I have spoken at length about how pre-taxed funds can complicate an estate plan. While having a fund that you can grow with pre-taxed money can increase the rate of the fund’s growth, it can be a bit of a double-edged sword.
The thing with pre-taxed money (like traditional IRAs) is that if you want to use that money, you have to pay the tax on it first. You can’t roll those funds over to cover the cost of living, nor can you pull the money out to pay for big expenses without also paying tax. Thus, that money is essentially locked up.
What I am getting at is, an estate heavily invested in pre-taxed accounts tends to not be very flexible for planning purposes. And you want flexibility. After all, 70% of individuals over the age of 65 will need some type of long-term care. If most of your money is locked up, how will you manage to protect your assets and pay for long-term care?
A great option for folks with pre-taxed accounts is an asset based long-term care insurance policy. As I’ve mentioned in other articles, long-term care insurance is a great tool to cover the cost of future care (not only long-term care but chronic care as well). Not only does it cover the cost of long-term care, it also provides you with flexibility in your future plans, all the while costing less in a year than two-weeks at a long-term care facility.
So, what’s an asset based long-term care policy? This type of policy allows for you to directly pay your long-term care insurance premiums out of your tax qualified account. This is a great option because it allows you to roll that money over without taking an immediate tax hit. Thus, the amount withdrawn from the pre-taxed account is not taxed when used to pay the long-term care premiums. Furthermore, what you pay toward long-term care insurance may be tax deductible depending on your overall medical expenses for the year.
Long-term care insurance is not only a great option to ensure that your cost of care is covered at a reasonable and affordable rate, it’s also a great estate planning tool to lend you flexibility and optimize your tax liability each year. If you have questions regarding long-term care insurance or an Estate Planning or Elder Law matter, let the experienced attorneys, and agents, at McIntyre Elder Law and McIntyre Financial help you.