The high costs of long-term care affect an increasing number of individuals and their families.
According to Genworth’s 2016 Cost of Care Survey, the average annual cost of an assisted living facility, which provides personal care and health services, was $43,536. The average cost of a semiprivate room in a nursing home, which provides a higher level of supervision and care than an assisted living facility, was $82,125; $92,345 for a private room.
This article considers some of the common financial, legal, and tax concerns.
What Is Long-term Care?
Medical treatment is designed to cure a condition or illness. Long-term care is different; it is meant to address the needs of an individual who, because of a chronic condition, accident or other trauma, or illness, requires assistance with basic self-care tasks or other necessary assistance for independent living.
No one knows for sure whether he will ever need long-term care, but increased longevity in the population, family medical history, and other factors suggest that everyone should be thinking about it. Wealthy individuals can personally bear the cost of long-term care, although they too need to plan for financial management and advance medical directives. Those with little savings and income must rely on family, charitable organizations, and government assistance. Those with moderate resources are well advised to plan ahead for the potential financial cost of long-term care.
Long-term care insurance
Those who can afford the premiums should buy long-term care insurance or explore state-sponsored long-term care partnerships that function like long-term care insurance. Currently most but not all states offer such partnerships. Generally, long-term care insurance pays a fixed daily amount when the insured needs long-term care. The coverage may run for a set period, such as three years, or for the life of the insured.
As mentioned earlier, one of the IADLs is managing finances. Without planning, an inability to handle this responsibility may require court intervention for a conservatorship or guardianship, which is costly and potentially embarrassing. Planning ahead allows for the solution that best meets a person’s wishes and financial situation. Selection of the right person to handle financial management is paramount.
One option, the durable power of attorney (POA), allows another person, such as a spouse, adult child, or close friend, to act as the person’s agent for financial matters. A variation on the durable POA is a springing durable POA. As the name implies, it springs into effect upon the occurrence of a certain event, such as the individual’s becoming unable to handle financial matters.
Another option is a living trust. While a revocable trust becomes irrevocable upon the incapacity of the grantor, a living trust can be better tailored to an individual’s needs. For example, if there is no individual to act as trustee, the person can name a financial institution to do so. A living trust can also act as a will substitute by specifying what happens to assets in the trust upon the death of the grantor.
Advance medical directives
If an individual wants to authorize someone to speak on her behalf when she is unable to do so, specific action should be taken. In view of today’s HIPAA laws on patient privacy, it is difficult if not impossible to speak for another person or obtain medical information about that person without a legal document. As with financial management, selecting the right person to act in health care matters is vital.
Housing and Long-term Care
Many individuals in need of long-term care prefer to stay in their own homes. This is often possible if there is assistance available from a relative or paid caregiver (usually a paid attendant who does no skilled nursing care). According to AARP approximately 40 million Americans are unpaid caregivers for adults, and this number is forecasted to be 45 million by. At present, there is no tax break for this type of respite care.
The cost of in-home care may be covered by a long-term care policy. There may be other payment options, including an attendant allowance through the Veterans Administration for veterans and their spouses.
If care cannot be provided in the person’s home, there is a spectrum of care provided in different arrangements, ranging from independent living to assisted living, skilled nursing care, and intensive nursing home care. The cost of living in a nursing home, which is used primarily for medical reasons, is a deductible medical expense to the extent the care is not covered by insurance or a government program. No allocation is needed for medical services; all of the costs, including amounts for food and lodging, are deductible.
Those residing in continuing care facilities in order to receive long-term assistance may also claim a deduction, but only for a portion of their costs. If, however, this living arrangement is primarily for personal reasons and not primarily for medical care, then only costs related to medical care are deductible.
Paying Out-of-Pocket for Long-term Care
Even though long-term care is not medical treatment, the costs for qualified long-term care services of a chronically ill individual that are not covered by insurance, government benefits, or other sources can be treated as a deductible medical expense (IRS Publication 502).
Tapping Long-term Care Policies
When it is medically determined that the insured needs long-term care, a long-term care policy begins to pay off after an elimination period, such as 30 or 90 days. If the policy pays a per diem amount without regard to the insured’s costs, only the portion up to a set dollar limit is tax-free. This amount is $360 per day for 2017 (Revenue Procedure 2016-55, IRB 2016-45, 707).
If the policy has a higher per diem amount, however, it can be tax-free to the extent of the actual cost of qualified long-term care services for a chronically ill individual.
Proceeds from life insurance policies
A life insurance policy may permit the payment of accelerated death benefits to the insured when he becomes chronically or terminally ill; these benefits can be tax-free [IRC section 101(g)]. Tax-free treatment on account of chronic illness is limited to the amount described earlier for long-term care insurance proceeds.
Helping Clients Prepare
The matter of long-term care is a complicated issue involving not only personal considerations but also legal, financial, and tax concerns. It is essential that financial professionals like our team at DeHoek & Company help individuals understand the myriad aspects of long-term care and meet the challenges that arise.
Read the full CPA Journal article