Advisers planning for the long-term-care needs of clients ought to seriously consider the potential tax savings that come with continuing care retirement communities.
Continuing care retirement communities combine independent living in retirement with assisted living facilities and nursing care services. Newcomers to a so-called
CCRC might start out living on their own in a cottage or apartment on the community's campus, before moving on to assisted living and nursing care as their age and medical conditions warrant.
There's a particular kind of client who opts for CCRCs as a living arrangement in retirement. “The people who are moving to CCRCs are the people who are buying long-term-care insurance,” Thomas C. West, senior associate with Senior Estate & Investment Advisors LLC. “They are affluent and educated. They exercise and eat right. They have longer lives and longer life expectancies.”
If this sounds like one of your clients, perhaps it's time for a briefing on CCRCs and how they can work to save on taxes in retirement.
Different Levels of CCRC
Clients will find themselves facing an array of choices when they assess these retirement communities. For one thing, there are three different levels of service: extensive, modified and “fee for service,” according to Susan M. Tillery, CEO of Paraklete Financial Inc. and a certified public accountant and personal financial specialist.
“Extensive” contracts are the Cadillac of CCRC; they cover everything. “Modified” provides a lesser degree of coverage, but there's a provision that allows the client to receive more care if needed at a price. “Fee for Service,” as the name implies, is a pay-as-you-go option.
Expect to shell out for the top-end service. Ms. Tillery is working with a married couple who have been residing at a CCRC for the past three years. The pair, in their early 80s, made the move after the husband had a heart attack and was diagnosed with Alzheimer's shortly after. The wife tried to manage the household on her own, but was having a hard time doing so.
They wound up moving to a CCRC and the husband is residing in an Alzheimer's care unit, while the wife is still living healthily and independently in a cottage. Both dwellings are on the same CCRC campus.
The couple paid $305,000 upfront for their “extensive” service contract. As for monthly costs, the wife pays a $2,180 fee each month, and her husband's care runs about $5,500 each month. They used the $1 million proceeds from the sale of their home in order to cover the large lump sum cost of entry. To complete the full LTC and healthcare financing picture here, they're on Medicare and the wife has LTC insurance coverage, which she bought before moving to the CCRC.
Though the upfront cost seems staggering, it gives the wife of peace of mind. “She can make some long-term relationships, she can still handle independent living, and she can move when needed to assisted living or skilled nursing,” Ms. Tillery said.
The Tax Picture
To be sure, some might be taken aback by the upfront and monthly costs of being in a CCRC with high levels of service.
That's where the tax savings comes into the picture.
Some of the wife's $2,180-per-month fee is deductible as a medical expense. Meanwhile, all of her husband's $5,500 monthly fee is deductible because he's in the Alzheimer's unit. About $100,000 of the entry fee was also deductible during the first year, according to Ms. Tillery.
Here's a recap on the
deductibility of medical expenses. In most cases, you can deduct the amount of medical and dental expenses that exceed 10% of adjusted gross income. That threshold falls to 7.5% of AGI for taxpayers who were born before Jan. 2, 1950 – the demographic for whom it would make sense to talk to about CCRCs.
Additionally, a portion of the large upfront deposit for the CCRC can be returned to the clients' estate after they die or if they leave the facility. In Ms. Tillery's clients' case, the lump sum is amortized on a sliding scale: the amount of the lump sum that's eligible to go to the estate or be refunded is reduced by 2% each month for the first year, then 0.5% per month for the following four years, and from year five onward, the estate can get back 50% of the lump sum if the clients pass away.
But what about clients who are in their 50s and 60s, and are still years away from considering assisted living and long-term-care arrangements?
Those clients may have parents who need those services, and they might be footing the bill.
“These clients are successful and OK from a retirement perspective, but now they're picking up the nursing home bill for their parents,” Lyle Benson, CPA and personal financial specialist at L.K. Benson & Co.
There's generally no tax benefit for clients who pay the cost of care for elderly parents, but in some cases, those parents can be
considered dependents by the IRS. In turn, the cost of care will become deductible for the client.
Elderly parents will have to meet certain income tests, and their adult children will have to provide more than 50% of their support, said Mr. Benson.
Don't Forget Your Team
Advisers should be sure to bring in a team of experts if their clients are considering a CCRC. For one thing, it'll make sense to bring in an accountant to discuss sound tax strategy behind using the medical expense deductions. A geriatric care manager who can navigate the landscape of local care facilities is also in order, noted Mr. Benson. Finally, bring in an elder law attorney to cover asset protection strategies and discuss Medicaid planning.
“That's all an important part of the overall process,” Mr. Benson said. “Make sure it's a team effort. That's how you benefit the client the most. Have everyone on the same page.”
