As the senior population continues to grow rapidly over the next 20 years, financial planners and tax advisers are sure to receive an increasing number of questions related to elder housing decisions and the financial implications of various choices.
With the use of online tax preparation programs and the latest innovations around online financial planning and investment programs, financial professionals have an opportunity to expand their breadth of service and increase client loyalty by equipping themselves with the knowledge and information necessary to effectively guide their clients through the often overwhelming decision process related to senior housing choices. Moreover, they can be the catalyst for prompting their clients to take a proactive approach to planning for the later phases of retirement, thereby helping them avoid difficult, and often costly, situations.
This column provides an overview of important housing considerations, the senior living landscape, and a few specific ways that financial planning professionals can help clients in this area.To Stay or Not to Stay
Although most people want to stay in their homes as long as possible, it is important to recognize that this is not necessarily the best choice in every case, particularly once they are unable to remain socially active and care for themselves. A Washington Post report on gerontology professor Stephen Golant's book Aging in the Right Place says the author makes the case that "the concept of aging-in-place has become a mantra in recent years that might prevent older adults from seeking healthier, more holistic alternatives" (Kunkle, "Aging in Place Concept Has Been Oversold, Professor Argues," The Washington Post (March 5, 2015)).
For a family caregiver, the physical, emotional, and financial stress can be dramatic. Various studies suggest that up to 70% of family caregivers have clinically significant symptoms of depression and are forced to take time away from their own friends, family, and careers (see, e.g., Caregiver Assessment: Voices and Views From the Field (Vol. 2), available at www.caregiver.org). In fact, the average of lifetime lost wages and benefits of a family caregiver is almost $304,000 (see The MetLife Study of Caregiving Costs to Working Caregivers, available at www.metlife.com). Therefore, the notion that staying in the home is the least expensive option is not always true after accounting for the cost that is transferred to the next generation. Of course, if home modifications and hired care are required, they can push the cost substantially higher.
This is not to suggest that older adults should not stay in their homes. But it is important for clients and their advisers to consider the various implications of this choice and plan accordingly.Confusing Terminology
For those who think that a senior living community could be a viable alternative to aging at home, one area that causes a great deal of confusion is the terminology—trying to understand how one senior living provider differs from another.
To lead clients through the research process, financial planning professionals should be aware of the four main categories of senior living.
Independent Living Only
Retirement communities that only provide independent living mainly include active adult living communities, which are planned residential developments with free-standing, single-family homes that are designed with seniors in mind. This category also includes apartment-style retirement communities that cater to those who are able to live completely independently, without the need for assisted living or health care services. Residents have the freedom to hire their own private caregivers.
Independent Living With Limited Care
Communities that provide independent living with limited care most often include apartment-style residences, although some may provide villas or townhomes. The major difference between this category and the previous one is that residents also have easy access to assisted living and/or memory care on-site. These services are typically made available to residents in their apartments, but some of these communities offer separate on-site assisted-living and memory care facilities.
Independent Living With Full Care
Independent living with full care goes a step further than the previous category by offering services spanning the full continuum of care, ranging from independent living to assisted living, memory care, and skilled nursing care. Senior living providers that fall into this category are usually referred to as continuing care retirement communities (CCRCs), also known as life plan communities. The key concept with this category is that a resident should not need to move again later, regardless of health care needs that may arise over time.
In the category of "care only" are stand-alone assisted-living facilities or skilled nursing centers, often with a memory care component. They do not feature independent living residences. Technically speaking, many of these facilities are not age-restricted and, therefore, are not retirement communities in the true sense of the term, even though they typically serve an older population.CCRCs: A Popular but Complex Choice
Of the senior living provider types described above, CCRCs are the only ones that provide residents with contractual access to lifetime housing and health care. Residents who live independently today know that the care they may need in the future will be available to them in the community in which they reside. However, choosing a CCRC is a significant financial and life decision, and the residency contracts are generally more complex than other senior living options.
The payment structure of a CCRC contract can be broken down into two main parts: (1) buy-in structure and (2) monthly payment structure.
CCRC Buy-In Structure
CCRCs have three main types of buy-in structures:
Entry fee: The resident pays an entry fee that may or may not be refundable in the future. Nationally, the average entry fee is around $250,000, yet the fee can range dramatically based on location, services and amenities, and the type of contract offered.
Equity: The senior purchases the residential unit, which may be resold later, or has a contractual right to a certain percentage of the appreciation when the community resells the residence.
Rental: There is no upfront payment or purchase other than a nominal community fee. All other things being equal, the monthly fee will generally be higher for a rental community than for an entry-fee community. Rental contracts may not include contractual access to health care. In this case, access is on a space-available basis, just as it would be for someone outside the community seeking direct access to the health care center.
CCRC Monthly Payment Structure
The monthly payment structures described below dictate how the monthly fee is adjusted when a resident who has been independent begins needing care services.
Fee for service: Once a resident transitions from independent living and begins requiring care services—including assisted living, memory care, and/or skilled nursing care—the monthly fee will increase to reflect the market rate of the care.
Modified: This is also a fee-for-service model, but the cost of care is typically discounted anywhere between 10% and 50% of the market rate. This discount may last only for a certain period, after which rates will increase to match the market rate. Alternatively, a CCRC may offer a certain number of days of care at no charge before the resident's monthly rate increases.
Lifecare: There are slight variations among providers, but generally speaking, the monthly service fee for a lifecare contract covers lifetime housing and health care services as needed, without a significant cost adjustment as a resident transitions from one level to another. This type of contract is considered an all-inclusive plan and functions much like a long-term-care insurance policy in the sense that a resident's out-of-pocket exposure to future health care costs is transferred to the provider. All other things being equal, the monthly service fee for a lifecare contract may be higher while the resident is living independently than it would be at a community offering a fee-for-service or modified contract. The entry fee may also be higher.
Refundable Entry-Fee Contracts
Over the past couple of decades, refundable entry fees have become a popular choice for those who like the peace of mind offered by a CCRC but want to know that they or their estate will get back some portion of the entry fee if they move out or die. Almost all CCRCs offer a traditional, declining balance refund. A declining balance contract provides a refund within a certain period after taking residency, usually somewhere between two and four years. The amount of the entry fee that is refundable is reduced by a certain percentage each year, until no refund remains. An easy example would be by 25% of the entry fee per year for each of the first four years. After that there is no remaining refund.
Unlike traditional contracts, refundable contracts pay a refund no matter how long a person resides in the community. Under a refundable contract, the amount of the refundable entry fee may also be reduced over the first few years, but not for the full 100%. For example, under a 50% refundable contract, the refundable amount might be reduced by 25% of the entry fee for the first two years, but the remaining 50% remains refundable, no matter how long the resident lives in the community.How Financial Professionals Can Help
The deciding factors when choosing a CCRC can be broken down into five main categories: lifestyle preferences, quality of health care services, affordability and tax impacts, contract analysis, and financial viability of the provider. The last three present opportunities for financial planning professionals to offer a great deal of assistance. Here are a few specific areas where they can help.
Affordability and Tax Impacts
Most consumers, and even many financial planning professionals, have trouble projecting the potential long-term cost of moving to a CCRC because of the many cost adjustments that could take place as one moves from independent living to assisted living and, possibly, to skilled nursing care. Depending on the type of residency contract, the payment structure could vary from one community to another.
Although CCRCs do their own financial qualification analysis for new residents, some consumers may seek assistance running their own numbers. For instance, a couple may want to see a projection showing how their assets may be impacted if they live in the community for 10 years and require a combined five years of assisted living and/or skilled nursing care. Or, if they are trying to decide between two communities, they may want to see projections of both.
Residents of entry-fee retirement communities may be eligible to deduct a sizable portion of the entry fee and monthly fees as a Sec. 213 medical care expense. Typically, a CCRC's auditor or CFO will recommend an appropriate formula to determine the allowable deduction amount, often providing residents a written explanation each year. A deduction equal to 20% to 40% of the entry fee and monthly service fee is not uncommon, but it can vary from one community to another.
Only nonrefundable portions of the entry fee should be used for a tax deduction. If a resident takes a deduction on any amount that is ultimately refundable, then the refund would likely be taxable.
A financial planning professional can help clients assess whether a tax deduction would be available based on their particular financial situation. Adult children who pay some or all of the entry fee may also be entitled to a tax deduction. In this case, other factors must be considered, including the total amount of financial support they provide for their parents. (For more information, see the section titled"Lifetime Care—Advance Payments" in IRS Publication 502, Medical and Dental Expenses; see also Rev. Ruls. 75-302, 76-106, and 76-481.)
A financial planning professional can do a great service for clients by helping to point out some of the key aspects of a CCRC contract. While there are many things to consider, here are a few important questions:
- How will the monthly service fee change over time? Changes to the monthly fee may include normal inflationary increases, which should not exceed 3% to 4% on average, and adjustments based on the payment structures described above.
- What is included in the monthly fee, and what is extra? This applies to both independent living and health care services. Knowing this ahead of time can help residents and their family members avoid unwelcome surprises later.
- What are the stipulations for receiving an entry-fee refund? Is the refund payable when the resident moves from independent living into assisted living or health care, or is it only paid once the resident no longer resides in any level? Does the resident's prior residence have to be resold before the refund is paid? If so, is there a time limit by which the refund will be paid, regardless of whether the residence is resold? Do monthly fees continue in the meantime?
- Is the entry-fee refund recorded as an interest-free loan to the community? If so, will the resident receive a Form 1099-INT, Interest Income, each year on imputed interest?
- Can the entry-fee refund be used to pay for health care services if the resident runs out of money? Before any financial assistance is provided, CCRCs will often use the resident's entry-fee refund to cover the shortfall. This is not uncommon, but residents and their heirs should be aware of this upfront.
Residents of CCRCs count on the retirement community to uphold its commitment to provide lifetime housing and health care services. While only a small percentage of CCRCs have ever gone bankrupt, weak financials could still lead a provider to cut back on services, increase fees (beyond reasonable inflationary increases), or both.
Financial planning professionals, especially tax advisers, can be a valuable asset to clients by helping to analyze a retirement community's financial position. A tax adviser could provide important advice on the following matters:
Financial ratios: A CCRC should be willing to provide a copy of its most recent audited financial statement, which can be analyzed to determine if there is weakness in the areas of liquidity, debt, or cash flow. Of course, a new provider generally will not exhibit as strong a financial position as what might be expected of an established provider.
Actuarial projections: Financial ratios show a snapshot of today's financial position, but is the provider on track to meet future obligations? CCRCs should have a professional actuarial study performed every three to five years to see if it reveals a future service obligation (FSO)—a shortfall of projected actuarial assets compared to actuarial liabilities.
Occupancy ratio: Maintaining a high occupancy ratio in independent living is vital to a provider's financial standing. A temporary decrease may be all right, but occupancy that remains below 90% for an extended period can be a drag on a provider's financials. Ultimately, a high occupancy ratio reveals strong demand for the community in the marketplace.
Auditor's report: To accompany the audited financial reports, CCRCs should also provide the auditor's report. This should be examined for an unqualified, or "clean," report with no accounting exceptions. If there are exceptions, the financial planning professional and the client should ask what steps are being taken to resolve these issues.
Bond covenants: Many of the financial ratios and even occupancy ratios may be monitored as a condition of required bond covenants, which are laid out by the bond trustee for CCRCs that are financed with long-term, publicly issued debt. It could be a financial red flag if a provider has violated bond covenants. Any such violations are typically mentioned in the audited financial statement under footnotes to long-term debt.Summary
The PFP Section's Retirement Planning resources page also includes guides on Social Security and practical retirement planning as well as information on long-term-care planning, and more. In addition, membership in the PFP Section (aicpa.org/PFP) includes access to Forefield Advisor, which provides clear and concise consumer-oriented materials on many of these topics with special resource centers for Social Security and health care reform. CPAs who specialize in providing tax, estate, retirement, risk management, and/or investment planning to individuals, families, and business owners may be interested in applying for the PFS credential. CPAs can demonstrate their confidence and competence in these PFP disciplines through experience, education, examination, and a resulting credential. Information about the PFS credential is available at aicpa.org/PFS.
Choosing a retirement community is a big decision, particularly if it is a CCRC that requires a sizable entry fee in exchange for lifetime housing and access to health care. Other than a sales representative at the retirement community, many clients may not have a knowledgeable resource to consult for guidance and insights. By equipping themselves with the knowledge and tools to help clients ask the right questions and avoid surprises later, financial planning professionals can provide peace of mind and add value as trusted advisers.
The AICPA Personal Financial Planning (PFP) Section provides significant resources to help CPAs assist clients with retirement and elder planning. For additional in-depth information, planning ideas, and commonly asked client questions on planning for the financial needs with health decisions after retirement, refer to The CPA's Guide to Financing Retirement Healthcare, by James Sullivan, CPA/PFS, available in the AICPA Personal Financial Planning Section at aicpa.org/pfp/retirement. PFP/PFS members have full access to the guide; nonmembers can download a free excerpt. Late in 2016, Sullivan will be authoring a new CPA Guide on life-transition decisions (such as housing) after retirement.
Theodore Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Brad Breeding is president and co-founder of My LifeSite, a Raleigh, N.C., company that develops web-based tools and resources designed to help families and their advisers make better-informed decisions when considering a continuing care retirement community. Mr. Breeding provided further information on housing decisions that face elder client in his "Continuing Care Retirement Communities" session at the 2015 AICPA Advanced PFP Conference. More information is available at aicpaconferencematerials.com. Mr. Sarenski is chairman of the AICPA PFP Executive Committee's Elder Planning Task Force and is a member of the AICPA Advanced PFP Conference Committee and PFP Executive Committee Thought Leadership Task Force. For more information about this column, contact firstname.lastname@example.org.
The PFP Section's Retirement Planning resources page also includes guides on Social Security and practical retirement planning as well as information on long-term-care planning, and more. In addition, membership in the PFP Section (aicpa.org/PFP) includes access to Forefield Advisor, which provides clear and concise consumer-oriented materials on many of these topics with special resource centers for Social Security and health care reform.
CPAs who specialize in providing tax, estate, retirement, risk management, and/or investment planning to individuals, families, and business owners may be interested in applying for the PFS credential. CPAs can demonstrate their confidence and competence in these PFP disciplines through experience, education, examination, and a resulting credential. Information about the PFS credential is available at aicpa.org/PFS.