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Written by: Jerry Love, CPA

Published: 16 May 2011

I am frequently asked by small business owners if they should have a separate LLC or multiple LLCs for their assets. The answer is “it depends” on what your objective is for considering this. In a short column like this, I will only be able to highlight the strategies of why you would consider this and not the details of how.

If the concern is legal liability, then this is a discussion to be had with their legal counsel and not their CPA/financial planner. The fundamental question to be raised with their attorney is if you have the assets in another LLC will it limit any of your liability exposures.

Other reasons a business owner might consider this are: 1) raising additional capital with a sale-leaseback, 2) transferring by gift to family members, 3) sharing the ownership with employees, or 4) they have heard this is the thing to do.

The fundamental issue up front is, as far as tax considerations are concerned, there should be a legitimate business purpose. Further, all elements of the transaction should meet an arms length standard and be at fair market value.

For a sale-leaseback, the business owner will set up a new LLC and then under an arms length transaction, sell the asset to the LLC and immediately enter into a lease for this property from the LLC. If the primary purpose of this strategy is to raise more capital, then it is necessary to find the investor who will be putting the cash into the LLC. The primary disadvantage in considering this strategy is the small business owner is giving up some of the profits in the business via the lease payments.

The primary caution in considering this strategy is you must understand the transaction must be an “arms-length” transaction for both the sale to the LLC and the leaseback of the asset from the LLC. A secondary issue is whether the lease qualifies as an operating lease or a capital lease. The third issue, which may be the most critical to many small businesses, is have you given up your primary asset that may be critical for your use as collateral for your overall debt structure?

The CPA/financial planner should also determine the tax ramifications of the sale-leaseback. Most likely, the business owner will have to pay taxes at the time of the sale.

If the motivation is to transfer ownership in assets to other family members or employees, this transaction may be structured more along the lines of a gift-leaseback. In order to determine the value of the gift into the LLC, you must obtain an appraisal of the fair market value of the equipment. This strategy would normally only be considered by a business that would conclude that it is “asset rich.” As with the sale-leaseback, it is important that the lease be at fair market value.

This strategy could afford the business owner to 1) potentially reduce the size of their taxable estate and 2) potentially shift some income and cash flow to either family members or key employees.

For any gifting, you must discuss with your CPA/financial planner the gift tax and estate tax implications. A major factor in evaluating this strategy is whether the assets transferred will be appreciating in value. Another factor as discussed above, is whether the business owner will need the assets for collateral in the future. And, the business owner needs to make a long-term estimate of the cash flow impact on the business.

The CPA/financial planner should assist the business owner in determining if a gift tax return must be filed or in the case of employees, if the transfer constitutes taxable compensation.

The CPA/financial planner also needs to carefully research the issue related to the new LLC’s ability to take depreciation on the assets.

If the business owner has decided they want to go forward with setting up a separate entity for any of these reasons or other purposes, they should retain a competent and experienced attorney to draft the documents for the transaction(s) to transfer the assets to the entity and for the terms and conditions of the lease.

If one of the motivations of the business owner is protecting assets from creditors or for other reasons, the attorney needs to be the one leading the discussion and advising the business owner.

The final aspect of considering this topic is control. In these transactions, the business owner may be giving up control over assets that are key to the business. An extension of this question is to consider if future asset purchases will be made by the newly created LLC or inside the business.

Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Written by: Jerry Love, CPA/PFS, ABV, CVA, CFP

Published: 13 August 2010

By: Jerry Love, CPA/PFS, ABV, CVA, CFP

This is a question I am frequently asked by the Baby Boomer generation. After all, most of us have accepted there are stages in life and the logical progression is after we have been in the workforce for 40 something years, we should be able to retire. Well, the answer is the infamous “it depends.”

In the prior column, we explored the concept of when should you begin to draw your Social Security. So this article seems to be the logical extension of that one.

This question is really not very difficult to answer if you can tell me a few things: 1) how much will you be spending each year, 2) at what age will you retire, 3) how much do you have in savings, 4) what is your rate of return on your investments, and 5) how long will you live? OK, I would also need to know a few more things including how much you will be getting from Social Security and any pension or annuity type payments etc. Of course, we also need Big Brother to tell us exactly how much inflation will be by year, how much your investments will earn each year and whether there are  any other variables such as family members coming to live with you or huge medical bills that are not covered by Medicare or your long term care policy. 

These are all very important questions because according to Bank of America, http://learn.bankofamerica.com/articles/money-management/how-much-do-you-need-for-retirement.html, “many Americans have a retirement savings shortfall”. According to the Employee Benefit Research Institute (EBRI), about 64% of all workers have less than $50,000 saved for retirement.” 

Further EBRI says, “almost 50% of workers ages 45 and older do not know how much they will need in retirement.” (http://www.deseretnews.com/article/865577034/How-much-money-you-need-to-retire-comfortably.html?pg=all)

So let’s begin to work through this maze.

Any planning for your retirement has to begin with our determining how much you are expecting to spend. Yes, this is basically me asking do you have a budget? The most frequent reply is “no”. So what I will generally do is encourage the client to do one of two things: either take the most current year or at least the prior three months and summarize by category what you have spent. From this historical summary, we can then identify what you would be expecting to spend in the first year of retirement. 

Yes, we will make some modifications to this to adjust for items that may not be necessary during retirement which may include items you have been spending related to your work. There have been many articles written about how a person only needs 70% - 85% of their pre-retirement income. However, I have found it is better to assume that your spending will not be reduced during retirement and may in fact increase because you want to do some traveling or other items on your bucket list.

So first contrast that there is a difference in how much you are making prior to retirement and how much you are spending. If you are taking the rule of thumb literally, your current spending is probably in the range of 70% - 85% of your current income, if you consider that in most cases, 7.65% is going to pay your Social Security and you may be deferring 15% to your 401k or similar plan. If you throw in a few items such as commuting costs and anything else directly related to your employment, you might be on target to these rules of thumb. I choose instead to help clients think in terms of what they are spending. Some surveys indicate that as many as 15% to 20% of retirees see their spending go up during the early stages of retirement.

It is also important to understand that there are some increases to your budget during retirement, not the least of which may be medical expenses. From: http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPgTrJyW, “EBRI estimates that a 65-year-old couple in 2019 that does not have any employer-provided health benefits will need $450,000 to have a 50% chance of funding healthcare expenses not covered by Medicare. Even with employer benefits, there is a 50% chance that out-of-pocket expenses will reach $268,000.”

In addition to the unknown of how much may be needed for medical expenses, it is also important to discuss if there are other major expenditures the client may have in mind during retirement.

Another important factor for us to anticipate is how long you will live.  From http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPg1OTqv, “The Society of Actuaries estimates that for a married 65-year-old couple, there is a 45% chance of one person reaching 90 and a 20% chance one will reach 95.”

Of course no one knows exactly how long we will live and for most clients, we are attempting to determine the life expectancy of two people not just one. 

The actuarial tables are a good starting place. I generally ask the client to compare those life expectancies with their family history. There certainly seems to be support for the premise that the current population is living longer than prior generations due to improvements in our medical profession and that we are more educated about ways we can improve our health. Taking all of this into consideration, I find that it is generally a good idea to begin with a longer life expectancy than the tables. Most people would prefer to leave some assets as an inheritance to someone versus running out of money many years before their passing.

Of course, we also have to consider inflation during retirement. If a person retires at age 66, and lives another 20 to 25 years, they should be expecting that each year many things they consume will be increasing in price. Many financial planners will use a 3% assumption for inflation. Assuming you are 66 now and you believe your life expectancy will be only 15 years. If inflation is 3% per year, that means that the next year your expenses would be $51,500 which is $50,000 + ($50,000 x 3%) and the second year your expenses would be $53,045 which is $51,500 + ($51,500 x 3%) and so on up until your retirement 15 years from now when you will require $77,898 to buy the same things that you can buy today for $50,000.

To quote http://www.newretirement.com/Planning101/Inflation.aspx, “when living on a fixed income, inflation has a profound impact on your quality of life. Basically, inflation makes goods and services more expensive and decreases the value of your money.  When you are working – your wages generally rise as the costs of goods and services increase. Your earnings ‘keep pace with inflation’, so normal inflation is not generally a big concern. However, when you are living off of savings – inflation literally robs you of income.”

Keep in mind that history shows that inflation runs about 3% a year, meaning the cost of living doubles roughly every 24 years. Some articles say that you should conservatively assume inflation will be 4% annually.

The next element in our calculation is how much will our investments earn during our retirement. This is especially important considering that many people have a perception that as they approach their retirement age, they should move closer to having 100% of their retirement assets in CDs, savings accounts or bonds. However, you should note that many of the retirement calculators assume an annual return of 8%, a lofty goal in today's investing environment.

Here is some data for comparison. According to an article written by Chris Taylor, March 28, 2012, http://www.reuters.com/article/2012/03/28/us-column-yourmoney-retirement-returns-idUSBRE82R0XH20120328, “a couple of basic building blocks: According to Irvine, California-based Index Fund Advisors, 86 years of data reveals the long-term return of the Standard & Poor's 500 index to be 9.78% annually, while long-term government bonds average 5.73%.  That's a good place to start, and then you can start refining from there, depending on your particular asset allocation.”

He continues in his article to observe: “Even among financial professionals, there's a wide range of expected rates of return. For its sample pre-retirement balanced portfolios, Baltimore fund shop T. Rowe Price plugs in 7% annual returns, pre-retirement. Vanguard uses 6% for a long-term, balanced portfolio. In a recent research paper titled ‘How Much to Save for a Secure Retirement,’ Boston College's Center for Retirement Research analysts used a slim 4 percent. That might be overdoing it on the cautious side - but if being ultra-conservative prompts you to save even more, then that's not a bad outcome. Better to end up with too much than too little.”

Another critical element for us to understand is how much we are taking out of the retirement savings each year. This is called the “spend rate”. According to Vanguard, “basically, retirees who have a diversified portfolio of stocks and bonds can generally withdraw roughly 4% of their assets during the first year in retirement. In subsequent years, they should then adjust the dollar amount of withdrawals based on inflation. As an example, let's consider a $1 million retirement portfolio with an initial 4% withdrawal of $40,000. Assuming an inflation rate of 3%, during the second year the dollar amount of the annual withdrawal would increase by 3%, to $41,200.” (https://retirementplans.vanguard.com/VGApp/pe/pubnews/4PercentRule.jsf)

According to http://www.retirementwatch.com/CashSample4.cfm, “most studies conclude that the maximum safe rate is just over 4% of the portfolio's value.”

However it is important to note that one size does not fit all. According to http://www.advisorone.com/2012/03/26/milevsky-what-is-a-proper-spending-rate-in-retirement, “the greatest economic scholar of the first-half of the 20th century, Professor Irving Fisher, was born in 1867 and served as a professor of economics at Yale University during the years 1900 to 1935. Fisher’s Optimal Retirement Plan - If you haven’t heard of the infamous 4% rule of retirement income planning, it’s probably for the better. Most economists do not take kindly to this rule and the source of their discomfort can be traced directly to Irving Fisher’s ideas about lifecycle consumption smoothing. Fisher’s philosophy was that there was no universal spending or consumption rate and that everyone should pick a number that would best smooth their consumption. It does not have to be fixed or flat over time, and really depends on your personal preferences and especially your attitude towards risk.”

So about now, I imagine some are saying “my head is spinning, can you just tell me how much I need to have in my retirement account?”

From https://www.fidelity.com/viewpoints/personal-finance/8X-retirement-savings, “to simplify matters, we’ve created a rule of thumb: Save at least 8 times (X) your ending salary to help increase the odds that you won’t outlive your savings during 25 years in retirement. Fidelity suggests that you should have saved 1X your current salary by 35, then 3X by 45, and 5X by 55.”

From: http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/#ixzz2WPfLeA2e, “the fund company T. Rowe Price advises a multiple of 12 times final pay. And another approach from Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits.”

In conclusion, what I hope you will be able to take away from this article is that the answer to the initial question of “do we have enough money to retire?” is a complex matter that requires a skilled financial planner who will help you work through several inter-related assumptions as you make this evaluation.

Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Written by: Jerry Love, CPA

Published: 11 June 2010

Social Security is considered by many as one of the most important government programs in American history. Many people think of Social Security solely as a retirement program. According to the Social Security Administration (SSA), about 98% of children under age 18 would be eligible for survivor benefits if a working parent dies. Further, it is estimated over 4 million children under the age of 18 receive monthly benefits because one of their parents is either disabled, retired or deceased. Survivor benefits are available to any child for whom the deceased worker provided at least half of the child’s support.

This was not always the case. The original Social Security Act of 1935 did not allow for monthly awards of survivors benefits.

To be eligible for these benefits the child must be the biological child, adopted or a dependent stepchild of a qualified person. In some instances the child may be eligible for benefits based on a grandparent’s earnings.

The benefits will stop for the child when they turn 18 or if they marry prior to age 18. The benefits can be extended from age 18 to age 19 if the child is a full-time student in high school. In which case the benefits will stop when they graduate from high school or when they turn 19, whichever comes first.

The Social Security Administration will send the child a notice three months prior to their 18^th birthday to forewarn them the benefits will end at age 18, unless the child is a full-time student enrolled in the 12^th grade or lower grade. If the child is still eligible based on being a full-time student, they will be asked to notify SSA and complete a statement of attendance, which will need to be certified by a school official.

In order to apply, your client will need the child’s birth certificate (or other proof of birth) as well as the social security numbers of both parents. If the deceased was married at the time of death, a marriage certificate will be needed. Also, it may be necessary to have proof of U.S. citizenship or lawful alien status. If you are applying for benefits based on someone passing away, then your client will need a death certificate for the deceased. Your client will be asked for W2 forms or self-employed tax returns for the most recent tax year, because there is a delay in the posting by SSA.

The child will be eligible for up to 75% of the deceased parent’s basic Social Security benefit. However in the cases where multiple family members are eligible there is a limit to how much will be paid to a family, which is from 150% to 180% of the parent’s full benefit amount. If the sum of the benefits payable to family members is greater than this limit, the benefits will be reduced proportionately. There are some unique circumstances in which the family may receive more than the 180 percent.

The amount the child will be eligible to receive depends on the average lifetime earnings of the deceased parent. Similar to the retirement benefits, the higher the worker’s lifetime earnings have been the higher the survivor benefits will be. Basically the SSA makes a calculation in the same manner they would if the person were applying for retirement benefits.

There is also a very small lump-sum death payment of $255. This is normally paid to a surviving spouse who was living in the same household as the deceased worker when s/he died. If there is no eligible surviving spouse, then the lump-sum payment can be paid to eligible children of the deceased.

Generally, in order for your client’s children to receive survivor’s benefits, they must have 40 credits. This is the equivalent of 10 years of work. However, if a parent dies before age 32, fewer credits are required in recognition of the fact the parent had fewer working years. The number varies according to the parent's age at the time of death. The deceased parent must have earned at least six credits within three years of his death for his child to receive monthly survivor’s benefits.

Under a special rule, if your client has worked for only one and one-half years in the three years just before your death, benefits can be paid to your children and your spouse who is caring for the children. Similar to SSA’s rules for a retiree who is between age 62 and their full retirement age, if the child works, the SSA will reduce his/her monthly benefit by $1 for every $2 she earns above the annual limit set by the SSA. The annual limit is 2015 is $15,720.

An application for an ongoing monthly Social Security death benefit should be filed within six months of the worker’s death as no more than six months’ worth of benefits will be paid retroactively. If the deceased was married at the time of death, the surviving spouse is eligible for benefits on their own merits. Furthermore, a divorced spouse of the deceased person who has an eligible dependent child living with them could be eligible for benefits if they have not remarried.

Taxation is the same as for Social Security survivors’ benefits as Social Security retirement benefits. They are fully taxable to the extent of the current laws regarding Social Security taxation.

Jerry Love, CPA is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Written by: Jerry Love, CPA

Published: 24 February 2010

By: Jerry Love, CPA/PFS, ABV, CVA, CFP | A recent article by Christine Vestal, ACA Spurs State Shift in Long Term Care, caught my attention and confirmed something that I have observed many times over the past few years that ACA is a program larger than Social Security and Medicare combined.  Christine writes:

“In New Hampshire, Medicaid pays for in-home care for nearly all of its developmentally disabled residents. For frail elders, the opposite is true. Most wind up in nursing homes.

“To remedy this imbalance, New Hampshire is taking advantage of Affordable Care Act funding for a program aimed at removing existing barriers to providing long-term care in people’s homes and communities.

“Known as the Balancing Incentive Payment Program, it is one of several ACA provisions designed to keep as many people as possible out of costly institutions.” (http://www.pewstates.org/projects/stateline/headlines/aca-spurs-state-shift-in-long-term-care-85899534029)

The first Baby Boomers are approaching age 70.  As with many other issues, this is beginning to bring issues into focus related to long term care in America.  Long term care (LTC) is generally defined as a person who needs assistance that a normal healthy person does not.  It can be a vague concept.

Most insurance policies that provide coverage for long term care use the definitions based on activities of daily living (ADL) that a person is having difficulty with one or more of the following: bathing or showering, using the restroom, eating, getting in or out of bed or a chair, dressing, or moving across the room to sit in a chair.  Other functions that may be considered could be light housework, preparing meals, going shopping for groceries, managing medications and paying bills.  

As you may notice, the definition of who is in need of long-term care is focused on a person having difficulty performing tasks vs. identifying a symptom like a pain in the chest.  The secondary definition that is frequently used is that the difficulty performing the tasks is long term in nature and not something that may be resolved with rehabilitative care such as physical therapy.

It is estimated that nearly ten million Americans are in need of some level of long-term care.  Although the majority of these people are over 65, not all are.  Some are in need of this care in their home, while others are better served in a nursing home. It is estimated that 80% or more of those in need of long-term care are not in a nursing home.  Sometimes that distinction is based on whether they live alone or if the other person or persons in the home are capable of providing the care.  The issue, in part, is a question of independence.  Can the person live independently or conversely, how much assistance do they need?

As you might note, this is not care that will normally be paid by health insurance and is not covered by Medicare.  In fact the health care system is not designed to provide these basic needs. Most of the health coverage available is designed to address and pay for acute care, the detection and treatment of an injury or illness that is more of a short-term problem.

A study by Genworth Financial, Inc. and National Eldercare Referral Systems, LLC in 2013 found the median cost of a private room in a nursing home is $83,950. The study also concluded that a home health aide would cost an average of $19 per hour. The study also identified the median cost of an assisted living facility would be $41,400. An assisted living facility would provide personal care and assistance with medical care for those who are not able to live alone but do not require constant care normally required by nursing home residents.

However the study found the median cost varies significantly in the different 437 regions of the country. For example, the median cost of a private room in a nursing home for the following states was:

Texas               $61,230
Kansas            $62,780
Georgia            $67,525
Florida              $91,250
California          $97,820
New York        $125,732

Current estimates suggest that the demand for long-term care among the elderly will more than double in the next thirty years. Alongside policy toward Social Security and Medicare, policy toward long-term care will increasingly shape quality of life for aging Americans.  (Congressional Budget Office,"Projections of Expenditures for Long-Term Care Services for the Elderly " Washington: CBO, March 1999.)

A very large majority of the population who need long-term care are on Medicare, although as indicated Medicare does not pay for long-term care. Medicare finances long-term care only tangentially through its limited skilled nursing facility (SNF) and home health benefits. Despite recent growth in spending on these benefits, much of the SNF and home care paid for by Medicare remains short-term rehabilitative care, often related to a hospital stay or outpatient procedure. Medicare covers SNF care for up to 100 days following a hospital stay of at least three days. For homebound persons needing part-time skilled nursing care or physical or other therapy services, Medicare pays for home health care, including personal care services provided by home health aides. (http://www.medscape.com)

According to a poll commissioned by the National Academy of Social Insurance’s (NASI) Study Panel on Long-Term Care, nearly three quarters of baby boomers and seniors are concerned either a great deal or a fair amount about paying for long-term care. According to The Economic Status of the Elderly (NASI Medicare Brief No. 4), “More baby boomers are likely to be living alone in old age compared to their parents, for three reasons. First, more of the baby boomers have never married. Nearly 10% of the youngest baby boomers (born between 1956 and 1964) are forecast never to have married by ages 55 to 64, which is twice the rate of their parents. Second, more of those who did marry will become divorced or widowed by the time they reach ages 55 to 64—25% to 30% of them compared to 15% to 20% of prior cohorts. Finally, childlessness is on the rise. In 1989, 26% of couples aged 25 to 34 had no children, compared to only 12% of such couples in 1959. These trends will result in increase in the percent of older Americans living alone, from 21% of those age 63 to 72 today, to 24% of those 10 years younger, to 37% of the early baby boomers.” (http://www.nasi.org/book/export/html/169)

Although LTC is financed through a combination of public and private resources, the largest public source is the Medicaid program. Medicaid is the largest single payer of LTC services. Medicaid-eligible people who use long-term care services are among the most disabled and chronically ill of the total Medicaid population. Although they accounted for only 7% of the Medicaid population, these long-term care users consumed more than half (52%) of total Medicaid spending. Moreover, the number of people who need LTC services is expected to increase rapidly during the next several decades. People age 85 and older constitute the fastest growing population in the United States; their numbers are expected to increase from about 4 million in 2005 to almost 21 million by 2050, foreshadowing an ever-expanding need for LTC services. (http://www.ncsl.org/research/health/long-term-care-faq.aspx)

Another facet of the need for long term-care is the growing number of people who are diagnosed with dementia.  Dementia is a general term for a decline in mental ability severe enough to interfere with daily life. Memory loss is an example, however Alzheimer's is the most common form of dementia.  Dementia is not a specific disease. It's an overall term that describes a wide range of symptoms associated with a decline in memory or other thinking skills severe enough to reduce a person's ability to perform everyday activities.  Alzheimer’s disease accounts for 60 to 80% of cases.

According to the Alzheimer’s Association, “Alzheimer’s disease is the sixth leading cause of death in the US.  More specifically, one in three seniors dies with Alzheimer’s or another form of dementia.  It is the only cause of death among the top 10 in America without a way to prevent it, cure it or even slow its progression.  More than 5 million Americans are living with the disease.  By 2025, the number of people age 65 and older with Alzheimer's disease is estimated to reach 7.1 million—a 40% increase from the 5 million age 65 and older currently affected.  In 2013, Alzheimer’s will cost the nation $203 billion and this amount is expected to rise to $1.2 trillion by 2050.”

The duration and level of LTC will vary by person and often change over time.  Here are some statistics: 1) someone turning 65 today has almost a 70% chance of needing some type of LTC services, 2) women will need care longer (3.7 years) than men (2.2 years), and 3) one-third of today’s 65 year olds may never need any LTC support but 20% will need it for longer than five years. (http://longtermcare.gov/the-basics/how-much-care-will-you-need/)

So the big question is how do you pay for the LTC?  Basically, there are three ways you pay all the costs (private pay), you buy LTC insurance that may pay for some or all of it, or qualify for Medicaid.

Option 1: Private Pay: As discussed above, it can be very expensive and may extend for several years.  Suffice it to say, that the cost of LTC can consume a significant amount of the lifetime savings a person has accumulated for retirement.  Fidelity Benefits Consulting, which has been tracking retiree health care costs for more than a decade, estimates that a 65-year-old couple retiring this year will need $220,000 to cover future medical costs (deductibles and copayments, premiums for optional coverage for doctor visits and prescription drugs, out-of-pocket expenses for prescription drugs, and other expenses that Medicare doesn't cover, such as hearing aids and eyeglasses). That doesn't include the high cost of long-term care. (http://www.aarp.org/health/medicare-insurance/info-12-2012/health-care-costs.html)

In an article published by MoneyWatch, by Steve Vernon, July 19, 2010, Long-Term Care: What Are the Real Risks? (http://www.cbsnews.com/news/long-term-care-what-are-the-real-risks/), two-thirds of people age 65 and over will need long-term care in their lifetime. The article quotes a comprehensive paper written by researchers and academics entitled Long-Term Care Over an Uncertain Future: What Can Current Retirees Expect?  (http://www.allhealth.org/briefingmaterials/Long-TermCareOveranUncertainFuture-WhatCanCurrentRetireesExpect-461.pdf) This report, released in 2005, estimates the full range of out-of-pocket expenditures that people might expect to spend over their lifetime. For instance, according to this study:

- 42% of people turning age 65 will have no private out-of-pocket costs for long-term care over their lifetime.
- 19% of those turning 65 will have out-of-pocket costs under $10,000 over their lifetime.
- 8% will have costs between $10,000 and $25,000.
- 14% will have costs from $25,000 to $100,000.
- 11%will have costs over their lifetime from $100,000 to $250,000.
- 5% will have costs of $250,000 or more.

The report cited above estimates that for people turning age 65 in 2005, 69% of this group will need some form of long-term care over their lifetime, for three years on average. Of this period, 1.9 years will be provided at home, with 1.1 years provided at any type of formal facility.

Option 2: Buy Long-Term Care Insurance: According to the American Association of Long-Term Care Insurance, (http://www.aaltci.org/long-term-care-insurance/learning-center/best-age-to-buy-long-term-care-insurance.php/) “for most people, the best age to apply for LTC insurance is in your mid-50s.  You can lock in your good health; and today there are policies that allow you to buy some coverage now and add to it in future years.  As we age, our health changes. And once you reach your 50s it almost never gets better (even if you diet and exercise). If you are 50, chances are that you leave your doctor's office with some new prescription in hand. That drug may help you live a long life. But it's those changes in our health that can make it harder or even impossible for you to qualify for long-term care insurance.”

Premiums for long-term care insurance are based on your age when you apply and your existing health condition.  If you wait until you are older or already have a diagnosis that would indicate you are more-likely-than not going to need extended LTC, then your premium is going to be very high, if you can get a policy at all. 

It would be impossible for me to estimate what a premium would be, but American Association of Long-Term Care Insurance has indicated the following on the above referenced web page: “Here is a real example. The following scenarios use real rates (2010).  You are age 55. You want what we term a "standard" plan of coverage. That equals $172,600 in current benefits (based on a $150 daily benefit for a 3-year plan). Your cost is $1,084 per year because you qualify for the preferred health discount (spousal discount too).  Long-term care insurance protection should grow to keep pace with rising costs. The one we are illustrating does. So, by age 65, the $172,600 benefit you bought at age 55 -- will have grown in benefit value to $276,000.  Someone age 65 (today) would pay $3,275 for $276,000 in coverage because it's very unlikely they will still qualify for that good health discount.  And that reflects today's rates. Chances are rates will rise. So, the 55 year old who waits for 10 years will pay even more.”

Option 3: Qualify for Medicaid: It is necessary to understand the general distinction between Medicare and Medicaid. Medicare is a federal benefit that an individual receives once you turn age of 65 years. Medicare generally pays for your doctor bills and health care costs. Medicaid is also a governmental benefit. The first type of Medicaid, known as Community Medicaid, has strict income and asset requirements and pays for health care needs. The second type of Medicaid, pays for nursing home costs once the requirements for Medicaid are met.

From: http://www.familiesusa.org/issues/medicaid/about-medicaid.html

Since 1965, Medicaid has been the backbone of this country's health care safety net.  Jointly funded by the states and the federal government, Medicaid covers more than 58 million low-income Americans, including families, people with disabilities, and the elderly. Today, Medicaid provides coverage for almost 29 million children and pays for approximately half of all long-term care costs.  The Affordable Care Act gives states the opportunity to expand their Medicaid programs to cover all individuals with incomes at or below 138% of poverty, an income of about $31,809 for a family of four in 2012. That will extend coverage to many low-income adults currently left out of the program and simplify eligibility determinations across the program.

Federal law requires states to cover certain categories of people in Medicaid. In general, there are six categories of so-called “mandatory” individuals: 1) children, 2) pregnant women, 3) very low-income parents, 4) the elderly, and individuals who are 5) blind or 6) disabled.

Eligibility levels for these groups of people varies by income:

- Children under age six with family incomes up to 133% of the federal poverty level ($25,390 for a family of three in 2012).
- Children ages 6-19 with family incomes up to 100% of poverty ($19.090 for a family of three in 2012).
- Pregnant women with family incomes up to 133% of poverty.
- Parents whose income meets the state’s AFDC (Aid to Families with Dependent Children - former welfare program) criteria in place as of July 1996.
- People who are elderly, blind, or who have disabilities and who receive Supplemental Security Income (SSI) may have incomes up to 74% of poverty ($8,266 for an individual in 2012).
- Certain people with severe disabilities who would qualify for SSI if they did not work.
Elderly individuals and people with disabilities whose Medicare premiums are paid by Medicaid through the “QMB,” ”SLMB,” and “QI” programs—generally speaking, these are individuals who have incomes below 150% of poverty.

The Affordable Care Act requires states to maintain the Medicaid eligibility levels, policies, and procedures that were in place in March 2010 (the date the Affordable Care Act was enacted) until the state has an operational exchange.

The Affordable Care Act of 2010, signed by President Obama on March 23, 2010, creates a national Medicaid minimum eligibility level of 133% of the federal poverty level ($29,700 for a family of four in 2011) for nearly all Americans under age 65. This Medicaid eligibility expansion goes into effect on January 1, 2014 but states can choose to expand coverage with Federal support any time before this date. See related Federal Policy Guidance at http://www.medicaid.gov/Federal-Policy-Guidance/Federal-Policy-Guidance.html and states that have expanded Medicaid prior to 2014.

The Affordable Care Act (ACA) goes a long way toward simplifying Medicaid eligibility.  Medicaid is a means-tested insurance program designed to help cover the expenses of people living with low incomes or lacking a certain level of resources. Poverty alone, however, will not necessarily allow you to qualify for Medicaid.  In order to qualify for Medicaid, though, you will first of all need documentation of U.S. citizenship, and some way of satisfying certain residency and immigration requirements.

Joy Johnson Wilson, Health Policy Director for the National Conference of State Legislatures, summarizes Medicaid and CHIP provisions in the new law and compares them to current law.  In particular, on page 8 Wilson notes that the ACA “[r]equires states to use a net income standard (no asset or resource test, no income disregards) to determine [Medicaid] eligibility.” The new federal income eligibility threshold is 133% of the federal poverty level (effective 1/1/14).

Essentially, the Medicaid expansion under the ACA will broaden Medicaid eligibility for low-income, non-elderly adults without regard to assets. A major exception for that age group is those with incomes above the threshold but with high out-of-pocket medical costs. Such individuals will be required to spend their assets down to the existing asset limit, which varies by state and is typically a few thousand dollars.  Existing rules, including the asset tests, will continue to apply for individuals obtaining Medicaid eligibility through another program (e.g. foster care children, or SSI/SSDI recipients) and the elderly.

The Affordable Care Act called for a federal minimum income standard of up to 133% of the federal poverty line for all states. This expansion of Medicaid would establish this minimum in all states for them to participate in the federal Medicaid program and qualify for federal matching funds and took effect on January 1, 2014.

So all states now have the same income threshold? No. The United States Supreme Court in its ruling in June, 2012 on the Affordable Care Act stated that the federal government could not mandate or require this expansion of Medicaid as a condition of participating in the program, but rather participation in the expansion had to be voluntary.

Did all states agree to the expansion? No. Twenty-five states and the District of Columbia have agreed to participate in the expansion. 14 states have declined to participate in the expansion. Eleven other states have not officially stated if they will participate in the expansion.

The 25 states (along with the District of Columbia) that are participating in the expansion are: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Hampshire, New Mexico, North Dakota, Ohio, Oregon, Rhode Island, Vermont and Washington.

The 14 states that are not participating in the expansion are: Alabama, Georgia, Idaho, Iowa, Louisiana, Maine, Mississippi, North Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas and Wisconsin.

The 11 states that have not officially declared their intentions are: Alaska, Indiana, Kansas, Kentucky, Nebraska, New York, Tennessee, Utah, Virginia, West Virginia and Wyoming.

Conclusion: As with many aspects of financial planning, there is not a “one size fits all” answer.  Furthermore, the Affordable Care Act has added some new twists to an already complicated issue that is of great concern to our clients and most of us.

Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..