As the number of senior citizens in the United States continues to rise, CPAs and financial planners will be increasingly called upon to help individuals evaluate their end-of-life care strategies. The ideal plan is one which is in place before a medical event makes such care necessary. The authors detail several planning options for long-term care that professional advisors can assist individual clients with arranging.
In the wake of the Tax Cuts and Jobs Act of 2017 (TCJA), many CPAs worry that their practices will be diminished because there will be fewer older Americans required to pay income taxes, fewer filers engaging CPAs to prepare their tax returns (because of simplified forms and the higher standard deduction), and a significantly smaller number of estates subject to taxation. While to some extent this may be correct, the rapidly growing number of older Americans will, in fact, increase the need for professional advice from CPAs in several areas, including advising individuals about the significant costs of long-term care, assisting with the creation of safeguards against financial elder abuse, and performing fiduciary services, such as serving as trustee of trust or agents under powers of attorney.
Forty million Americans (13% of the population) are over age 65; by 2050, this number is projected to more than double to 88.5 million (20%). In addition, 5.7 million Americans (1.8%) are over age 85; by 2050, this number is projected to more than triple to 19 million (4.4%). Fifty percent of individuals over 85 will need assistance with daily functioning because of medical problems (both physical and cognitive), and chronic care at home, in an assisted living facility, or in a skilled nursing home can cost anywhere from $60,000 to $180,000 per year. This is both a national and an individual crisis; for most middle-income families, these costs are financially devastating (Genworth Cost of Care Survey 2018, http://bit.ly/2OWMRqG).
When Medicare was enacted in 1965, President Lyndon B. Johnson promised:
Every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age. No longer will illness crush and destroy the savings that they have so carefully put away over a lifetime so that they might enjoy dignity in their later years. (Public Papers of the Presidents of the United States, Lyndon B. Johnson, Volume II,Government Printing Office, 1966.)
Contrary to President Johnson’s prediction, long-term care costs can, in fact, crush seniors. And most seniors—and some professionals—don’t realize that Medicare only provides coverage only for acute care and skilled care, with very limited coverage for long term, chronic care. The financial pressures on older Americans may become worse in the next few years. On October 15, 2018, the Treasury Department reported that the U.S. budget deficit grew to $779 billion in President Trump’s first full fiscal year, a result of the TCJA, bipartisan spending increases, and rising interest payments on the national debt (a 77% increase from the $439 billion deficit in fiscal year 2015). Any additional tax cuts will certainly push the deficit even higher, and the Republicans are looking to reduce Medicare—and Medicaid and Social Security—benefits to deal with the deficit.
This article will address how CPAs can help individuals plan for long-term senior care, discussing the available options such as long-term-care insurance (LTCI) and partnership plans, some of the new “hybrid policies” that combine life insurance and long-term care benefits, accelerated benefits riders for life insurance policies, life and viatical settlements of insurance policies, reverse mortgages, congregate care communities, and Medicaid planning.
Medicare is America’s health insurance program for individuals over 65 who are entitled to Social Security retirement benefits, as well as younger individuals with disabilities who have received Social Security Disability benefits for two years. Medicare Part A covers hospital stays, Part B covers physicians’ costs, and Part D provides for prescription drug coverage.
After an individual has been hospitalized for at least three days and admitted to a nursing home within 30 days of that hospitalization, he may receive Medicare coverage for a maximum of 100 days, provided there is a skilled need. Qualifying individuals will be fully covered for the first 20 days; for days 21 through 100, they will have a daily copay of $170.50. There is no coverage after 100 days. Getting coverage, however, is spotty at best, as most nursing home stays are not considered skilled. A dementia patient admitted because she cannot remain at home is generally categorized as a “custodial” patient, not “skilled.” In addition, some hospital patients are now being classified as “in observation status” instead of as “admitted,” which does not fulfill the three-day hospital stay requirement. Several patient advocacy organizations have successfully challenged these decisions in a few cases, but the problem persists. Professionals need to know that their clients can challenge such wrongful classifications.
Medicare effectively provides little help for individuals suffering from long-term, chronic illness.
Medicare home care benefits are also quite limited. First, the care must be considered medically necessary, usually meaning the patient requires skilled care—such as physical, occupational, or speech/language therapy—and is home-bound. Although the statute allows for up to 35 hours a week for “part time and intermittent” benefits, in reality, beneficiaries receive no more than a few hours of benefits a week. Medicare also does not pay for home health aide services if that is all an individual requires.
Medicare effectively provides little help for individuals suffering from long-term, chronic illness, and there is little in the Patient Protection and Affordable Care Act of 2010 (ACA) or other health reform proposals that helps in any meaningful way. The ACA included the Community Living Assistance Services and Supports program, which attempted to provide limited long-term care benefits via a voluntary employee participation program funded by payroll deductions. The plan had limited benefits and was actuarially unsound, and the Obama Administration withdrew the launch of its proposal in 2012.
This dearth of meaningful coverage is particularly disconcerting considering the rising number of elderly Americans and the rising cost of care. Until the situation changes, seniors are on their own and must piece together ways to finance their long-term care ahead of time.
Long-term Care Insurance
LTCI is designed to cover custodial care costs not covered by Medicare. For those who can afford it and meet medical underwriting criteria, these policies offer a viable option for paying (in whole or in part) for chronic care at home or in an assisted living facility or nursing home. Having LTCI may preclude the need for Medicaid planning or, where needed, allow planning through divestiture of assets, because the policy benefits could cover care costs during a period of ineligibility (depending on state law).
Premiums for LTCI depend on age, place of residence, the amount of coverage desired, the coverage elimination period chosen, and whether an inflation rider and waiver of premium rider are purchased. Generally, policy benefits are payable when a licensed healthcare practitioner certifies that the insured is unable to perform at least two of five activities of daily living (usually listed in the policy as toileting, bathing, ambulating, self-feeding, and dressing) without substantial assistance for a period expected to last at least 90 days.
LTCI policies receive favorable tax benefits. Individual policyholders who itemize deductions and have tax-qualified LTCI policies are able to claim LTCI premiums as a medical expense deduction on their income tax returns—one deduction that has survived the TCJA. The amount of the deduction is based on the taxpayer’s age at the end of the tax year and was subject to an adjusted gross income reduction of 7.5% for 2017 and 2019 for persons age 65 or over; however, the floor will be 10% for 2019 and after. In addition, New York allows a 20% credit against state income taxes.
Individuals may wish to purchase LTCI for their parents to ensure their wishes to remain at home can be fulfilled and to provide a psychological benefit. Those who do purchase such policies for their parents can also benefit from possible income tax deductions if the child provides more than 50% of the parent’s support.
LTCI is a relatively new concept. An increase in the number of people keeping their policies, combined with low interest rates preventing companies from earning an anticipated return on policies with benefits increasing 3%–5% each year, has resulted in some companies exiting the LTCI business and others imposing significant premium increases. There also may be additional underwriting and higher premiums for women, who tend to live longer (Kelley Holland, “Long-term Care Insurance May Be Harder to Get,” NBCNews.com, Apr. 26, 2013, https://nbcnews.to/2KjegVa). Individuals who exhaust the policy coverage may need to revert to self-financing their care; in addition, those whose daily benefits do not cover the actual cost of care will not find LTCI attractive.
Having LTCI may preclude the need for Medicaid planning or, where needed, allow planning through divestiture of assets.
The New York Partnership for Long-Term Care
The Partnership for Long Term Care program (sometimes called a “public-private partnership”) combines LTCI and Medicaid. After the insured individual has exhausted the LTCI policy benefits, he becomes eligible for Medicaid benefits. Medicaid extended coverage will allow the individual to be eligible for Medicaid without regard to resources to the extent of the “protected” amount of assets (i.e., the total insurance benefits paid). New York offers an optional enhanced plan as well (the “total asset protection” plan). New York law provides coverage to the insured individual without regard to his resources to the extent of LTCI benefits, or all resources if the policy is a total asset protection plan. The policyholder’s spouse’s assets are also protected from support claims.
It is important to note, however, that an individual’s income is not protected; thus, if the plan beneficiary is in a nursing home, her income must be contributed to the cost of care. There are, however, strategies to avoid the “spend down” in many cases.
The partnership program is currently available in approximately 40 states (see https://on.ny.gov/2IlYINu). Plans vary from state to state; in most states, the insured receives asset protection only to the extent of the LTCI benefits (i.e., “dollar-for-dollar” plans).
For consumers who have concerns about the “use it or lose it” aspects of traditional LTCI, several insurance companies offer hybrid policies that combine life insurance with long-term care benefits riders. There is usually a single premium paid upon purchase, so concerns about LTCI premium increases are removed. To the extent the death benefit is not used for long-term care needs, it is paid out at death. Accountants will play an important role in counseling clients about whether a hybrid policy makes sense by analyzing the purchase costs and the risks of premium increases for LTCI, the loss of income and appreciation on the single premium paid, and the danger of not having the funds paid for the single premium available for necessary living expenses.
Accelerating Life Insurance Benefits
Another source of financing for long-term care expenses is to draw down life insurance benefits during life, pursuant to an accelerated benefit rider on a life insurance policy. Most accelerated benefit riders allow withdrawal of a percentage of the face value on a monthly basis; some policies allow lump-sum withdrawals. Generally, to obtain accelerated benefits, the insured must be terminally ill or suffering from a long-term, chronic illness (“Accelerating Life Insurance Benefits,” American Council of Life Insurers, http://bit.ly/2YQG6eq). Many individuals who choose the accelerated death benefit have less than one year to live and use the money for treatments and other costs to support their quality of life.
Accelerated benefits can range from 25% to 95% of the death benefit. The payment depends on the policy’s face value, the terms of the contract, and the policyholder’s state of residence. The amount of the death benefit will be reduced to compensate the carrier for loss of interest on early payout and by any outstanding loans against the policy. Typically, accelerated benefits are not subject to federal income taxes. Planners should keep in mind that while using this resource may be appropriate under the circumstances, the policyholder’s beneficiaries will not receive some or all of the life insurance policy benefits.
Life and Viatical Settlements
Unlike an accelerated death benefit, a life settlement or viatical settlement entails the sale of an individual’s ownership of a life insurance policy to a third party in exchange for an immediate payment of a percentage of the death benefit. The new owner becomes the beneficiary of the policy and receives the death benefit when the insured dies.
Generally, the third party will purchase the life insurance for a sum substantially greater than the surrender value of the policy but less than the net death benefit. The amount depends on the age, health, and life expectancy of the insured and the terms of the policy.
Life settlements generally involve sales of policies by individuals who are not necessarily terminally or chronically ill, but do have a life expectancy of two to 10 years. Viatical settlements are sales of policies by the terminally or chronically ill. The proceeds of the sale may be tax free, subject to the provisions of Internal Revenue Code (IRC) section 101(g), which in general provides that the funds received will not be counted as income if the benefits are taken by a terminally or chronically ill individual. Because life settlements and viatical settlements are profitable for buyers, brokers often compete aggressively to purchase a senior’s policy.
Most accelerated benefit riders allow withdrawal of a percentage of the face value on a monthly basis; some policies allow lump-sum withdrawals.
Another option is to obtain a reverse mortgage. Individuals over age 62 may be able to borrow against the equity in a primary residence with no obligation to make any principal or income payments until the home is sold or the individual dies. The debt is limited to the value of the home, regardless of the fact that said value may be less than the debt at the time of death. The leading reverse mortgage program is the U.S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program.
The amount that can be borrowed will depend on the age of the youngest borrower, the current interest rate, and the lesser of the appraised value of the residence or the HECM/FHA [Federal Housing Administration] limit of $679,650. In general, the more valuable the home, the older the individual, and the lower the interest rate, the more the individual can borrow. Individuals can select from six different payment plans, including—most relevant to home financing decisions—a credit line or a lump sum payment option. To be eligible for an HECM, in addition to being over age 62, the individual must own the home (it can be a two-to-four family home, provided the borrower occupies one unit). The fees for reverse mortgages can be substantial.
Private bank, or “jumbo,” reverse mortgages are presently not as available as they were prior to the 2008 financial crisis. It had been possible to get a reverse mortgage on cooperative apartments in New York for jumbo loans, but since jumbos are not presently available and HUD rules do not permit reverse mortgages for co-ops, New Yorkers who own co-ops are currently denied this option. It seems unlikely that HUD’s position will change in the near future.
Congregate Care Communities
In most states, individuals may purchase a residence in a congregate care community that provides several levels of care: independent living, assisted living, and total care (nursing home). There is a substantial initial cost (often not refundable) and monthly maintenance charges, but in some cases, the monthly fees do not increase—or increase only slightly—as the owner moves up through the various levels of care. In effect, the owner has purchased a significant amount of cost protection—similar to insurance—in case her health deteriorates and a higher level of care becomes necessary.
The Medical Assistance Program (Medicaid)
Medicaid is the option of last resort for some middle-income families, even though it is commonly believed to be only for the poor. While eligibility is complicated because, unlike Medicare, Medicaid is a means-tested benefit program, planning is possible, depending on the state and particularly for married individuals and individuals with disabilities. Medicaid covers nursing home care in all states and home care services in a few; New York has a generous Medicaid home care program and liberal eligibility rules, including no transfer of asset penalties for persons who seek Medicaid home care benefits. Unlike Medicare, Medicaid generally provides benefits for care that is deemed custodial. CPAs can work with an elder law attorney experienced in Medicaid planning to ascertain whether Medicaid can be tapped for an individual’s needs, assist in providing the financial information and history to prepare a proper Medicaid application, and advise about the tax consequences of any asset transfers that might be required to meet means tests.
The Accountant’s Role
In many cases a CPA will be the family advisor and the initial observer of the need for protective action for clients who need to address how care will be paid for. Even if the need is not immediate, helping a family plan for a future need is critical. CPAs can play an important role in the effort to develop a plan that addresses the financing problem. The plan should include having a durable power of attorney with a gifting power, which is critical to implement current planning when an individual becomes ill or incapacitated. In addition, healthcare advance directives in place (i.e., healthcare proxy, living will) are essential to ensure that an incapacitated individual’s wishes are followed. Having these advance directives in place may avoid the need to obtain a guardianship in the future.