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Two Little Known Options for Long-Term Care

long-term care

Life is full of uncertainties.

Not a single one of us knows how long we will live. We don’t know if our health will hold out or if we will be sickly. There are so many unknown variables that it only makes sense to make an effort to be prepared in the event that you or your loved one will require long-term health care. This is even more important when you have limited assets and want to make sure they cover the care you’ll require.

While most people think they won’t require long-term care assistance, the fact is that one in every two people (50%) will need long-term care assistance.

Long-term care can include home health care, adult day programs, independent living facilities, assisted living facilities and nursing home care. Traditional ways to pay for this type of care include personal savings, “traditional” long-term care insurance, Veterans benefits and Medicaid benefits.

Traditional long-term care insurance is very expensive and, on top of the expense, if you don’t use the policy then you lose all the money you invested in it. You cannot even pass it on to surviving family members through inheritance. However, due to the strain on Federal and State budgets because of the use of Medicaid, the federal government has created very attractive tax incentives and options for people to leverage their own funds to pay for care.

I’m going to review two specific examples including the Pension Protection Act of 2006 and Planning Strategies with Retirement Accounts.

First, the Pension Protection Act of 2006:

The significant section of The Act became effective on January 1, 2010. This allows a person who owns a current annuity to convert it to a Pension Protection Act annuity that contains a long-term care fund.

Here’s an example of the difference between how a traditional annuity works versus a Pension Protection Plan annuity.

Let’s say that Mary owns a $100,000 deferred annuity. If she needs care in the future, she will withdraw funds from the annuity, dollar-for-dollar. Any interest withdrawn is taxable income. Once the $100,000 is depleted, other sources will be necessary to pay for care. Here’s the good part. Mary can convert her annuity into a Pension Protection Act long-term care annuity turning her $100,000 into $300,000* for long-term care purposes. The entire amount being withdrawn for care purposes is tax-free. (*These figures are just an example and may vary depending on age, health, etc.)

Now, let’s look at Planning Strategies with Retirement Accounts.

When a person owns a retirement account and dies leaving the account to children, the children must pay up to 30% in taxes on the account. To incentivize people to use retirement funds for long-term care purposes, the Internal Revenue Code (tax code) now includes provisions wherein a person can roll all or a portion of a retirement account into a life insurance policy with a long-term care rider. All money withdrawn for care may be tax-free. Additionally, any amount not used for care that is distributed to beneficiaries upon death is also tax-free. You can look at that as increasing the inheritance by 30% or more. Most importantly, if the person does not use the funds for care, the asset is not “lost” and is payable to beneficiaries.

Most people are not aware of these options. Unfortunately they often wait for a crisis, spend down assets needlessly and then seek other resources such as VA and Medicaid benefits.

Call The Elder & Disability Law Firm of Victoria L. Collier, PC for a free 15-minute telephone consultation to determine if your situation is a good fit for asset leveraging and tax savings.