Contract Layers
Each retirement community will host different levels of financial commitments and contracts. Not every community will have each of these contract types available, but most will feature more than one contract:
• Type A Plan: Life Care. This has a higher entrance fee and monthly rental fee; however, clients will be allowed to progress through the phases of care without additional financial commitment for regular care. These entrance fees vary depending on the size of the home unit selected. Some of the larger home units can cost more than $500,000.
• Type B Plan: Modified Fee For Service. Generally, this plan has a lower entry fee than Type A, but may only provide a limited amount of assisted living or nursing care in the fee. If more health care is needed, it is often provided at a discounted rate.
• Type C Plan: Fee For Service. This plan has a lower entry fee than A or B, but any health care needed is “pay as you go” at full market rates.
• A Rental Contract. This option has a minimal entry fee, reduced level of residential services and amenities and health care at full market rates.
Careful consideration is needed for a client to make the best choice for their circumstances.
Other Financial Considerations
The contract is not the only financial decision clients who are working with financial advisors will need to make. The entire journey to move into a retirement community needs to fit into the client’s overall financial plan.
• As you assist clients with the financial commitment to move into a CCRC, it is important to consider the amount of expenses that will be saved when the client no longer owns their home. Expenses that are typical and can add up quickly include real estate taxes, property insurance, utilities, maintenance and repairs, lawn and landscaping costs, and homeowner’s association dues. It is probable that after the client sells the house and moves into the CCRC these expenses will result in savings to their monthly budget and can be used towards the monthly fee payable to the CCRC.
• Tax savings: Are there any specific tax considerations that may factor into the various types of contracts? For a Plan A, often called Life Care option, a portion of the entrance fee may be available as a medical deduction for tax purposes. A portion of the monthly fee may also be able to be considered a medical deduction as well. In certain situations, the medical expense deduction for an entrance fee can top $40,000 to $50,000 as an allowable expense. Paying careful attention to the tax savings will also be a benefit in calculating the after-tax costs of moving into a CCRC.
• Sale of primary residence: Will the sale of a client’s principal residence provide enough liquidity to cover the entrance fee, or at least pay a large portion of it? It may be close, but using the proceeds of a sale like that may allow a client to retain more of their liquid net worth.
• Insurance: Does your client have a long-term care policy that will provide financial assistance if they are to need skilled nursing care services in the future? If this is the case, Plans B and C may be a more attractive option for them financially, based on their already existing long-term care coverage.
Conclusion
Transitioning to a retirement community can be a great step for many clients, so long as it fits into their lifestyle goals and needs and their financial stability. Assisting clients as they evaluate retirement communities includes walking through many complex layers of decision making, something a financial advisor is well-equipped to do. Knowing a client’s personal preferences, family situation, goals and financial picture gives us the insight to come alongside and guide through these decisions. It is a privilege to partner with clients through these major life changes.
Angie M. Stephenson, CFP, CPA/PFS, is a partner and senior wealth advisor at Domani Wealth.