Protecting
Your Savings From Long-Term Care Expenses
By Jon Flynn
Please note this article was written in September 2007. All relevant
facts referenced in this article are from that point and time. For the most
current exclusion figures, seek the advice of a tax consultant.
“Isn’t there anything we
can do to protect his savings”, Elaine said?
Her father, Stan, had just been diagnosed with Alzheimer’s disease. Since he was always the picture of health,
know-one really gave the thought of Dad ever going to a nursing home a second
thought.
According to a 2006 study
by Genworth Financial, the average annual rate for a private nursing home room
in Pennsylvania is $76,376. At that
rate, how long will Stan’s savings last?
Sadly, not very long, Stan did well in life financially, but not well
enough to keeping his nest egg from cracking under that kind of pressure.
I explained to her that
the recently signed Deficit Reduction Act of 2005 (DRA) has drastically changed
the landscape for seniors who are concerned with their ability to protect
assets from an unexpected stay in a nursing home. Unfortunately, this leaves
families of an individual facing at an immediate long-term care crisis with
very limited “last minute” options to protect assets. Elaine is like many people today who are
coming to realize that proper planning many years in advance of a health crisis
is now needed.
What could have Stan done
to protect his nest egg if he planned early?
Gifting
strategy. Currently in 2007 the annual exclusion amount
is $12,000. Also you can give up to $1,000,000 in gifts that exceed this annual
limit, total, through out your life, before you start owing the gift tax. Every
year Stan could have taken advantage of this and gifted money to his children
without facing any gift taxes, and without them owing an income tax on the
gifts. By removing enough money from his estate, Stan could have possibly
become eligible for assistance from Medicaid to cover the cost of the nursing
home.
Since, the DRA changed the
Medicaid “look-back” period from three years to five years for all gifts –
gifts should now be done well in advance.
Keep in mind that Tax Form 709 still needs to be filed for the amounts
gifted above $12,000, so the IRS can keep a tally on what you’ve given away.
Irrevocable
Trust. Unfortunately, some adult children may not be good
candidates to receive large gifted sums due to problems with certain personal
and financial issues. Things like being
in debt, a shaky marriage, pending lawsuits, being financially immature, ect. In cases such as
these, gifting can still be done but with a strategic tie-in to an Irrevocable
Trust. This strategy definitely comes
with some “fine print”. It can also be
complex to set up and difficult to make changes to. So I strongly urge that you only work with a
professional if you think it can help your situation as well.
Long-Term
Care (LTC) Insurance. Stan could have purchased an insurance policy
to pay for his long-term care needs. LTC
policies can cover more than just the cost of a nursing home stay. Properly structured policies can also cover
care that is provided in an adult day care, an assisted living facility or even
at your home. Long-term care policies
come in many shapes and sizes so I’ll have to save a detailed discussion for
another time. Let’s just say that they can be a perfect match for some and make
no sense for others. While the annual
premiums can at first glance appear to be expensive, they can provide hundreds
of thousands of dollars worth of coverage for a lengthy need.
Everybody situation is
different and arriving at solutions can get complicated. So always consult with financial, legal, and
tax professionals before making any decisions.
Jon Flynn is a
Certified Financial Planner TM and owner of Flynn Financial in
Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC
and of Securities America Advisors, Inc. Flynn Financial and Securities America
are unaffiliated. Mr. Flynn can be
reached at 570-876-5015.