In the last two weeks we have reviewed the pros and cons of aging in place and outlined basic information about the costs of senior housing. Today we will provide information about long-term care insurance, income and estate taxes as well as the timing for your Plan for Your Later Years. Let’s start with LTC insurance.
Long-Term Care (“LTC”) Insurance. None of us knows how long we will live and if we will need LTC in our later years. Long-term care, as we outlined last week, can cost $9,000 or $12,000 per month or more. Insurance policies are available to provide that coverage for a fee. Policies generally cover both facility and home health care for those individuals who need assistance with their basic day-to-day activities. The policies generally provide a daily maximum reimbursement benefit (e.g. $250 per day) for a certain period of time (e.g. 240-360 months). An inflation factor of 0%- 5% annually is usually included, which can increase the daily benefit over time. Premiums can be $2,000 to $5,000 annually for a typical 60 year old. Premiums become more expensive the older you are and, once in place, are subject to likely large increases every 5-10 years.
The key benefit to purchasing a LTC insurance policy is peace of mind. When a senior cannot handle their own daily activities, there is a certain stress for both that individual and their family. Some major decisions will need to be made and having a LTC policy can reduce that stress.
However, you can obtain LTC insurance and pay premiums for decades and never need LTC or never qualify for reimbursement. The decision to buy LTC insurance or not is not an easy decision. Rationally, we know that premiums are set for insurance companies to make money. Further, we know that many of our clients can and do self-insure; we have shown them, based on their facts and planning that they can handle the risk and don’t need an insurance company. But emotionally, even some who can self-insure, determine that they want coverage to provide peace of mind to them and their family. You should review it carefully somewhere around the age of 60 with an experienced, independent total wealth manager who knows you and can help you look at the rational and emotional pros and cons.
Income Taxes. The U.S. tax code was changed in December 2017 which resulted in a huge increase in the standard deduction. For 2023 returns, a married couple will get a $27,700 standard deduction, if both are 65 or over, add $3,000. There are limits on tax deductions and, as a result, 88% of Americans filed their 2020 income tax returns using the standard deduction. Accordingly, this section will talk about potential tax deductions, but the actual impact can only be known by doing a specific tax projection, such as DWM does, for you.
Medical expenses, at home or in a facility, are a potential deduction. The IRS allows deductions for medical and personal home care services for chronically ill and/or disabled individuals. The IRS also allows deductions for portions of entrance fees and monthly fees paid by independent living residents. The logic is that part of the independent living entrance and monthly fees are a pre-payment of future care. Up to 100% of assisted living fees may be deductible. Most long-term care premiums are also potentially deductible as well.
But to have an impact on your taxes, these medical expenses have to meet two tests. First, all medical expenses are reduced by 7.5% of adjusted gross income (AGI). So, a married couple, both 65, have joint AGI of $100,000 and $20,000 of medical expenses (Note, if you received reimbursement from insurance, including LTC, those amounts are subtracted from the medical expense amount). Then $12,500 ($20,000-$7,500) may be deductible if you itemize. However, you need to look at the second test, comparing potential itemized deductions to the standard deduction. In this example, let’s assume $10,000 in real estate taxes, $12,500 in net medical expenses, $5,000 of gifts to charity, no interest expense and no other itemized deductions. That means the itemized deductions are $27,500 vs. the standard deduction of $30,700. So, no net impact. Again, you need a CPA or total wealth manager that knows you to do the projections to see the impact, if any, of these medical expenses.
Estate taxes and planning. Currently, the lifetime estate and gift exemption is $13 million per person. A couple passing away in 2023 would need more than $26 million of assets to pay federal income taxes. In IL, the estate tax starts at $4 million. There is no estate tax in SC. The federal exemption, unless changed by Congress, is slated to reduce to roughly $6 million per person in 2026. The estate exemptions have gone up and down over the years and it is impossible to predict what they might be in the future.
Aside from taxes, entrance fees to CCRCs (continuing care retirement communities), as we pointed out last week, can have a refundable portion. These would come back to the estate as would the equity value of any equity ownership once it is sold. Your estate planning should provide the proper titling so that these amounts do not have to go through probate. More generally, your estate plan should be reviewed and potentially updated every couple of years to make sure that your documents express your wishes. In addition, you and your attorney and wealth manager need to make sure the titling and beneficiary designations are appropriate for your plan to reduce estate administration time, money and hassle.
The Timing of Your Plan for Your Later Years
- You should start by age 60 looking at the pros and cons of obtaining LTC insurance. By age 70, our experience is that the costs are generally prohibitive because of your age and potential medical issues at that time.
- Generally, sometime between the age of 65 and 75, it’s time to complete your initial Plan for Your Later Years. It’s not only important for your planning but also for your family to know what your plan is.
- Do you want to age in place? If so, you need to have a plan for how it can work well for you and your family. Experts say that in-home care can be very unreliable. Often the workers are paid a small hourly wage and often not very dependable. Agencies with higher paid staff can charge $40 per hour or more. For even 12 hours per day, that is a $175,000 per year expense.
- If you consider a CCRC, what might be the general location? Perhaps pick a few locations if you are not sure, and then review different CCRCs at those spots.
- Get information and feedback on the health assistance available either with aging in place or at a CCRC. Talk with family and friends and visit facilities.
- Ask older family and friends what they are planning on doing and why.
- Try to identify a couple of possible places and scenarios that would feel right for you-where you would be close to people that matter to you and you can get excellent health assistance.
- Then, work with your family and/or total wealth manager to evaluate the costs involved. Obviously, if you have LTC insurance, you will likely be getting reimbursements for a portion of home health or assisted living or other services. If you are not aging in place, your current home is likely an asset that can be sold to provide additional funds. Generally, for our clients, cost is not the most important factor. Being in the right CCRC is.
- Summarize your initial Plan for Your Later Years and share it with your family.
- Review it every year or so and update it accordingly as you continue in good health.
- With the cohort of Americans 65 and older growing larger every day, we suggest you consider, by age 75, putting your name on waiting lists of your 2 or 3 top candidates for CCRC. The cost is fairly minimal. Even if you think you might want to age in place, get on a couple of waiting lists. We likely all have seen how one’s health can change dramatically in their later years. My grandmother, Nonie, at age 80 seemed like she was 60 and then she passed away at 84.
Conclusion: Most of us have led a very nice life. We’ve worked hard. Hopefully we all will age comfortably and happily surrounded by family and friends with excellent health care assisting us as we need it. For those above 65 or older or with family in that group, don’t wait- Plan!! Benjamin Franklin said “If you fail to plan, you are planning to fail.” We all need a Plan for our Later Years. Do the first one and then update it every couple of years. It’s the best way for you to get what you want and deserve- comfort and happiness in your later years.