Is Self-Funding Long-Term Care Sensible? Essential LTCI Guide
TL/DR –
The article discusses the financial implications of purchasing a long-term care policy versus self-funding in the event of requiring long-term care. It highlights the tax consequences of liquidating investments to cover care expenses, suggesting a long-term care policy can provide income and avoid the need for such liquidations. It also mentions the potential for beneficiaries to receive a stepped-up cost basis, effectively making gains during the original owner’s lifetime tax-free for heirs.
Decoding Taxes and Long-term Care Planning
Understanding tax implications is key in long-term care planning. This could influence your decision to purchase a long-term care policy or opt for a self-funding approach.
Key Insights
- Long-term care planning could incur additional taxes for some.
- Not everyone enjoys paying extra taxes.
- Consideration of tax bills could impact your long-term care strategy.
Exploring the Tax Implications
Considering Question 1: Is it more financially prudent to buy long-term care insurance or to self-fund this expense?
And Question 2: Have you considered the tax consequences for the cost basis, the original investment price?
Answer: Preemptive planning with a long-term care policy eliminates the worry about account management and capital gains implications for clients. As the financial advisor Fritz Ehrsam explains, there are crucial factors to consider:
- What are the tax consequences of withdrawing significant amounts from your brokerage account to cover long-term care costs?
- How would the taxation of your taxable investments change due to potential future basis adjustments?
If a client has a long-term care plan that provides steady income, forced investment liquidations to handle care expenses may not be necessary.
Understanding the Benefits
As Ehrsam emphasizes, “If my clients can keep their money invested without needing to liquidate it for expenses, long-term gains continue tax-deferred. This provides an opportunity for beneficiaries to receive a stepped-up cost basis and could eliminate capital gains tax.” This step-up in basis could essentially make lifetime gains tax-free for heirs.
Consider Two Scenarios
Scenario 1: Joe, 85, has $1 million invested in the stock market. Without long-term care insurance, Joe needs to liquidate stocks to cover his $100,000 annual care expenses. Consequently, Joe is faced with substantial potential capital gains tax. It begs the question: Would Joe have preferred to purchase long-term care insurance when he was younger to avoid paying up to 25-30% in stock sales taxes?
Scenario 2: Joe has $1 million in an IRA.
—
Read More Health & Wellness News ; US News