Elder Care Funding Considerations for Clients
Estate planning answers the questions: What happens when you die? How will your assets be distributed and to whom? It may involve minimizing estate taxes using trusts. But, increasingly, the bigger questions are: What happens if you live and get sick? What happens if you have increased health care costs and need to rely on others for assistance for an extended period before you pass away? While advances in medical science have extended our lives, many seniors need years of long-term care.
CPAs often have aging clients who may face choices over how to pay for long-term care without depleting their nest eggs. If these clients have time to plan ahead, they can use irrevocable trusts to protect assets so that they can qualify for government benefits such as Medicaid and the Veterans Affairs benefits that can help pay for care. Those programs may not, however, cover the entire cost, so the assets in the trust can be used to pay for whatever the government program won’t cover. For clients who are already at more advanced stages of need, they will need to qualify for benefits to pay for care as quickly as possible and preserve as much as possible for a healthy spouse or other family member in need.
Here are the common issues CPAs should be aware of and which can impact income taxes:
- Standard deduction versus itemized. Given the high cost of long-term care — whether administered in a nursing home, assisted living facility or at home — clients often have an increased medical deduction on Schedule A of their Form 1040. Revisit each year whether a senior client who normally takes the standard deduction may now benefit from itemizing because of increased care for themselves or their spouse.
- Using retirement funds. Conventional advice has held that we should only take the minimum amount required from our IRAs and other tax-deferred accounts under required minimum distribution (RMD) rules (the recently passed SECURE Act limits this tax advantage). For clients who currently have long-term-care expenses, using retirement funds first is advisable if the tax can be offset by the increased medical deduction. For clients who are looking to protect assets using trusts, this gets a bit more complicated because they don’t yet need care. If, however, they do need care for a lengthy time period, they may need to spend a large part or all of the retirement account on care.
- Medicaid considerations. Medicaid is the primary government program that pays for long-term care. With limited exceptions, Medicaid recipients must contribute their income to the cost of care and the state pays the rest. Income means gross income. Clients should not withhold anything from their Social Security or pension for taxes because the increased medical deduction will eliminate the need but also because Medicaid requires the gross income to be turned over to either the facility or the state. Any amounts already withheld which are then refunded upon filing an income tax return could cause the loss of Medicaid if not handled correctly because of Medicaid’s strict asset limit.
- Irrevocable trusts. The irrevocable trusts used for long-term-care asset protection purposes are typically but not always grantor trusts. In some cases, the income generated by trust assets is taxed to the grantor and in other cases the income can be taxed to other lifetime beneficiaries or to the trust.
- Annuities and REITs. Clients can often have annuities or Real Estate Investment Trusts (REITs) which can complicate qualifying for Medicaid. Annuities are generally considered countable assets subject to spend-down rules (except for Medicaid compliant annuities which are treated as income). Annuities often have surrender charges and REITs usually do not allow for easy liquidation.
Laurie Hauptman, Esq, is a partner at Hauptman & Hauptman. She can be reached at email@example.com.
Yale S. Hauptman
Yale S. Hauptman, Esq. is the founding partner of Hauptman & Hauptman PC, which specializes in elder, estate planning and special needs law. He can be reached at firstname.lastname@example.org.
This article appeared in the May/June 2020 issue of New Jersey CPA magazine. Read the full issue.