How CPAs Can Help
In Brief
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.
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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
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).
Hybrid Policies
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.
Reverse Mortgages
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.
Peter J. Strauss, JD is a
senior partner at Pierro, Connor, and Strauss LLC, Latham, N.Y.
Louis W. Pierro, JD is the founder and principal of Pierro,
Connor, and Strauss.
Elizabeth Forspan, JD is a Partner with Forspan Klear LLP in
Great Neck, N.Y. and a member of The CPA Journal Editorial Advisory
Board.
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