Hidden tax benefits of continuing care retirement communities

Advisers planning for the long-term-care needs of clients should seriously consider the potential tax savings that come with these communities

Apr 10, 2015 @ 1:09 pm

By Darla Mercado

Advisers planning for the long-term-care needs of clients ought to seriously consider the potential tax savings that come with continuing care retirement communities.

These communities combine independent living in retirement with assisted living facilities and nursing care services. Newcomers to a so-called CCRC might start out living on their own in a cottage or apartment on the community's campus, before moving on to assisted living and nursing care as their age and medical conditions warrant.

There's a particular kind of client who opts for CCRCs as a living arrangement in retirement. “The people who are moving to CCRCs are the people who are buying long-term-care insurance,” Thomas C. West, senior associate with Senior Estate & Investment Advisors. “They are affluent and educated. They exercise and eat right. They have longer lives and longer life expectancies.”

If this sounds like one of your clients, perhaps it's time for a briefing on CCRCs and how they can work to save on taxes in retirement.


Clients will find themselves facing an array of choices when they assess these retirement communities. For one thing, there are three different levels of service: extensive, modified and “fee for service,” according to Susan M. Tillery, CEO of Paraklete Financial Inc. and a certified public accountant and personal financial specialist.

“Extensive” contracts are the Cadillac of CCRC; they cover everything. “Modified” provides a lesser degree of coverage, but there's a provision that allows the client to receive more care if needed at a price. “Fee for Service,” as the name implies, is a pay-as-you-go option.

Expect to shell out for the top-end service. Ms. Tillery is working with a married couple who has been residing at a CCRC for the past three years. The pair, in their early 80s, made the move after the husband had a heart attack and was diagnosed with Alzheimer's shortly after. The wife tried to manage the household on her own, but was having a hard time doing so.

They wound up moving to a CCRC and the husband is residing in an Alzheimer's care unit while the wife is still living healthily and independently in a cottage. Both dwellings are on the same CCRC campus.

The couple paid $305,000 upfront for their “extensive” service contract. As for monthly costs, the wife pays a $2,180 fee each month, and her husband's care runs about $5,500 each month. They used the $1 million proceeds from the sale of their home in order to cover the large lump sum cost of entry. To complete the full LTC and health care financing picture here, they're on Medicare and the wife has LTC insurance coverage, which she bought before moving to the CCRC.

Though the upfront cost seems staggering, it gives the wife peace of mind. “She can make some long-term relationships, she can still handle independent living, and she can move when needed to assisted living or skilled nursing,” Ms. Tillery said.


To be sure, some might be taken aback by the upfront and monthly costs of being in a CCRC with high levels of service.

That's where the tax savings come into the picture.

Some of the wife's $2,180-per-month fee is deductible as a medical expense. Meanwhile, all of her husband's $5,500 monthly fee is deductible because he's in the Alzheimer's unit. About $100,000 of the entry fee was also deductible during the first year, according to Ms. Tillery.

Here's a recap on the deductibility of medical expenses. In most cases, you can deduct the amount of medical and dental expenses that exceed 10% of adjusted gross income. That threshold falls to 7.5% of AGI for taxpayers who were born before Jan. 2, 1950 — the demographic it would make sense to talk to about CCRCs.

Additionally, a portion of the large upfront deposit for the CCRC can be returned to the clients' estate after they die or if they leave the facility. In Ms. Tillery's clients' case, the lump sum is amortized on a sliding scale: The amount of the lump sum that's eligible to go to the estate or be refunded is reduced by 2% each month for the first year, then 0.5% per month for the following four year. From year five onward, the estate can get back 50% of the lump sum when the clients pass away.

But what about clients who are in their 50s and 60s, and are still years away from considering assisted living and long-term-care arrangements?

Those clients may have parents who need those services, and they might be footing the bill.

“These clients are successful and OK from a retirement perspective, but now they're picking up the nursing home bill for their parents,” Lyle Benson, a CPA and personal financial specialist at L.K. Benson & Co.

There's generally no tax benefit for clients who pay the cost of care for elderly parents, but in some cases, those parents can be considered dependents by the IRS. In turn, the cost of care will become deductible for the client.

Elderly parents will have to meet certain income tests, and their adult children will have to provide more than 50% of their support, said Mr. Benson.


Advisers should be sure to bring in a team of experts if their clients are considering a CCRC. For one thing, it'll make sense to discuss with an accountant a sound tax strategy behind using the medical expense deductions. A geriatric care manager who can navigate the landscape of local care facilities is also in order, Mr. Benson noted. Finally, bring in an elder law attorney to cover asset protection strategies and discuss Medicaid planning.

“That's all an important part of the overall process,” Mr. Benson said. “Make sure it's a team effort. That's how you benefit the client the most. Have everyone on the same page.”


What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Cutting through the red tape of adviser regulation is tricky

Don't expect a simple rollback of rules under the Trump administration in 2018 — instead, regulators are on pace to bolster financial adviser oversight.

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

State measures to prevent elder financial abuse gaining steam

A growing number of states are looking to pass rules preventing exploitation of seniors.

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print