Long-Term Care Planning: Protecting Your Wealth and Your Family
Few financial risks are as difficult to think about, or as easy to postpone, as the need for extended care later in life. Yet long term care planning can have a large effect on a retirement plan, an estate plan, and the people you love. Care may be needed at home, in assisted living, or in a nursing facility, and it can last for months or years.
For Wisconsin families, long-term care is both a wealth question and a tax question. How you pay for care affects which assets you spend, which accounts you draw from, what you pass on to the next generation, and how much tax you pay along the way. This article explains the main options in educational terms and the planning issues worth discussing with your advisors.
Start Here: A Complimentary Wealth and Tax Review
A long term care strategy works best when it fits inside your broader financial plan. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Your retirement income plan: how expected spending and potential care costs fit together
Your balance sheet: investments, retirement accounts, real estate, and business interests that could fund care
Tax considerations: how drawing from different accounts to pay for care may affect your taxes
Estate and family goals: how care planning coordinates with your estate plan and legacy wishes
Request your wealth and tax review.
Why Long-Term Care Planning Matters
Long term care costs can be significant and tend to rise over time. Costs vary widely depending on the type of care, the setting, and where in Wisconsin or elsewhere care is received. Many people are surprised to learn that traditional health insurance and Medicare generally do not cover extended custodial care, such as help with bathing, dressing, or eating. Medicare may cover limited skilled care in certain situations, but it is not designed to pay for long stays.
Without a plan, care costs often come from savings and investments, which can reduce the assets intended to support a spouse or pass to children. Care needs can also place emotional and financial strain on family members who step in as caregivers.
What Are the Main Ways to Pay for Long-Term Care?
There is no single right answer. The options below are presented for education only. Insurance products should be evaluated with a licensed insurance professional, and legal questions should be reviewed with an elder law or estate attorney.
1. Self-Funding From Your Portfolio
Some families with substantial assets choose to set aside a portion of their portfolio to cover potential care costs. This approach keeps flexibility and control, but it also concentrates the risk on your own balance sheet. If you self-fund, your wealth management plan may designate specific assets for care, consider how liquid those assets are, and model how a long care event could affect a surviving spouse.
2. Traditional Long-Term Care Insurance
Traditional policies pay benefits for qualifying care in exchange for ongoing premiums. Key features to understand include the benefit amount, benefit period, elimination period, and inflation protection. Premiums on some policies may increase over time, which is worth understanding before purchasing.
3. Hybrid Life and Long-Term Care Policies
Hybrid policies combine life insurance or an annuity with long-term care benefits. If care is not needed, a death benefit may pass to heirs. These products can be complex, and their costs, benefits, and terms vary widely, so a careful review with a licensed professional is important.
4. Medicaid
Medicaid can pay for long-term care for people who meet strict financial and medical eligibility rules. Medicaid rules include a look-back period for asset transfers, and the rules are complex and change over time. Any planning in this area should be coordinated with an elder law attorney.
How Taxes Fit Into a Long Term Care Strategy
Long-term care decisions have tax consequences that are easy to overlook. Some areas worth discussing with your tax planning and preparation professional include:
Medical expense deductions. Qualified long-term care expenses may be deductible as medical expenses for taxpayers who itemize, subject to income-based limits.
Premium deductibility. A portion of premiums for tax-qualified long-term care insurance may be treated as a medical expense, subject to age-based annual limits that adjust over time. Rules can differ for self-employed individuals and business owners.
Health savings accounts. If you have an HSA, funds may be used tax free for qualified long-term care expenses and, within annual limits, for qualified long-term care insurance premiums.
Which account to draw from. Paying for care from a traditional IRA, a Roth IRA, or a taxable account can produce very different tax results. In some cases, large medical deductions in a care year may help offset income from IRA withdrawals.
Selling appreciated assets. Selling investments or a home to fund care may trigger capital gains, so timing and coordination matter.
For more on how account choices interact over time, see how to evaluate a Roth conversion strategy.
Protecting Your Family and Your Legacy
A long term care strategy is also part of your estate and family plan. Questions to discuss include who will make decisions if you cannot, whether powers of attorney and health care directives are in place, and how care costs could affect the inheritance you intend to leave. These documents and any trust planning should be coordinated with your estate attorney.
Families with multiple generations, business interests, or real estate often benefit from a coordinated approach. Learn more about working with a legacy family advisor and how family office services in Wisconsin can help organize complex family finances. For adult children helping a parent, it may also help to read about working with a father's advisor.
When Should You Start Long Term Care Planning?
Many people begin evaluating their options in their 50s or early 60s, while they are still healthy and have more choices. Waiting can limit options, because health changes may affect eligibility for some insurance products. Starting earlier also gives you time to build care costs into your retirement planning and tax strategy over several years.
An Integrated Approach Across Wisconsin
Long-term care touches investments, taxes, retirement income, insurance, and estate planning. When those pieces are handled by different professionals who rarely speak, important connections can be missed. Compound brings wealth management, investment management, and tax planning together, and coordinates with your insurance professional and estate attorney, so care planning fits inside one strategy. Compound works with individuals and families throughout Wisconsin, including Milwaukee, Madison, Green Bay, Appleton, Oshkosh, Wausau, and Janesville, as well as surrounding areas.
Want to see how long-term care fits into your plan? Request a complimentary wealth and tax review.
Frequently Asked Questions
What is long term care planning?
Long term care planning is the process of preparing for the possibility of needing extended help with daily activities, and deciding how that care may be paid for without undermining your retirement or estate plan.
Does Medicare pay for long-term care?
Medicare generally does not cover extended custodial care. It may cover limited skilled care in certain situations, but it is not designed to pay for long-term stays.
What are the options for paying long term care costs?
Common options include self-funding from savings, traditional long-term care insurance, hybrid life or annuity policies with care benefits, and Medicaid for those who qualify. Each has tradeoffs worth reviewing with qualified professionals.
Are long-term care expenses tax deductible?
Qualified long-term care expenses and a portion of qualified insurance premiums may be deductible as medical expenses, subject to limits. Your tax professional can help determine how the rules apply to you.
When should I start a long term care strategy?
Many people begin evaluating options in their 50s or early 60s, while they are healthy and have more choices. Starting earlier also allows care costs to be built into a multi-year retirement and tax plan.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Tax planning often intersects with investment decisions, business ownership, retirement planning, and other financial considerations. Compound Wealth provides an integrated approach that combines tax planning, wealth management, accounting, and business transition services to help clients evaluate financial decisions from multiple perspectives as part of an ongoing planning process.
