Nursing Homes and the Family Business
One of the more important considerations in planning for the succession of a family business is the issue of long-term care. Long-term care is the need for assistance with the normal activities of daily living that extends for a period longer than 100 days. Activities of daily living (ADLs) include things like eating, bathing, dressing, and toileting. An ongoing difficulty with independently performing two or more ADLs is a benchmark for determining if someone is in need of assistance. While many think of long-term care as nursing home care, in reality, long-term care is provided over a continuum. Long-term care usually begins in the family home and may advance over time to an assisted living facility and finally to a nursing home.
So, how likely are you to need long term care? Here are some of the interesting statistics set forth in an article on Morningstar:
52% of people turning age 65 will need some type of long-term care services in their lifetimes.
47% of men 65 and older will need long-term care during their lifetimes.
58% of women 65 and older will need long-term care during their lifetimes.
2.5 years is the average number of years women will need long-term care.
1.5 years is the average number of years men will need long-term care.
14% of people will need long-term care for longer than five years.
10% of Americans over age 65 have Alzheimer's dementia.
33% of Americans over age 85 have Alzheimer's dementia.
64% of Americans with Alzheimer's dementia are women.
57.5% of individuals turning 65 between 2015 and 2019 will spend less than $25,000 on long-term care during their lifetimes.
15.2% of individuals turning 65 between 2015 and 2019 will spend more than $250,000 on long-term care during their lifetimes.
As you can see, the likelihood of needing to spend all of your assets on nursing home care is actually quite small. However, if you are the 6 foot man who drowns in the river with an average depth of 3 feet, the averages didn’t mean a whole lot. The reality is any one of us may have long-term care needs and those costs can become expensive. In the context of a family business, the problems created by long-term care costs are only amplified.
There are generally four resources from which the costs of long term care are paid for:
Medicaid (or other government programs).
Medicaid is a welfare program. The availability of Medicaid (or other needs based government programs) are contingent on our assets, or really our lack of assets. Generally you must be impoverished to qualify for government assistance.
There are many strategies for dealing with potential long-term care costs. Some strategies encourage you to give your assets away to family or transfer them into what is known as a Medicaid Asset Protection Trust in order to become impoverished and qualify for government assistance. While this can be a strategy, some may struggle with giving up control of what they built and others may not feel ethically comfortable giving away assets to qualify for a welfare program. Additionally, you have to be sure that at least five years will pass before you need Medicaid benefits. No matter your misgivings, this is a significant decision. This is especially true when there is a family business in the mix. Are you really ready to give up that business and its assets on the off chance you end up in a nursing home?
But what if you end up in a nursing home and the successors can’t afford to pay the cost? Will the business or its assets need to be sold? A better approach is to insure the problem. Long-term care insurance is insurance specifically designed to cover the cost of long-term care expenses. Like many policies, the cost will be heavily influenced by age and health. The cost of the policy is also influenced by how long the benefit pays out. Policies can be set up in a variety of ways, all of which will also influence the cost. Historically, long-term care insurance has been a win-lose proposition. You either benefit from the insurance you purchased or you don’t. Some might even say this is really a lose-lose proposition, since winning means you have lost your ability to perform at least two of your ADLs.
An even better solution is to insure the problem using life insurance with a long-term care rider. These policies allow you to have the best of all worlds. With this type of policy, if you do not need to utilize the long term care benefit, your family still receives the death benefit of the life insurance. If you need the money for long-term care you can access the death benefit early. Some carriers will even provide for a return of premium option – basically a money back guarantee. This allows you to deposit a lump sum into the policy and thereby increase your benefits. If it turns out you need the money, you can get it back.
The cost of a stay in a nursing home can be scary. When you have a family business the failure to properly plan could devastate the business and those who rely on it. With some planning, you can keep your assets and have liquidity to pay the cost of the nursing home care all without the need of going onto a government program meant for people in poverty.
If you would like to discuss how nursing home costs may impact your family business or if you know of someone who could benefit from talking further about these options, please give us a call or send us an email. We would love to help.