Planning for the Cost of a Continuing Care Retirement Community

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Financial planners and tax professionals suggest that moving to a continuing care retirement community (CCRC) can help manage and predict medical expenses as you age.

For those who can afford the substantial entry fees, living in a CCRC (also known as life plan communities), can be a worthwhile answer to tax strategy and planning questions. The cottage- or condominium-style facilities are designed to provide independent living, assisted living, memory care and skilled nursing display some complexities. Experts say some of the facilities don’t always deliver on that full continuum of care and the tax advantages come with caveats. The benefits of the best facilities include comfortable living and planning opportunities for many older clients.

“This is where it’s really valuable to financial planners,” said Sean Dowling, a certified financial planner and enrolled agent specializing in working with current and prospective residents of CCRCs as the president of a Greenwich, Connecticut-based firm called The Dowling Group. “Health care is probably one of the most difficult things to prepare for somebody, and it’ll be potentially the largest expense you’ll ever have. For some people, health care will be well above what you spent on your home.”

That’s why Dowling and a half dozen other experts recommended that prospective residents and their financial professionals examine the fine print of their fees and contracts and the fiscal condition of any life plan community. This would include the details beyond the swimming pools, dining areas and other activities depicted in glossy brochures and websites.

By the numbers

The nearly 2,000 CCRCs across the country charge entrance fees ranging from a few thousand dollars to more than $1 million. The average is $329,000, according to “Where You Live Matters,” a senior living resource from the American Seniors Housing Association, a nonprofit research and advocacy group. In addition, the facilities collect a monthly service fee that depends on the size, amenities and services of the life plan community.

“When you compare the monthly costs of living at home — including items such as mortgage or rent, property tax, home insurance, food, utilities, housekeeping, lawn and garden services, gym membership, entertainment, activities, scheduled transportation, home security and home maintenance — to the monthly cost of independent living at a CCRC. You may be pleasantly surprised at how affordable a CCRC really is,” according to the Where You Live website.

Life plan residents have “better physical, emotional, intellectual, social and vocational wellness than their community-dwelling counterparts,” according to the “Age Well Study” from research organization the Mather Institute and Northwestern University. “From Year 1 to 5, social contact significantly increased for residents. Overall engagement in intellectual activities significantly increased for residents (including increased writing and attending education) and decreased for older adults in the community at large.”

Types of CCRCs

CCRC residents usually agree to one of the four main types of contracts, according to Where You Live Matters:

  • “Type A” or “Life Care,” which aims to keep monthly fees relatively consistent at the same level for the rest of residents’ lives;
  • “Type B” or “Modified Plan,” which has lower monthly fees than Type A and, sometimes, smaller entrance fees but assesses part of the cost of a higher level of health care to the resident;
  • “Type C” or “Fee-for-Service,” which has potentially the cheapest fees for independent living but increases to market rates for expanded medical services; and
  • “Rental” agreements, which have no entrance fee (or perhaps a small community fee) but charge monthly service costs that can go beyond the initial costs of other CCRC contracts, plus market rates for medical care.

Another advocacy group of about 1,500 members, the National Continuing Care Residents Association, sees a need for stronger “federal regulations that have been developed by the state organizations with experts who understand senior living,” according to the group’s president, Jim Haynes. Prospective residents may notice major differences between facilities equipped for the full range of services onsite compared with those “that have offloaded their skilled nursing responsibilities to a hospital organization” or among those in states that require, for example, regular financial audits of senior communities, Haynes said. Prospective residents should know that specialized care can sometimes come with more fees, he noted.

“Yes, you get room and board, and you get onsite doctors and nurses, but if you need a kidney scan or dialysis or something like that, that’s extra,” Haynes said. “You end up paying more than you would expect.”

Tax questions

Those costs may prove beneficial to some clients’ tax savings through itemized deductions for medical and dental care, though. The most important figures for determining the potential deductions are 7.5%, the level that the expenses must exceed against a client’s total adjusted gross income, and a percentage disclosed each year to residents in a “Medical Expense Calculation Letter” from the CCRC reflecting the portion of fees going to medical services, according to Liting Chuang, a certified public accountant who’s the director of tax planning and an associate wealth advisor with the Seattle-area office of Bordeaux Wealth Advisors.

“We would want our clients to get a letter or a certification from the CCRC that indicated the reasonable percentage that was applicable to medical care,” said Chuang, noting that she advises clients to track the costs of medical care, Medicare premiums or any long-term care insurance. “So you would want to aggregate all of those expenses and, hopefully, at the end of the day, you’re in excess of 7.5% of AGI.”

A client who is eligible for up to $100,000 worth of deductions through charitable gifts, entrance fees and out-of-pocket medical costs could get $35,000 to $40,000 worth of tax savings, according to Steve Henderson, a CPA and CFP who is the regional director and partner with the Tulsa, Oklahoma-based office of Merit Financial Advisors. However, the higher standard deductions stemming from the Tax Cuts and Jobs Act of 2017 reduced the number of clients who can tap into those potential savings, Henderson noted.

“Rarely do we see a normal client get a medical deduction,” he said. “They’re rarely going to have enough that they’re going to get above 7.5%, let alone get above the higher standard deduction.”

Tax Benefits at Edgehill

The possible tax savings on monthly service fees revolve around whether the residents live in independent living or facilities with higher levels of care, such as assisted living or skilled nursing, according to a PowerPoint presentation Dowling gives regularly at another CCRC in Stamford, Connecticut called Edgehill. The percentage of expenses attributable to medical care at Edgehill usually ranges between 35% and 45%, which independent living residents would multiply by their total monthly service fees paid in a given year to calculate their deduction. Assisted living residents may be eligible to deduct a higher percentage, while skilled nursing residents can usually claim 100% of their monthly fee.

Up to 90% of the first entry fee paid by a couple is refundable upon a resident’s death or move to a new home. The nonrefundable portion of the first resident’s entry fee and 100% of any spouse’s entry expense decides the amount of the potential deduction, Dowling’s presentation noted. To calculate the deduction for the tax year that the residents pay those fees, the residents would multiply the medical-expense calculation by their nonrefundable entrance fees.

Financial planners and their clients should think through potential out-of-pocket costs. Medicare or long-term care premiums and vehicles such as donor-advised funds or a charitable remainder trust to get a complete picture of the possible tax benefits, Dowling said.

“You really need a multiyear tax plan when you’re thinking about a CCRC and you’re talking about moving into one,” he said. “If you can break this up into two years, what we’ve found is that you can maximize that first-year deduction.”

Other planning questions

Advisors and clients may find some other savings by thinking through their options for the contracts with a CCRC, said James Bremis, a CFP who’s a financial planner with Wakefield, Massachusetts-based Sentinel Group.

“A lot of the times when you go into those CCRCs, you’re prepaying for health care expenses even though you might not necessarily need them,” Bremis said. “If you’re worried about costs and you’re trying to lessen the blow, that’s one way you could do it.”

In seeking the maximum possible deduction with the move-in, older clients and their planners might find fresh reasons to think about a major charitable gift alongside the consideration of moving into a life plan facility, Henderson said.

“It’s also an opportunity to do some other planning,” he said. “You can have some conversations with them about some things that they may have thought about but just never had the chance to do.”

Life at Edgehill

At Edgehill, which is owned and operated by Benchmark Senior Living, the 330 residents live in “a multifaceted senior living community” that has all of the amenities plus “the full scope of service” across assisted care, memory care or long-term nursing needs, according to Elizabeth Dupree, Edgehill’s director of sales and marketing.

“That’s what sets Edgehill apart,” she said. “It’s a great place to be. It’s a lot of fun, but it offers the safety and security for the residents knowing that, regardless of what might happen in the future, we can take care of it.”

While some CCRC contracts could potentially take the place of long-term care insurance, and Dupree cautioned in an interview that she isn’t a financial advisor. She noted that the insurance policies may cover part of the monthly service fees.

Living in a CCRC “offers some semblance of assuredness in a time of total uncertainty in terms of how much things are going to cost,” Dupree said. “If people have long-term care insurance, they should continue to endeavor to research these types of communities and not wait.”

Dowling’s firm has been working with residents of Edgehill for 30 years. He compares the facility to a college, country club, church group or another social organization. Residents often take in Broadway shows, he said.

“They have dinners together every night. They have buses that take them into the city,” Dowling said. “My clients who go there love it. They cannot say enough good things about it.”

Resources for prospective residents

The websites of the National Continuing Care Residents Association and the American Seniors Housing Association each provide resources to clients and advisors to help with decisions about whether a CCRC may be a good fit for any older adults in their lives. For example, Where You Live Matters has a page explaining the costs of CCRCs and a checklist for any visits to facilities.

Haynes’ organization has a consumer guide, a handbook discussing what prospective residents should know about the financing of CCRCs and a “model bill of rights” for residents. Haynes recommends that potential residents consider the location, ask to see the health care facilities on any tour, try to meet people who have lived on the campus more than a year and request financial reports and contracts. Then run them by a lawyer, accountant or financial advisor.

“The first thing is, where do you want to live basically the rest of your life?” Haynes said. “They will take you and show you the swimming pool, the tennis courts, the gym, a meal, which is probably wonderful and the service is probably outstanding. Don’t rush into it.”

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