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A Creative Way To Fund a Long Term Care Policy

 

How would you like to lever an existing asset so as to get much more mileage out of it and provide for long term care that you may not otherwise have qualified for?

Rabbits out of a hat? Not really. Take a look at this scenario…

Dick and Libby are in their early 70’s. Dick was a plumber by trade and acquired a number of rental real estate properties over the years. That’s what is providing for their retirement. They don’t have money to burn, but are doing pretty good.

Dick has a $150,000 IRA down at the bank. When he turned 70 1/2, the bank started sending him the required minimum distributions each year as required by the IRS. They don’t need this money to live on and Dick would just as soon let the IRA sit there and earn interest.

They went to a seminar on long term care a couple of years ago and looked into it a little. But the premiums were more than they were willing to pay. On top of that, Dick has had some moderate health issues that the agent said would probably add to the cost.

Being a practical man, Dick figures he’ll never need long term care. He’ll figure something out. Besides, Libby is a model of good health. Basically, they just don’t want to think about that possible eventuality and enjoy themselves.

The one thing they really want to do, when it is all said and done, is leave their estate to their children. All the duplexes Dick owns are paid for and the value is going up every year. He figures they are an asset that their kids would find hard pressed to duplicate. Plus, it would be kind of an on-going reminder of his business acumen.

But to an outsider looking in, the costs of a potential long term care facility—for either or both of them—could require liquidating their real estate holdings and lowering or eliminating their kids’ inheritance.

Let’s take a look at something they could do to make sure this never happens…

The first step would be to do a “trustee to trustee” transfer of their IRA to an insurance company combination IRA/life insurance/long term care policy. This is a tax free event.

This combination product has some unique features that give Dick and Libby a number of benefits that they aren’t getting by leaving the IRA at the bank.

First, they still have an IRA. The insurance company will set an interest rate each year and the IRA will continue to grow. Much like it’s doing now at the bank.

Each year, the insurance company will move some money from the IRA into a combination life insurance/long term care policy. This is done automatically and is nothing that Dick or Libby has to remember or fuss with.

The long term care part of the plan creates a fund of $225,000 that Dick can draw down on at around 2% per month if he ever needs long term care. That’s $4,500 a month and the fund is $75,000 bigger than his IRA. And he doesn’t have to go to the “home”. This could be for home care or assisted living expenses. Over time, this fund of $225,000 increases, just like his IRA. If he wanted, he could add Libby to the plan as well and provide a $4,500 a month benefit for her too.

One key thing is that Dick has a lot better chance of qualifying medically for this plan compared to applying for the traditional long term care policy he looked at several years ago.

Long Term CareBut here is the best part. If Dick is right, and neither he nor Libby ever needs any form of long term care, the life insurance part of this plan will be paid to their children—tax free. Remember, it started out at being worth $75,000 more than his IRA (a total of $225,000) and this grows every year. So unless the bank invests his IRA in Google stock, (not likely, of course) the plan will pay more to the kids than the IRA.

What is the downside to all this? Really only one thing. Dick and Libby have to pay tax on the money that is moved each year from the insurance company IRA to the life insurance/long term care part of the plan. But the tax on this amount is likely much less that buying a traditional long term care policy at their ages. And remember, the bank was sending them part of this anyway as their annual RMD.

There is more to it than this simple explanation. If you have an IRA and need long term care, sit down with your financial planner and take a look at transferring all or a portion of your IRA into a plan like this.

As far as Dick and Libby are concerned, here’s what this transfer has done for them:

  1. Kept it simple. All they did was move an IRA from one financial institution to another.
  2. Covered their long term base with an amount greater than the annuity they would have tapped.
  3. Pretty much assured that Dick’s real estate would never have to be liquidated to pay for long term care.
  4. Left more to their children.

 

 

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