Add LTC Insurance to Your Estate Plans

September 16, 2008
Patrick J. Flanagan, CFP

Physician's Money Digest, May 31 2003, Volume 10, Issue 10

Even a physician who's serious aboutestate and asset protection plans canleave room for the enemy of these plans—serious or disabling illnesses. For those onthe fence about the need for long-termcare (LTC) insurance, understanding someof the hidden benefits may help the decisionto purchase such insurance.

LTC insurance allows you to substituteinsurance premiums for these moreexpensive real dollars, preserving yourassets. In fact, the premiums can be as lowas 3% to 5% of the actual cost of care. Butthere are other less obvious benefits ofLTC insurance that can provide additionalestate planning support both now andlater, including the following:

• Freeing up assets with embeddedcapital gains, which are often left atdeath—People with appreciated assetsoften do everything they can to hold on tothem to avoid capital gains taxation andmaximize their estates. Since these assetshave often been held for long periods oftime, the gains can be significant. Whenpassed at death, the beneficiaries receive a"stepped-up" cost basis equal to the fairmarket value on the date of death.

But these assets often have to be soldin the event that custodial care is needed,which not only generates a tax bill, butleaves less funds available for care, therebycausing assets to dwindle even faster.

LTC insurance, for pennies on the dollar,can protect these assets and shieldthe estate from premature liquidation.Not planning for this risk can leave agaping hole in your estate plan.

• Protecting marital assets—Many peopleare getting married later in life or aremarrying more than once. Regardless,people attempt to protect assets theybring into a marriage through prenuptialagreements. Unfortunately, a "prenup"does not protect a healthy spouse's assetsfrom being used to pay for LTC for a seriousillness. This also applies to assets thatwere brought into the marriage and neverplaced in joint ownership. With LTC beingone of the most expensive events to befallanyone (dying is cheaper), there is effectivelyno protection from spending downyour marital assets. You can, however, protectthese assets with LTC insurance.

• Using the gift tax limit exception—Your estate plan includes taxable gifts.Although using the $11,000 annual gifttax exclusion is usually part of an estateplan, the dollar limit makes it difficult tomove larger sums of money. In fact, theannual growth in assets can cancel outthe benefit of making gifts because ofthis limitation. An exception to theannual gift tax limit allows you to makegifts in excess of this amount for medicalcare or higher education expenses. Thepayments must be made directly to thecare provider or school. This includespayment of LTC premiums for anotherperson, as long as the premiums are paiddirectly to the insurance company. Withaccelerated payment options in manyplans, large sums can be moved.

• Transferring value in a corporation—Many estate plans include strategiesfor moving or transferring ownershipof a C corporation later in life, usuallynear retirement. Under current taxlaws, LTC premiums paid by a C corporationare 100% deductible by the corporation.Also, policy benefits to the employeeare tax-free when received. There areno limitations on the deductibility of thepremiums, even if they're paid under anaccelerated payment option, including asingle premium option when available.LTC insurance allows tax-free transfersout of a corporation.

Patrick J. Flanagan is an independentCertified Financial Planner™ practitioner based inPoint Pleasant, NJ. A contributor to Physician's Money Digestsince it's inception, he offers financial planning, insurance, and investingservices. He welcomes questions or comments at 800-969-0899.