Retirees are usually looking to enhance their quality of life when they transition into life plan communities (formerly referred to as “continuing care retirement communities”). One thing you may not know is that many of these communities offer contractual promises to provide housing and care for seniors even if they deplete their assets. That financial security can be just as comforting as the physical security that these communities provide.
Those promises, however, have contractual terms and conditions. The communities take on financial risk for all residents if a percentage of their residents run out of money. What I’ve seen is that the way a resident runs out of money often attract attorneys and can ultimately end up with the resident being evicted from their community. So how can you help to make sure that doesn’t happen to you or a loved one?
Transparency is key
Life plan communities both physically and financially underwrite prospective residents. The goal: to ensure that residents remains in independent living for a reasonable period of time, and also can afford the entry fees and monthly fees. I provide a similar type of analysis to my clients as well, to help ensure that their financial goals outside of the community fees can continue to be met.
During this underwriting process, it is important to disclose to the community all of your or your loved one’s income sources and assets. Disclosing spending patterns (regular, ongoing expenses) is also very important. If there is consistency in your documented spending, it is less likely that you or your loved one would later be denied “benevolent care” if you deplete your assets before death.
Be careful about gifting assets
Gifting financial assets can be an efficient way to reduce your estate, and provide financial support to family. If you show a regular pattern of gifting prior to entering a community, and fully disclose it as part of your ongoing spending, there should be no problem continuing to be generous.
However, a better option is to make larger financial gifts to trusts prior to entering a life plan community, while maintaining enough assets to pay your entry fees and ongoing fees.
Be cautious about listening to ‘smart’ family members
I call this the “stupid son-in-law syndrome.” Many families have a member who thinks he know more about finances than he does. It may not necessarily be a male family member, but it is the relative who always seems to know what’s best for everyone and is not shy about sharing an opinion.
For instance, when stupid son-in-law hears that Mom and Dad are moving to a community, here’s what he might suggest:
- Sign the contract (don’t bother with the details).
- Start gifting $10,000/year to each of your three children and their spouses (he doesn’t even know that the annual exclusion gifting limit has risen to $14,000).
- Deplete your assets within a five-year “look-back” period (he doesn’t know what that means but he read about it online).
- Apply for “free care” now that assets are out of your name.
While this type of strategy may sound similar to “Medicaid planning,” this approach would constitute a breach of contract at a life plan community. Why? It shows both a significant change in the parents’ spending patterns and an intention to hide assets.
To clarify: Gifting can be a good thing to do—but it is advisable to make gifts prior to entering into a life plan community agreement.
Dealing with spending choices and asset fluctuations
In addition to gifting, there are some less obvious issues related to changes in spending that could lead a life plan community resident to deplete assets. For instance, group bus trips to Atlantic City are great fun. However, gambling losses could cause a resident to put assets at risk. Those losses could trigger the community to claim breach of contract.
Residents often want to stay in their independent living units as long as possible. However, that may not be optimal if the resident’s health deteriorates. Community administrators might recommend transitioning to assisted living or skilled nursing care.
However, instead of moving, the resident might hire an outside home health aide to provide care in his/her independent living unit. A home health aide can cost $20/hour. At five hours a day, that can add up to an additional $36,000 per year! So at this point, the resident has not transitioned to the next step on the “continuum of care,” but has significantly accelerated the depletion of his/her assets.
Finally, invested assets are subject to market fluctuations. However, if a resident’s asset values decline and are depleted because of a market change, that is not usually considered a reason to deny benevolent care.
Avoid the legal drama
Entering a life plan community is a big financial and emotional investment. Residents must adhere to terms and conditions of residence and care agreements so the community maintains its financial strength and can make good on its promise to provide care for life. The last thing anyone wants is to get into a legal battle to determine whether any community contract terms were breached.
In order to avoid the stress and expense of a life plan community contract dispute, I advise clients to:
- Be financially transparent and upfront about spending patterns to your prospective community.
- Be mindful of problematic spending, such as gambling or hiring expensive outside help that could trigger a breach-of-contract lawsuit.
- Be extremely cautious about taking your son-in-law’s advice–unless he is a Wealth Advisor experienced in working with prospective residents making important decisions about life plan communities.
- Talk to your Wealth Advisor and possibly your attorney before entering into a life plan community contract. Experienced professionals can often save you from expensive financial or legal mistakes.
Important Disclosure Information
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This presentation is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
Please note that RegentAtlantic does not provide legal advice. Please consult with an attorney of your prior to signing any legal documents or contacts.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.