Many life plan communities (also known as continuing care retirement communities, or CCRCs) offer residents contracts that provide partial refunds of their entry fees. A life plan community refund typically ranges from 50 to 90% of the significant lump sum new residents are required to pay before occupying their independent living units.
Entry fee refunds may provide peace of mind to seniors who hope to leave inheritances to children or grandchildren. However, it’s still very important to read your particular community contract to determine how and when any refunds will be paid.
The long wait for a refund
Many people assume that their life plan community refund will be immediately paid when they die or opt to move out of the community (if they choose to do so during their lifetime). Most contracts, however, actually hold back refunds until the community is able to move a new tenant into the former resident’s unit. Alternately, refunds payable may become part of a community “queue” and paid out in turn, as new residents pay entry fees.
Obviously, both of these options can be problematic for residents who move and need their refunds to pay for alternative housing. Waits for refunds can also hold up family members’ ability to file estate tax returns or make estate distributions.
Why the hold up, anyway?
Refund restrictions are in place to help maintain the overall financial health of life plan communities. For instance, consider what could happen if a community were to experience a larger-than-usual number of deaths in a given year and was also forced to pay out significant refunds all at once. The community might need to raise monthly fees for current residents to make ends meet.
On the other hand, when there are no limitations on how long a community can take to pay refunds, beneficiaries and former residents are left in the lurch. They could wait many months, if not years, before receiving their refunds. So what can be done?
Enter New Jersey Senate Bill 182
In New Jersey, legislation was recently introduced that would limit the amount of time a community could withhold a refund. The limit: one year following the vacancy of a residential unit. The new legislation would also require that the community pay the refund within 60 days if the unit is reoccupied.
The goal of this legislation is to motivate communities to actively market all of their unoccupied living units, regardless of whether doing so would require them to pay refunds to former occupants. Another goal is to get refunds to former residents’ beneficiaries within a reasonable period of time. This allows beneficiaries to identify potential estate assets and liabilities. The pending bill’s primary sponsor is Senator Kip Bateman.
Refund legislation around the country
A similar refund bill was previously proposed in California. That legislation would have required life plan communities to issue refund payments within 120 days of a contract termination or pay beneficiaries interest on the outstanding balance. While this bill was more aggressive than NJ S182, California Governor Jerry Brown ultimately vetoed it in late 2015.
There are currently a handful of other states that have timing requirements for life plan community refunds. Some of these states — which include New York, Maryland, Massachusetts, and Michigan — even apply their refund-timing provisions to traditional (non-refundable) contracts within the first four to five years of an individual’s residency.
A few caveats on refund time limits
While the intent of this kind of legislation and regulation around the country is positive, it could end up having a negative impact on senior communities and existing residents.
If we look at the real estate downturn prior to 2008, there are some stark examples of life plan communities that faced tremendous financial pressure. In many cases, prospective residents were no longer able to afford to pay steep entry fees as their home values dropped. If that is coupled with a requirement to pay refunds out before receiving new entry fees, those costs will most likely pass along higher monthly fees to current or future residents.
New Jersey bill may strike a reasonable balance
The California refund bill may have been too aggressive. However, the New Jersey proposal may provide a more reasonable time frame for communities. In addition, it could also help protect the rights/interests of beneficiaries and respect promises made to former residents who are relying on their refunds to meet their estate planning goals.
Clearly understand your options
If you or family members are currently considering a life plan community, my advice remains the same as ever: Be absolutely sure you understand the terms and conditions of the community’s contracts. If you choose a contract that offers a refund, you should also make sure your beneficiaries understand the options related to refunds and timing.
The newly introduced New Jersey legislation may provide more refund-related consistency for life plan communities, when compared to other states. Regardless, choosing a community and evaluating its contract is still a major undertaking. Consider working with a knowledgeable, objective financial advisor who can help you with this important decision.
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