, such as interest and dividends; capital gains and rental income), for married couples with income above $250,000. This is already law, and is not part of the current negotiations.
• Also as part of the 2010 health care legislation,  income from self-employment and wages will be subject to an additional tax of 0.9%.  This applies to compensation of married couples in excess of $250,000 and single individuals in excess of $200,000 annually. 

Capital Gains and Dividend Tax Rates:

There has not been any published information on changes to the capital gains or dividend tax rates, or where these stand in the current negotiations. I would expect that the capital gains rate will increase from the current 15%, to 20% (plus the above 3.8% tax rate increase from the health care reform act). I cannot forecast what change, if any, there will be to the dividend tax rate, other than the known increase due to health care reform tax, discussed above.

Change in calculation of inflation:  There is a proposal to adopt a new method of calculating inflation, which is expected to result in showing less inflation. The impact would be to reduce the growth of certain benefits, such as inflation adjustments to Social Security. There are other impacts of this inflation calculation change, such as slowing the rate that tax brackets rise each year, so taxpayers would pay more Federal income tax each year, than if this change had not been made.  I have not seen any details on how the new inflation factor would be calculated, or whether this would affect the inflation factor that is used in the investment return for TIPS (Treasury Inflation Protected Securities). This change is subtle, but a very important provision.

AMT (Alternative Minimum Tax):  The White House is proposing to permanently extend the AMT inflation adjustment provisions, which Congress has done every year or two, for many years, as the original law did not include any inflation adjustments. This would provide needed clarity and correct a measure that Congress usually fixes anyway.

Payroll Tax Cut: The Wall Street Journal, but not the Times, reported that the White House did not request an extension of the Social Security payroll tax cut. This would represent a tax increase as of January 1, from 4.2% to 6.2% of the social security tax that all workers pay. This is a change in position for the Democrats, as it would directly affect workers of all income levels.

Deductions:

There were no reports of any changes to itemized deductions. It is possible there will be some type of cap or limitation on total itemized deductions, such as 28% or 35% of one's adjusted gross income. It is possible that this change, if enacted, would only affect very high income levels.

Other items:

• The White House is requesting upfront infrastructure spending, as well as a temporary extension of expiring unemployment benefits. Other tax breaks may be extended permanently, such as research and development credits for businesses. 
• It is also expected that a permanent adjustment will be made to physicians' Medicare reimbursements. This is to correct a 1997 law, that has been corrected on an annual basis, to prevent massive reimbursement reductions.
• It is unclear whether there will be an increase in the age for Medicare eligibility, which is currently 65.  Republicans are proposing to increase this age to 67, to slow the growth of Medicare spending.
• There are no details on specific spending cuts, or when the actual tax reform changes will be drafted. We would expect some tax changes to be approved in the near term, with further revisions in 2013.

Estate taxes:  There has been no public information about how estate taxes will change going forward, based on these negotiations.

If you would like to discuss any of these matters further, please contact our office.

Sources:  The Wall Street Journal, http://online.wsj.com/article/SB10001424127887324407504578185362961624862.html?mod=WSJ_hpp_LEFTTopStories

The New York Times, http://www.nytimes.com/2012/12/18/us/politics/president-delivers-a-new-offer-on-the-fiscal-crisis-to-boehner.html?hp&_r=0&pagewanted=print