For long-term care, planning ahead is key
Even though we counsel our clients on how to proactively plan to provide for aging at home and conserving financial resources, we are frequently faced with clients who have either failed to plan ahead or were caught by surprise with a sudden chronic medical condition that requires expensive long-term care at home or in a facility.
At that point, planning efforts are expedited, but some options may no longer be available.
Many of these individuals will be stuck paying privately for their long-term care needs longer than necessary than if advanced planning had been done. However, even if you are spending significant amounts of money each month for long-term care, there are many situations where last-minute efforts can be valuable.
One of those areas deals with income tax planning.
Here are a couple scenarios where making some adjustments in how the care is paid can pay off in the form of either significant income tax deductions or reducing overall income tax exposure.
1. Which assets to liquidate to pay for long term care:
Let’s say you are in need of long-term nursing home care, which in Pennsylvania is about $13,000/month currently, and you have a typical estate asset combination of a home, bank accounts/Certificates of Deposits (“CDs”), some Individual Retirement Accounts (“IRAs”) and some non-IRA investment accounts.
Remember that when a person enters a long-term care facility it is up to other family members (usually via a Power of Attorney) to find where the assets are and start using them to pay for care. This is a very stressful situation for the family member in charge of taking care of the bills.
The default (and sometimes incorrect) choice is to access the easiest assets such as cash in a checking or savings account or liquidating a CD to obtain some quick cash. While this may be necessary in the short term to pay for the first month of care, one should examine what this type of care is going to cost over months or years. This could be hundreds of thousands of dollars.
While many people have often heard from their financial planners and accountants over the years to never touch their investments, this may actually be the one time where it is better to start liquidating highly appreciated assets to pay for this care.
This strategy recognizes that long-term care expenses are income tax deductible. Many people say, “I just receive Social Security [and maybe a pension] so I don’t have that high of an income that could use an income tax deduction.” This is where people don’t realize that many seniors who start paying for longterm care suddenly become “itemizers” on their income tax returns because of the significant medical costs.
Practically speaking, if you have these large deductions and low income, such deductions are lost every year. That gets us back to the aforementioned strategy. If the nursing home resident (or even assisted living facility resident) has care expenses of, let’s say, $100,000 or more per year and they are paying for this privately, wouldn’t it make more sense to generate an income tax deduction each year through liquidating taxable gains and offset them by the long-term care costs which are going to be paid no matter what?
Therefore, it is wise to consider the liquidation of IRAs that carry the highest unrealized income tax upon liquidation and “match” that income against the large annual medical deduction for long- term care.
Let’s say you liquidate all of your CDs and cash instead and then die before eating through all of your investments.
Well, you’ve now saved a nice large income tax bill for your heirs who will inherit the IRAs and then have to pay ordinary income tax when they withdraw those funds — which the Internal Revenue Service will force them to do very quickly after your death.
And we’ll bet your heirs, who are younger and possibly still working, are in a higher income tax bracket than you.
2. Paying for another family member’s care:
In another common scenario, assume you are an adult who is paying for the care of a parent or aunt or uncle in a long-term care facility.
You should check with your accountant as you may be able to claim an adult family member as an itemized deduction on your income tax return (see IRS Publication 502). Also be aware that the person receiving care may not be subject to the small gross income test of dependents, known as a “Qualifying Relative” under the tax code (see IRS publication 501).
In summary, planning for long-term care should be done in advance, as it will affect all of us someday. However, even when things move quickly, even without advance preparation, there are always some techniques that can be done at the last minute to improve your financial situation.
Julian Gray and Frank Petrich are Certified Elder Law Attorneys with over 65 years of combined elder law experience who practice in the Pittsburgh area at Julian Gray Associates. Send questions for consideration in this column to elderlawguys@grayelderlaw. and visit their web site at www.grayelderlaw.com.