LTCI, family and the estate plan strategy

Most insureds, including those who can afford the premiums, don’t like paying for LTCI because they might not use the coverage. One way to avoid that argument is to reposition the cost by having clients view the premiums as a gift to their children, suggests Vincent Barbera, CFP with TGS Financial Advisors in Radnor, Pa. “You’re gifting $5,000 to $6,000 (for annual premiums) in a way to your kids,” he says. “They’re going to receive a much bigger ‘bucket’ at death than they would have if you had to use it. So, in that sense, you’re actually providing for their future or even for your grandkids’ future by taking this on yourself.”

For wealthier clients who can afford to self-insure, making formal gifts to fund an irrevocable trust that owns the LTCI policies is a strategy worth considering. (My thanks to Anthony Stratidis and Karen Mellon of Marsh & McLennan Companies for bringing this approach to my attention.) The technique is similar to that behind an irrevocable life insurance trust. The parents create and fund an irrevocable trust that applies for and owns LTCI on the trust’s grantors–i.e., the parents–with an insurer that allows third-party policy ownership. The insureds’ children and grandchildren typically are named as the trust’s beneficiaries. Each year, the insureds make annual gifts to the trust to pay the policy premiums. Assuming the trust is structured properly, those premiums qualify under the annual gift-tax exclusion, which is $13,000 per recipient in 2011.