Year-End Long-Term Care Insurance Tax Opportunities
by Claude Thau
Whether you’re an attorney, CPA, financial planner or other financial adviser, you might know someone who would be interested in long-term care insurance (LTCi) and who might be able to maximize tax advantages by buying it before the end of the year. For pass-through entities (e.g. S-Corps, partnerships, sole proprietors), up to $2,120 of the combined premium for a 51- to 60-year-old owner and spouse ($5,660 or more for older couples) is tax-deductible. In many situations, the entire premium is tax-deductible. Consider the following situations:
- A pass-through business owner grooming the next generation (their child, son- or daughter-in-law or someone else) to take over the business: If the employed heir-to-the-throne is not yet an owner, the entire premium for their LTCi is tax-deductible now, but it won’t be when they become an owner. If the company buys 10-year-pay LTCi for the young heir and heir’s spouse, the premium will be low. And most of the premiums can be paid before the heir becomes an owner—a huge tax advantage.
- Retiring owners or chief executives can benefit from LTCi on a tax-favored basis. For example, if LTCi coverage is structured as part of a sale, Uncle Sam contributes to the cost, generating savings that the departing owner and new owner can share.
- Second-generation owners might buy LTCi for their parents who built the company.
- Any employer that pays income taxes directly to the government (as opposed to passing it through to owners’ individual tax returns) can deduct the full cost of LTCi on any employee or employee’s spouse (unless it is considered unreasonable compensation). Employers might limit the program to the CEO and spouse or another key employee.
- Retiring employees could benefit from LTCi being part of their retirement package. Tax savings could be shared with the employer.
- Mom and Pop companies (both spouses work in their company) are especially vulnerable to long-term care demands. If a parent needs LTC, might an owner-spouse be pulled away from the business? LTCi on the parents could make the difference of whether or not the Mom-and-Pop business survives. Furthermore, if either Mom or Pop needed LTC, might the other spouse be distracted from the business because of caregiving responsibilities? The Care Coordination services offered by LTCi can provide priceless value in such circumstances.
- With multiple partner-employees (e.g., law firms or medical clinics), LTCi may be most welcomed if owners share interest in LTCi or if profits are distributed based on each partner’s profitability.
- People who (or whose spouses) smoke, have diabetes or other health conditions may be interested to know that if their employer pays a portion of the premium for at least three employees, those employees can be covered—at the same price as preferred health, discounted premiums—based on four very streamlined questions. These questions do not ask about height, weight, tobacco use or many other conditions. If the employer contributes to the cost for a combination of 10 employees and spouses, the spouses can benefit similarly.
- People who own small businesses with inadequate retirement programs may be particularly interested that LTCi converts their most volatile financial risk into a fixed cost. Even someone who could afford to pay for needed long-term care might like to purchase LTCi because people are much more likely to get good quality care if they are insured. Widows and widowers especially are prone to skimping on care because they may (perhaps irrationally) fear out-living their assets or be reluctant to spend their children’s inheritance. Additionally, it’s common to be dissatisfied that LTC services cost more than seems appropriate—especially when you’ve formed your impression of the value of a dollar several decades before.
If any of the above circumstances fit you or any of your clients, you might want to contact your insurance adviser before the end of the year.
The author is not a tax adviser. He shares his understanding of tax laws solely to help people determine whether tax issues are significant to decisions regarding LTCi.
If tax issues are significant, people should rely upon tax advice from their tax professional.
Claude Thau is a nationally-known expert in long-term care insurance. He can be reached by phone at 913.403.5824 or by email at cthau@targetins.com.