DON'T OVERLOOK YOUR CLIENT'S LONG-TERM CARE INSURANCE NEEDS

By Alan D. Kahn, CPA, CLU,
The AJK Financial Group

Whenever you perform an estate and retirement planning review, don't forget to include a review and evaluation of long-term care insurance. It is estimated that nearly half of all people over age 65 will spend some time in a nursing home. It is essential in any planning scenario to consider how to protect lifetime savings from the unexpected cost of in-home care or a nursing home stay due to an extended illness.

One of the ways to meet the rising costs of long-term care while protecting assets is the purchase of a long-term care policy.

The following items should be considered when giving consideration to the purchase of long-term care insurance:

Coverage. The type of coverage depends on personal preferences. For example, is it preferable that the care be given at home or in a nursing home? Very often care begins at home but eventually leads to a nursing home setting for more intensive care.

Recognizing this very natural progression, a long-term care policy should offer the widest possible options, which include both home care and nursing home coverage. The amount of years selected for these benefits along with elimination periods should also be carefully reviewed.

The choice of an indemnity program, where benefits are paid automatically, or a reimbursement plan should be considered based upon which payout scheme makes the most sense over the long term.

Personal preference to be cared for at home by a loved one or friend, or by certified aides should also be considered when selecting a particular policy.

Costs. The earlier this type of coverage is factored into the financial plan, the lower the annual premium will be. In addition, the cost of long-term care policies vary depending on the type of coverage you select.

One way to reduce your annual premium is to choose a longer elimination period--the elapsed time before benefits are paid. For example, elimination periods often run from 20 up to 100 days. In general, the longer the period, the lower the premium.

Policies are also available in daily benefit amounts from $50 to $250 per day with policy maximum benefit periods of 3, 5, or 6 years or with an unlimited benefit period depending upon individual preferences and the expected size of estate. The longer the benefit period selected, obviously, the higher the premium.

Cost of living and inflation riders should also be considered based upon affordability and age of applicant.

Tax Advantages Under
1996 Tax Act

The recent passage of the Health Insurance Portability and Accountability Act of 1996 greatly enhanced the public's awareness of the need for long-term care. The role of the government now is to encourage the purchase of long-term care insurance by providing tax incentives.

A long-term care contract is now treated for tax purposes the same as accident and health insurance. An employer's contribution to a plan would be a tax deductible business expense and would not be considered taxable income to the employee or insured. Benefits derived from a qualified long-term care policy would not be included as income to the employee (for indemnity policies, the legislation established a tax free daily cap of $175 per day).

Long-term care premiums (not paid by employers) that do not exceed certain specified dollar limits listed below and unreimbursed expenses for long-term care services are eligible for the medical expense deduction subject to the floor of 7.5% of income.

Limitation on Premium

Age 40 and under $200

Age 41 to 50 375

Age 51 to 60 750

Age 61 to 70 2,000

Age 71 and greater 2,500

After 1997, these premium amounts will be adjusted for inflation.

For self employed taxpayers, the deduction for long-term care premiums will be treated the same as health insurance premiums with a phased-in approach from 40% in 1997 to 80% by the year 2006.

Even though the government has stated that long-term care contracts are to be treated like accident and health plans, long-term premiums will not be allowed under a section 125 plan (i.e., the insured cannot purchase long-term care with pre-tax dollars). However, the law allows penalty-free withdrawals from retirement plans, IRAs, 401(K)s, and 403(B)s. This will help the consumer to have access to an additional source of funds to pay for long-term care protection.

The legislation also allows tax-favored treatment for existing policies issued before January 1, 1997, that have met state standards at the time of issuance, with the exception of amounts purchased over the $175 per day policy cap established for per diem policies. The legislation will allow tax-free exchange of existing long-term care contracts for new qualified contracts up to January 1, 1998.

The choice of a long-term care program should be tailored to the financial resources available. Sometimes, it is not necessary to insure the entire daily nursing home rate. This will help to keep the policy premium down.

Other factors to consider are --

* the daily cost of nursing home and home care in the area relative to coverage available, and

* whether the policy is portable and can be used in any state in the country. *

NEW AUTHORITY ON STATUTORY SHORT FORM POWERS OF
ATTORNEY

By Frank G. Colella, Esq., LLM, CPA

As of January 1, 1997, three new powers--the authority to make annual gifts, to engage in retirement benefit transactions, and to undertake tax matters--have been added to the new statutory short form powers of attorney in New York State. Separate forms are available for durable and nondurable general powers of attorney, as well as springing general powers of attorney. In addition to the new powers, certain procedural changes were also enacted, including a streamlined process for selection of the delegated authority and an option to designate successor agents.

New Forms

A very popular form of power is the durable power of attorney, which continues in effect during the principal's incapacity. The new form has specifically eliminated the prior requirement that the principal initial a separate instruction to keep the delegation of authority in effect during periods of incapacity. However, the nondurable power, which is ineffective during the principal's incapacity, and the springing power, which becomes effective upon the occurrence of some future event (such as the principal's incapacity), also serve specific planning objectives.

Those using springing powers, however, should make every effort to precisely define the event (or events) that will trigger the authority--such as naming the particular doctor who is to make the determination of incapacity, if that is the particular event. Powers of attorney executed prior to January 1, 1997, will continue to be effective until revoked by the principal.

Authority for Gifts

A significant substantive change to the statutory short form is the addition of gift-making authority. This power permits the agent to make gifts to a class of individuals that includes the "principal's spouse, children, and more remote descendants, and parents not to exceed in the aggregate of $10,000 to each of such persons in any year." An agent that is a member of the permissible class of donees may make gifts to herself. The construction provisions to the statute further provide that the agent may consent to gift-splitting with the principal's spouse for gifts to the principal's children or more remote descendants, in any amount. Split gifts made by the spouse to other donees are limited to the annual exclusion. The gifts may be made outright, or in trust. In addition, the agent can prepare, execute, and file any return or other documents to effectuate the gifts, including the power to execute any trust agreement or other instrument needed in connection with the gifts.

However, one caveat deserves mention. Previously, practitioners that neglected to include a specific grant of gift-making authority in the old forms resorted to arguments that the authority was implied from the principal's prior history of gift-making or, alternatively, from the broad grants of authority contained in the power of attorney form itself. These positions were rarely persuasive and the IRS generally succeeded in challenging the gifts for estate tax purposes. If the principal now neglects to affirmatively grant gift-making authority to the agent, no grant of gift-making authority can be implied. While this protects the principal that has no intention of making gifts, it creates another pitfall for the unwary if gifts later become part of the principal's estate planning
program.

Authority for Tax Matters

The construction provisions for the tax matters power state the agent can prepare, execute, and file any of the principal's tax returns, including but not limited to "Federal, state, local, and foreign income, gift, payroll, Federal insurance contributions act, and other tax returns." In addition, the tax matters power further authorizes the agent to execute any power required by the IRS or other taxing authority with respect to a tax year for which the statute of limitations has not run, the tax year in which the power of attorney was executed, and to any subsequent tax year.

Previously, the IRS would not accept the statutory short form in lieu of Form 2848. However, the broad description of the agent's authority contained in the construction provisions should more than satisfy the requirements of the Treasury regulation because the power expressly authorizes the agent to undertake the principal's Federal tax matters. Accordingly, if the IRS continues to insist upon a Form 2848, the agent is expressly authorized to execute that form on behalf of the principal.

Authority for Retirement Transactions

The retirement transactions power is a third new grant of broad authority that permits the agent to contribute, withdraw from, and deposit funds in any type of retirement benefit or plan. Perhaps the most significant aspect of this power is, however, the authority to change beneficiary designations and make investment decisions. If the agent is the principal's spouse, child, grandchild, parent, or sibling, the agent may even designate herself as the beneficiary. If the agent is not a member of the permissible class, however, the principal can insert additional authority permitting the unrelated agent to designate herself as a beneficiary.

Additional Changes

One significant procedural change now permits the selection of delegated powers by identifying the individual letters assigned to the desired authority on one line and having the principal initial that one line. The prior statute required that the principal initial each and every delegated power to make an effective delegation thereof. Any power not initialed by the principal was deemed not delegated to the agent. This change was made in direct response to the heavy criticism from trusts and estates practitioners that reported the difficulty individuals too frail to initial all the delegated powers (in addition to signing the document) had in executing the statutory short forms.

The designation of a successor agent in the event the named agent "is unable or unwilling to serve," can be made directly on the short form. As mentioned above in connection with the use of springing powers, every effort should be made to precisely define the event that will trigger the successor agent's assumption of authority. While this may not be necessary in the event of the death or incapacity of the primary agent, it can become significant if the primary agent has relocated or, more ominously, fails to act responsibly in the performance of her duty. *

Editors:
Marco Svagna, CPA
Lopez Edwards Frank & Company

Lawrence Foster, CPA
KPMG Peat Marwick LLP

Contributing Editors:
Richard H. Sonet, CPA
Marks Shron & Company LLP

Lawrence M. Lipoff, CEBS, CPA
Lipoff and Company, CPA, PC

Frank G. Colella, LLM, CPA
Own Account

Jerome Landau, JD, CPA

Eric Kramer, JD, CPA

Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.

James McEvoy, CPA
Chase Manhattan Bank