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.
Here’s how the strategy pays off. Assume the couple incurs $300,000 in LTC costs during their lifetimes. They pay those expenses out-of-pocket, which reduces their taxable estates. The trust files for and collects the policy’s benefits. Those benefits can then remain in the trust where they can be invested and avoid inclusion in the insureds’ estates when they die. Essentially, the LTCI is replenishing the family’s wealth on an estate tax-favored basis.
Irrevocable trusts are complex and require expert guidance when recommending one to clients. But for those clients who are familiar with irrevocable life insurance trusts or dynasty trusts, buying LTCI through an irrevocable trust can provide multiple benefits.
Ed McCarthy has worked as a freelance writer and author since 1991. His specialty is explaining complex financial topics in understandable language. Before becoming a writer, he worked as a financial advisor and he is still licensed as a Certified Financial Planner.