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The Hidden Estate Tax

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It has been called the hidden estate tax and there are no exclusions, limits or laws regarding who and how much it can affect. The ability of a long-term illness or disability to ravage a client’s estate is tremendous. No matter how large is the estate, long term care expenses can decrease or even wipe out the assets the client has worked hard to accumulate over a lifetime.

The need for LTC insurance thus depends not on an estate’s size, but rather on how much a client plans to self-insure. Rarely does it make sense to completely self-insure when the losses can drastically reduce assets. LTC insurance, as a form of risk management, can protect these assets.

A recent National Underwriter article highlighted the need for LTC insurance and financial planning. Of those aged 44 to 65, 73% had no LTC insurance. This is despite the fact that health care and LTC costs were just behind major downturns in the stock market, competitiveness of the U.S. in international markets and inflation as major reducers of retirement next eggs–none of which clients do anything about. However, they can insure against the cost of an arduous and expensive LTC need.

Many clients are their own worst enemies because they drain their assets in an extended care scenario. Consider the expenses: In Miami, nursing home costs range from $155 to $270 per day and, on average, $71,000 annually. This scenario repeats across the country.

To consider average costs for affluent clients underestimates their real costs for LTC in a facility or at home. Affluent clients are accustomed to receiving superior services. Because skimping on nursing or home care is unacceptable to them, they purchase quality products that entail higher costs.

A further effect of quality care is greater longevity. Since a longer and more comfortable life comes at financial cost, longevity compounds the reduction of the client’s estate. This cost may be higher than the client’s heirs anticipated; they may wonder why the client didn’t purchase LTCI to protect the estate at a significantly lower cost than by self-insuring.

Another issue is the placement of the assets and their liquidity. If most of the estate is comprised of real estate or a business, the assets must be liquidated at some point to provide funds for LTC. Just like a traditional estate tax situation, these funds are not readily available; nor will they fetch the best price if sold out of desperation.

Many of these illiquid assets cannot be sold in pieces. This again diminishes their value and net worth. Even if an asset, such as a family business, is not sold it can significantly drain the business’s cash flow by paying for nursing care for the patriarch or matriarch of the family. The sad fact many times is that the family business could have purchased LTC insurance to fund this situation at pennies on the dollar.

For many individuals, the ability to deduct LTC insurance premiums is limited by IRS hurdles. Businesses do not have those limitations. S-corporations, sole proprietors, LLC’s and partnerships do not have to meet the same criteria that individuals do.

Businesses can deduct premiums for owners up to the age-based caps established by the government, similar to those for health or accident insurance premiums. For those involved in C-corporations, all of the premium can be deducted. So having one’s employer pay for LTC can prevent the reduction of a client’s estate by LTC costs. These plans can be designed to be fully paid before retirement and even return the entire premiums paid in to them.

Regardless of Congress’ actions in the coming months as to repeal of the estate tax, there will always be the hidden tax that can decimate a client’s estate. Affluent clients plan for stock market downturns, minimizing taxes and maximizing wealth transfer. However, they often fail to act to protect themselves from financially catastrophic cost of LTC. No matter what their financial status, clients are susceptible to denial. “It won’t happen to me,” they say.

The truth is that the odds are in favor of it happening to them. The effects of needing long-term care for the affluent may be different than a client spending down their assets to qualify for Medicaid, but either way, the children of clients are affected. For those with the assets to purchase LTC insurance, it only makes sense to share the risk with a professional risk expert instead of self insuring 100%.


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