|Go­ing Through the Roof

Most Amer­i­cans would pre­fer to age in place, but some­times the costs of home care make it im­prac­ti­cal. Here’s how to help.

Financial Planning - - CONTENT - By Don­ald Jay Korn

Most Amer­i­cans would pre­fer to age in place, but some­times the costs of home care make it im­prac­ti­cal.

FOR CLIENTS WHO NEED LONG-TERM AT­TEN­TION, the home-sweet-home so­lu­tion un­for­tu­nately may be a money pit.

Nearly eight in 10 older Amer­i­cans (77%) would pre­fer to re­ceive care in their homes, ac­cord­ing to a re­cent poll by The As­so­ci­ated Press and the Na­tional Opin­ion Re­search Cen­ter. That’s no sur­prise. How many se­niors would opt in­stead for a nurs­ing home or space over their son-in-law’s garage?

Pref­er­ences may not lead to prac­ti­cal­ity, though. “It’s hard to age in place, for se­niors who live alone, es­pe­cially if fam­ily doesn’t live close by or in the case of ad­vanc­ing de­men­tia,” says Jen­nifer Cray, part­ner at In­vestor’s Cap­i­tal Man­age­ment in Menlo Park, Cal­i­for­nia. “It’s less ex­pen­sive in the be­gin­ning when the care needs are still light. But over time, it can get more ex­pen­sive than liv­ing full time at a fa­cil­ity.”

THE CHAL­LENGE

For ad­vi­sors, the chal­lenge is to make home care more af­ford­able. How ex­pen­sive can it be to bring in care­givers?

The na­tional me­dian cost for home­mak­ers’ ser­vices is about $4,000 a month, or $48,000 a year, with a sim­i­lar me­dian for home health aides, ac­cord­ing to the Gen­worth 2017 Cost of Care Sur­vey.

Those costs as­sume the care to­tals 44 hours a week, or about six hours a day. More hours would boost the bills, as would liv­ing in a high-priced area. In some sur­pris­ing places like Iowa and Ken­tucky, the an­nual costs for even a 44-hour week can top $100,000 a year.

THEN DISAS­TER STRUCK

Peo­ple pre­fer­ring to stay in fa­mil­iar sur­round­ings may be clients or their par­ents, and may be ei­ther sin­gle or mar­ried. “Usu­ally, one spouse — of­ten the hus­band — needs care, which is pro­vided by the other spouse,” says Judy Lud­wig, vice pres­i­dent of fi­nan­cial plan­ning ser­vices at Braver Wealth Man­age­ment in New­ton, Massachusetts. “Some out­side sup­port will help to care for the ill in­di­vid­ual who would pre­fer to stay at home.”

Tra­di­tional mar­i­tal roles may also be re­versed. Debbie Gal­lant of Gal­lant Fi­nan­cial Plan­ning in Rockville, Mary­land, tells of clients in which the wife was 75 years old and the hus­band was 85. They needed to down­size out of their five-bed­room, three-level house, so they moved into a two-bed­room apart­ment, in­stead.

Then disas­ter struck.

The wife was in a head-on col­li­sion, and then spent 10 weeks in an ICU and in re­hab be­fore she was dis­charged to the care of her hus­band.

“Due to her in­juries, they were able to ac­ti­vate her longterm care pol­icy from Day One, as it cov­ered home care,” Gal­lant says. The pol­icy, pur­chased 14 years ear­lier with a 5% in­fla­tion ad­just­ment and no elim­i­na­tion pe­riod for home care, had grown to pay $350 a day. Those ben­e­fits, along with the pro­ceeds of the home sale, her IRA, her teacher’s pen­sion and So­cial Se­cu­rity cov­ered their costs. Al­to­gether, they were pay­ing $3,700 per week for care plus their nor­mal liv­ing ex­penses at their apart­ment.

Ac­cord­ing to Gal­lant, the ex­tra out­lays for stay­ing in their

apart­ment in­cluded 24-hour care­givers, a geri­atric so­cial worker who vis­ited twice a month and some­one to or­ga­nize their med­i­ca­tions each week. The cou­ple also needed to mod­ify their new apart­ment by in­stalling grab bars in the bath­room and widen­ing door­ways, and they bought a walker, a por­ta­ble wheel­chair, a hos­pi­tal bed, a seat for the shower, a por­ta­ble toi­let and med­i­cal alert neck­laces.

In many cases, Lud­wig notes, food ex­penses also usu­ally in­crease as care­givers also need to be fed. And Car­men Wong, part­ner and se­nior wealth ad­vi­sor at Con­flu­ence Wealth Man­age­ment in Port­land, Ore­gon, re­minds clients not to over­look trans­porta­tion costs, es­pe­cially if the most de­sired med­i­cal spe­cial­ists are not lo­cated within close driv­ing dis­tances.

Even­tu­ally, Gal­lant says, both spouses men­tioned above saw their health de­cline so much that they had to move into an as­sisted liv­ing home. Iron­i­cally, even at $8,000 to $10,000 a month, the fa­cil­ity was less ex­pen­sive than hir­ing care­givers to come to the apart­ment.

HIGHER CEIL­INGS

Therein lays the dilemma. Clients will prob­a­bly pre­fer to stay home if they need longterm care, but the costs can be over­whelm­ing. How can ad­vi­sors ap­proach this topic?

Step 1 en­tails rec­og­niz­ing the costs of home care and ad­just­ing fi­nan­cial plans ac­cord­ingly. “I’ve been sur­prised at how ex­pen­sive long-term care can be,” Cray says. Sources such as the Gen­worth Cost of Care sur­vey cite me­dian costs by area, but that’s just the me­dian. In re­al­ity, costs can be vastly higher, even for the ba­sics, she says.

Cray re­ports that her firm is chang­ing its mod­el­ing for the po­ten­tial costs of long-term care. “We’ll prob­a­bly add about 20% to the al­ready high num­bers we’ve been us­ing,” she says. “Find­ing that ex­tra money won’t be easy.”

“We may sug­gest sav­ing more and hold­ing more cash. When some­one needs care and is liv­ing in a house, they’ll need to keep it in good re­pair. The cash needs can be enor­mous,” she adds.

Plan­ning also can in­clude buy­ing LTC in­surance with home-care cov­er­age. “I tell my clients that the 14 years of pre­mi­ums that this cou­ple paid for their LTC in­surance were re­cov­ered in about six months of ben­e­fits,” Gal­lant says.

‘POOL OF MONEY’

Tax sav­ings can help too, at least un­der cur­rent law. For the afore­men­tioned cou­ple, the long-term care re­im­burse­ments from their LTC in­surance pol­icy were not tax­able. In ad­di­tion, un­re­im­bursed long-term care costs were de­ductible above 7.5% of their ad­justed gross in­come. (Pro­posed tax leg­is­la­tion would elim­i­nate this de­duc­tion, which now kicks in above 10% of AGI.)

“Long-term care in­surance is some­thing we might use, but costs are high,” says Cray. “We’ll be look­ing at an­nu­ities with LTC rid­ers as an al­ter­na­tive.”

“Con­cep­tu­ally, I like the idea of a pool of money that can be used for dif­fer­ent pur­poses. How­ever, with in­surance prod­ucts it’s vi­tal to look closely at the de­tails,” she says.

Wong adds that life in­surance cash value also can be used to help cover LTC costs. “An­other case we are work­ing on in­volves clients who have not pur­chased long-term care in­surance,” she says. “We are ex­plor­ing strate­gies to al­lo­cate a part of the re­tire­ment ac­count to a des­ig­nated pool of as­sets ear­marked for long-term care, which may even­tu­ally morph into an an­nu­itized in­come stream to fund part of the monthly needs.”

Clients will prob­a­bly pre­fer to stay home if they need long-term care, but the costs can be over­whelm­ing.

MONEY FROM HOME

Long-term care in­surance can help cover home care costs, along with other in­come sources and draw­ing down sav­ings.

“Some­times the chil­dren pitch in to help fi­nan­cially,” says Lud­wig.

Still, there may be a gap — one that might be par­tially filled with home eq­uity. “In many parts of Cal­i­for­nia, for ex­am­ple, home eq­uity is by far the largest as­set that many peo­ple have,” Cray says. A re­verse mort­gage might pro­vide a life­long source of un­taxed cash flow, but come up short.

“The amount of eq­uity that can be made liq­uid with a re­verse mort­gage is lim­ited and

would only cover a few years of high-cost care,” Cray says.

“It’s not a so­lu­tion for ev­ery­one who wants to stay in their home.” For the afore­men­tioned cou­ple, Gal­lant re­calls, “a re­verse mort­gage could not pos­si­bly have pro­vided the in­come stream that they needed to pay for their care once they re­quired more than just a few hours a day.”

On­line, ad­vi­sors can find many re­verse mort­gage cal­cu­la­tors to give clients an idea of what they can ex­pect.

At re­verse­mort­gage.org, for in­stance, the cal­cu­la­tor in­di­cates that a free-and­clear house in Peo­ria, Illi­nois val­ued at $500,000, could qual­ify for a fed­eral Home Eq­uity Con­ver­sion Mort­gage (HECM) with cash ad­vances around $1,250 a month to a cou­ple, both age 72. In 2017, the HECM limit is $636,150 of home value, putting a cap on loans backed by more ex­pen­sive prop­er­ties.

Lud­wig as­serts that re­verse mort­gages can work but they are tricky, and they come with fees. “I strongly rec­om­mend that a pro­fes­sional re­view any doc­u­ments that the cou­ple has to sign be­fore they turn over their house to a lender,” she says.

ON THE SELL SIDE

Sell­ing the house could free up even more home eq­uity, but how can such a sale be rec­on­ciled with a de­sire to stay home for longterm care?

One tac­tic is to sell and move into a smaller and pre­sum­ably less ex­pen­sive place, as Gal­lant’s clients did.

For in­di­vid­u­als, up to $250,000 of gain from the sale can be tax-ex­empt, and for mar­ried cou­ples fil­ing joint tax re­turns, the cut­off in­creases to $500,000. Re­cently wid­owed clients may also qual­ify for the larger ex­emp­tion, pro­vided they sell their home within two years of their spouse’s death.

‘A FOR­TU­NATE PROB­LEM’

An­other tac­tic, men­tioned by Lud­wig, is for the chil­dren to pur­chase the home from a par­ent or par­ents need­ing care, which can pro­vide needed cash.

The par­ents can then rent the home from the chil­dren or the chil­dren can gift the value of the rent to the par­ents, Lud­wig says. The an­nual gift tax ex­clu­sion — the limit for gifts with­out tax con­se­quences — will be $15,000

per re­cip­i­ent in 2018, an in­crease from $14,000 in 2017.

Tax-wise, it would be bet­ter to keep the home and get the ba­sis step-up, Cray says, so at the owner’s death, the heirs could avoid in­come tax on a sub­se­quent sale. If money is needed im­me­di­ately, a sale might be nec­es­sary, but the $250,000 or $500,000 cap­i­tal gains ex­clu­sion may not cover the full gain on some homes.

As Cray ob­serves, “that’s a for­tu­nate prob­lem to have.”

Not all prob­lems aris­ing from long-term home care are so for­tu­nate. Ad­vi­sors can be­come part of the so­lu­tion by ap­pris­ing clients of the pos­si­ble costs in­volved, and start­ing early with a fi­nan­cial plan de­signed to help clients stay put as long as pos­si­ble.

Ad­vi­sors can be­come part of the so­lu­tion by ap­pris­ing clients of the pos­si­ble costs in­volved and start­ing early with a fi­nan­cial plan.

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