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Long Term Care Insurance: Protect Your Wealth, Reduce Your Taxes Today, and Provide For Your Long Term Care Costs of Tomorrow

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date: March 14, 2006

As I said in my introductory newsletter, I view Asset Protection in a very different light than most Asset Protection “gurus.” To me, anyone or anything that can take your money is a creditor. Besides the IRS, our number one creditor (someone or something that will take our money) comes in the form of long-term care costs.

Think about it. Isn’t it a fair statement to say that one of the largest expenses for clients over the age of 65 is their long-term care costs? If you do not protect yourself against those costs, you will be paying the costs out of pocket post-tax--which is painful!

Speaking of taxes, none of us likes paying any more taxes than necessary. As a tax specialist for physicians and small businesses, I am always exploring new ways for you to reduce your income and estate taxes. The key to successful tax planning is finding the section of the Internal Revenue Code that offers you the largest deductions and provides you and your family with the greatest benefits. The purpose of this article is to introduce you to a way to reduce your income taxes today and enhance your retirement and estate plans along the way. The solution I will be discussing is the “Free Long Term Care Plan.”

What is Long Term Care Insurance And Why Do I Need It?
Long Term Care Insurance (LTCI) covers health insurance costs for people who cannot take care of themselves. These costs may include nursing-home care, in-home care, and other expenses. In some areas of the country, the cost of nursing-home care, or quality around-the-clock, in-home care may be $250 per day ($91,250 per year). Additionally, the U.S. Health Care Administration reports that costs are increasing 5.8% per year and are expected to more than triple in the next 20 years.

We all know that advancements in medicine have helped to increase the average life expectancy. With this increased life expectancy, there is a greater chance that each person may suffer a debilitating illness requiring significant long-term care. With the trends of increasing life expectancies, and increasing costs for medical expenses, the cost of long-term care can easily wipe out retirement savings and eliminate any inheritance you would otherwise leave to your children or grandchildren.

Won’t The Government Cover These Long Term Care Costs?
No. Not the way you’d like them to. Did you know that in California an individual does not qualify for LTC coverage until his/her available resources are worth LESS THAN $2,500? In addition, once that individual begins receiving LTC benefits, the state takes all but $30 a week of income from the patient. In a nutshell, you will have to spend every last dollar of your savings before you get any help. Although you may have more than enough savings to pay for these types of expenses, your potential health problems could wipe out your entire estate, which you hoped would go to your children or grandchildren.

Incidentally, I see many clients buying LTCI for their parents because they know they will have to take care of them if the need arises. It can be a major financial and emotional problem to be getting ready to retire, then have one of your parents or in-laws get sick and need $50,000-$100,000 per year for medical expenses. Even though this is usually done with after-tax dollars, it is a very wise “wealth preservation” strategy.

I Do Not Think I Will Need It.
Like most individuals, clients often do not want to bear the risk of self-insuring their Long Term Care costs. So, why haven’t more clients purchased LTCI? In one word--education. We see clients insure their lives, homes, cars, and income, but not an event (disability) that has the second highest probability of occurring in one’s lifetime (second only to death). Why? Part of it is the “it’s not going to happen to me” mentality, and part of it is the thought of having to pay LTCI premiums for the next 20-40 years with only a chance that you will ever use the insurance.

Would you consider paying for your LTCI if you could do so in a tax-deductible manner and in a finite period such as five or ten years? Would you consider paying for LTCI if you knew that your heirs would receive every dollar of that premium at a later date Income Tax Free?

The IRS Gave You a Break
What the federal government did with regard to a business being able to deduct the premiums for LTCI was significant. Under HIPAA (Health Insurance Portability and Accountability Act of 1996), LTCI premiums are treated like health insurance premiums for the self-employed. That means an owner of a C-Corporation, S-Corporation, P.C., or LLC can now take a tax deduction for 100% of the LTCI (the deduction is limited for non-C-Corps).

Prior to 2003, the scheduled deductibility of health insurance and, in turn, LTCI for an S-Corporation or P.C. or LLC treated as an S-Corp was as follows: 60% deduction for tax years 1999-2001, 70% for 2002, and 100% for tax years 2003, and beyond. (I put the past deduction information in my book because 90% of the physicians who were owners in non-C-Corporations were not aware that their health insurance was not fully deductible prior to 2003).

There is no good reason for any small businessperson to pay for his/her LTCI on an after-tax basis with the changes in the LTCI laws. If you are paying for LTCI with after-tax dollars, you are paying twice as much as you have to for your LTCI.

Would You Purchase Long Term Care Insurance If It Were FREE?
If set up correctly, LTCI can literally be free to the client. How? With a return of premium rider. An example is the best way to illustrate the point.

Problem:
Doctor Smith, age 55, has an estate of $2,000,000 and an income of $400,000 a year. Dr. Smith is worried about possibly paying over $100,000 during his lifetime for LTC coverage for he and his wife. Dr. Smith also does not like buying insurance, and does not want to pay LTCI for the next 30 years while he waits to become sick. Dr. Smith’s solution to his problem is through a (1) limited pay LTCI policy paid for through his medical office of a (2) tax deductible manner with a (3) return of premium rider.

Solution:
1) Client’s corporation pays a deductible premium of $8,985 a year for ten years (out-of-pocket cost for the physician: $5,391 a year);

2) Dr. Smith becomes disabled at age 75 and needs home health care ($200 a day) until death at age 85. (Total LTC benefit for ten years = $730,000); and

3) Dr. Smith dies at age 85 and his heirs receive the entire premium paid because of the return of premium rider. This amount = $89,850 which will pass income tax free to the heir.

Note: Some companies have a setoff on the return of premium rider for benefits paid.

Bottom Line:
The LTCI cost Dr. Smith $53,910 out of pocket over the ten-year pay period. His heirs receive $89,850 in cash (income tax free) from the LTCI company because of the return of premium rider, and his estate did not have to pay for the $730,000 in LTC costs incurred from age 75-85. Total Cost = $89,850; Total Benefit = $819,850.

By purchasing LTCI through the corporation with pre-tax dollars, Dr. Smith was able to protect his estate from LTC costs and was also able to return the entire premium to his heirs income tax free at death.

In this example (assuming that Dr. Smith’s estate was worth $4,000,000 prior to needing LTC), Dr. Smith’s estate would have been depleted by 25% without LTCI in place to protect the estate. Any person who is serious about Asset Protection, and would rather leave assets to their children than to the IRS, should look closely at this option as a way to shield family assets from the devastating effects of LTC costs.

Getting Around the Gifting Rules.
Many clients over the age of 60 with sizable estates are told by their estate planning attorneys to start gifting money to an irrevocable trust in order to lessen the size of their estate (which is done to lessen the estate taxes due at death).

The problem with an aggressive gift program is that there is a $12,000 per spouse per child gifting limit. So, if you have one child between you and your spouse, you could only gift $24,000 a year to an irrevocable trust. That is peanuts for a large estate (especially a liquid estate when the stock market is on the rise).

If you are still working, and if gifting makes sense to lower your estate taxes, then you can accomplish the same goal and better by purchasing LTCI through the corporation as a 100% tax deductible expense with the return of premium rider. Why? Because if you bought a very expensive LTCI policy (say a ten pay), you might have a premium of $50,000 a year. That premium (that was paid as a deductible expense) would be returned to your children income tax free at death.

Summary: Asset Protection and Wealth Transfer All Done in a Tax Deductible Manner.

A tremendous opportunity exists to fund an LTCI policy through a business to protect a client's wealth and to transfer money out of the business in a tax-deductible manner. The provisions that allow owners of small companies to tax deduct the premiums for LTCI provide a vehicle for funding a huge future potential liability with present tax-deductible dollars. If you are serious about having a complete estate plan that protects your heirs, LTCI should be one of your planning tools.

For further information please look at our education module. This module was created to teach advisors (CPAs, EAs, accountants, attorneys, financial planners, and insurance advisors) as well as lay people about the basics of long term care insurance. CLICK HERE

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