SEPTEMBER 2011 NEWSLETTER

                                       The Critical Need for Long Term Care Insurance

Don’t be blindsided by the need for long term care. With rising numbers of senior citizens in the U.S. population, long term care for a loved one will become a likelihood for many families, if not a certainty. What is it? Long term care is a broad concept. Long term care services include medical and non-medical care to individuals who may have a chronic illness or disability. Long term care also includes custodial care that helps to meet health or personal needs. Most long-term care is to assist the elderly with support services in their daily activities. Long term care can be provided at home, in the community, in assisted living facility or in nursing homes.
Why is it a problem? An examination of the numbers can help explain:
• A study by the U.S. Department of Health and Human Services reports that individuals who reach age 65 will likely have a 40% chance of entering a nursing home. About 10% of the individuals who enter a nursing home will stay there five years or more.
• By 2026, the population of Americans ages 65 and older will double to 71.5 million
• A report by the Pennsylvania Bar Institute reported that as of 2010, the average cost of nursing home care in Pennsylvania was $7,000 per month. This figure does not include the number of individuals who receive long term care who are not in a nursing home.
• The national high average annual cost of long term care is:
o $83,179 for nursing home care
o $44,345 for assisted living facility care
o $38,317 for home care
• Estimates project that by 2030, individual costs for long term care could run as high as $300,000 per year
• Healthcare costs overall have been increasing. Healthcare costs have grown on average 2.5% faster than U.S. GDP since 1970

Governmental support probably is insufficient to cover the costs of long term care. Medicare does not cover long term custodial care – at best, it may only cover skilled, post-hospital, recuperative care and may pay less than 3% of long term care expenses. Adding to the problem, in exchange for allowing the President to raise the debt ceiling, Congress required him to make budget cuts (likely in the trillions of dollars) in the coming years, which will come in large part from entitlement programs such as Medicare, Medicaid and Social Security. The likelihood that you or a loved one may need long term custodial care at some point, coupled with the high costs of care and little governmental support, make long term care a critical issue for families to address and plan for.

What can you do about it? You can buy long term care insurance to cover a majority of long term care expenses that basic insurance does not cover. When you purchase a long term care insurance policy, make sure you understand the types of services it covers. Many policies today cover care provided in a home as well as facility setting, again including assisted living facilities, adult day care, as well as nursing homes. Most policies are known as “indemnity” policies or “expense incurred” policies. An indemnity policy pays up to a fixed benefit amount regardless of how much you spend. Under an expense incurred policy, you choose the benefit amount when you buy the policy and you are reimbursed for actual expenses for services received up to a fixed dollar amount per day, week or month. Many companies offer a range of policies but no policies guarantee to cover fully all expenses incurred. A policy should be carefully reviewed so you understand exactly the kinds of services that it will cover.

While a long-term care insurance expert can help you determine some initial selections as to which policy is best for you, an independent advisor, financial planner, accountant or attorney, can be invaluable in providing the following objective, disinterested services:
• Determine an individual’s financial suitability and need for long term care insurance
• Confirm the financial soundness of prospective insurance companies
• Explain and compare policy features
• Highlight, clarify and explain uncertain terms in the policy
• Recommend a policy that services the individual’s needs over the long term

Finally, an attorney can also help you coordinate long term care with your overall estate plan. For example, certain long term care policies qualify as “qualified long term care insurance” and distributions from them may not be included in your gross income for tax purposes. In another example, you may use an asset to purchase a single premium immediate annuity with an income for life only option, which in turn is used to fund the long term care policy. Due to changes under the Pension Protection Act that went into effect in 2010, the annuity can automatically pay the long term care policy and, if set up properly, the income payments from the annuity can be tax free. Additionally, the value of the asset you have used to purchase the annuity may be removed from the value of our gross estate. Ultimately, independent advice is important in making long term care decisions not only to determine the best care, but also the best overall estate plan.

II. Use Your IRA to Make Charitable Donations
Thanks to changes in the federal tax law, individuals may now make tax free charitable donations directly from their IRAs. Previously, if a donor had wanted to make a charitable donation using funds from an IRA, he had to withdraw the funds from the IRA, pay income tax on the withdrawal, and then make the charitable donation. Now, a donor will not pay income tax on distributions from an IRA if the distributions go directly to the charity. The tax free treatment of charitable donations from your IRA is available only through 2011. The general requirements to receive tax free treatment are the following:
• The donor must be at least 70 ½ years old
• The annual limit on tax free donations is $100,000. For spouses filing jointly, each may make up to $100,000 donation tax free
• The payout may satisfy the required minimum distribution
• The donations may only be made from an IRA or rollover IRA account. Donations from other retirement accounts, such as a 401(k), do not qualify.
• The donation must be made to an IRS approved public charity. Donations to private foundations, supporting organizations, trusts established for both charitable and non-charitable purposes, or other funds over which the donor may have some advisory control do not qualify.
• The donation must be made directly from your IRA account to the qualifying organization. This is ordinarily done by instructing the company holding the IRA to make the transfer. If the donor receives the funds from the IRA and then donates them to charity, they will be subject to the income tax.

One drawback of donating directly from an IRA is that the donor may not claim a deduction for the donation. The drawback, however, is outweighed by the fact that the donor essentially receives a 100% dollar-for-dollar deduction on the donation anyway because the withdrawal from the IRA is tax free. The donor will not be subject to the usual limitations on claiming a charitable deduction.

III. Update Your Estate Plan
In 2011 and 2012, taxpayers enjoy a $5 million unified federal gift and estate tax exemption. The exemption, or “unified credit”, is available to offset both gift and estate taxes. For an individual who dies in 2011  or 2012, his estate will not pay federal estate tax if the sum of his taxable estate plus the taxable gifts he made during his lifetime equals $5 million or less. Meanwhile, for 2011 and 2012, the federal estate tax rate is a flat rate of 35%. Any excess amount over the $5 million exemption amount will be taxed at a rate of 35%. For example, assume an individual dies in 2011 with an estate worth $7 million. The exemption amount is $5 million. The individual has not previously used any of the available unified credit. The result is $2 million of his estate will be taxed at a rate of 35%. The tax due would be $700,000.

For married couples, the total unified credit is $10 million. The unified credit also may be rolled over between spouses, allowing a surviving spouse to use that portion of the pre-deceased spouse’s credit that was not previously used. For example, if husband dies and used $3 million of his credit, then at his wife’s death, she can use her $5 million credit plus the remaining $2 million of her husband’s.

The unified credit and the estate tax rate are set to change beginning in 2013. Beginning in 2013, the unified credit will drop to $1 million; $2 million for married couples. In addition, the estate will not be taxed at a flat rate of 35%. The maximum estate tax rate will be 55%. Depending on the size of the estate, it maybe subject to a lower rate. Finally, spouses will no longer be able to rollover their deceased spouse’s unused unified credit. It is imperative to update your estate plan to take advantage of the current estate tax laws in effect through 2012. At the same time, be proactive and plan ahead in anticipation of the coming changes for 2013.