By: Lily Vittayarukskul

May 28th, 2023

Effective estate planning requires addressing long-term care considerations. Unfortunately, conversations about long-term care between financial advisors and clients often lack depth and personalization, leading to inaccurate planning outcomes. By proactively engaging in comprehensive discussions about long-term care and incorporating it into the estate planning process, advisors can significantly improve the accuracy and effectiveness of their clients' estate plans. This article explores the current issues surrounding long-term care conversations and planning outcomes, providing examples of both poor and improved outcomes to illustrate the relevance and importance of these discussions in estate planning.

Client: John

Advisor: Sarah

In the initial estate planning process, John and Sarah focus primarily on asset distribution, wills, trusts, and tax strategies. However, they fail to address the topic of long-term care and its potential impact on John's future financial situation. The omission of long-term care planning proves to have significant consequences later on.

Several years pass, and John, now in his late 70s, experiences a decline in health. His mobility becomes limited, and he requires assistance with daily activities. It becomes clear that John needs long-term care services, such as home health aides or assisted living.

As John's health deteriorates, he realizes that he hasn't made any provisions for long-term care in his estate plan. The absence of a plan specifically addressing long-term care funding and arrangements leaves John and his family in a state of uncertainty and financial stress.

Without proper long-term care planning, John is forced to pay for his care expenses out of pocket, rapidly depleting his savings and retirement funds. The lack of advanced planning means John hasn't explored options like long-term care insurance or alternative funding strategies, leaving him unprepared for the significant costs associated with his care needs.

As John's assets dwindle, he starts selling valuable possessions and liquidating investments to cover the mounting expenses. The financial burden not only affects John's quality of life but also puts a strain on his family members who witness their inheritance diminishing and worry about their own financial futures.

Moreover, the absence of a designated long-term care plan also means that John's wishes for the type and quality of care he receives are unclear. Decisions regarding his care are made on an ad-hoc basis, without a comprehensive understanding of his preferences and goals.

The consequences of not addressing long-term care in the original estate plan are evident. John's financial stability is eroded, his family faces increased financial pressure, and the overall estate plan no longer accurately reflects his true financial situation and intentions.

This scenario highlights the importance of incorporating long-term care planning into the estate planning process. Had John and Sarah discussed and prepared for long-term care needs from the beginning, they could have explored funding options, assessed insurance policies, and established a clear plan to protect John's assets and ensure his care preferences are met. By neglecting to address long-term care, they inadvertently compromised the accuracy and effectiveness of John's estate plan, leading to unintended financial and emotional consequences for both John and his family.

What is Long-Term Care Planning?

Long-term care planning involves preparing for the future care needs and preferences of individuals as they age. It encompasses various aspects such as determining the type of care they desire, estimating the associated costs, identifying funding options, and considering who will provide support. The goal of long-term care planning is to ensure that individuals can live in a manner that aligns with their expectations for their future well-being.

Long-term care planning revolves heavily around what an individual expects to get out of long term care. Long term care “involves a variety of services designed to meet a person's health or personal care needs,” while they age (National Institute on Aging). Because long term care is so tailored to an individual’s care needs, it is very important to understand a client’s health condition and possibly risks while planning.

Imagine you are working with a client named Sarah who is approaching retirement. As part of the long-term care planning process, you engage in a comprehensive discussion about her expectations and preferences for future care. Sarah expresses a desire to age in place and receive in-home care if needed, emphasizing the importance of maintaining independence. Based on this conversation, you explore potential options for in-home care services, assess the associated costs, and discuss funding strategies to ensure Sarah's preferences are met while aligning with her financial situation.

The Importance of Long-Term Care Planning

Long-term care planning has gained increasing importance due to longer life expectancies and the potential financial burden associated with care needs. Many individuals are unprepared for the cost of long-term care, as very few believe they will need it in their futures (PBS) leading to financial crises when the need for care arises. By addressing long-term care planning, financial and elder planning professionals can help clients understand the significance of preparing for this aspect of their retirement, safeguarding their financial stability and overall well-being.

Let's consider the case of John, a client who neglected long-term care planning until he suddenly required assistance due to a health crisis. Without prior preparation, John finds himself scrambling to cover the costs of necessary care, depleting his savings and jeopardizing his financial stability. This scenario highlights the importance of long-term care planning and the potential consequences of unpreparedness. By proactively discussing long-term care with clients like John, financial advisors can help prevent such situations and ensure they have a comprehensive plan in place to address future care needs.

What Are the Costs Clients Need to Plan For?

The costs of long-term care can vary depending on the type of care required and the geographical location (Genworth). Expenses can include nursing home care, assisted living facilities, in-home care, and more. It is crucial to consider these costs and their potential accumulation over time. By discussing long-term care costs with clients, financial advisors can provide a realistic assessment of the financial implications and incorporate these figures into clients' overall financial plans.

Suppose you are working with a client named David who wants to understand the potential costs of long-term care. Through research and analysis of local care services, you provide David with estimates for different types of care, such as nursing homes and assisted living facilities, specific to his geographical location. Using this information, you discuss the financial implications and help David understand the importance of factoring these costs into his overall financial plan, including his estate planning goals.

How Will Long-Term Care Affect My Clients' Financial Status?

Long-term care can have a significant impact on clients' financial status and assets. The costs associated with long-term care can deplete clients' savings, investments, and other financial resources, as well as “dramatically reduce one's standard of living, or force someone to purchase less care than they need” (ASPE). Funding options such as long-term care insurance, hybrid life insurance, annuities, reverse mortgages, or out-of-pocket payments can influence clients' financial stability. It is essential to discuss and evaluate these options to help clients protect their assets and maintain their financial well-being while planning for long-term care.

Consider a client named Lisa who intends to fund her long-term care through a combination of long-term care insurance and personal savings. You work closely with Lisa to assess her current financial status, evaluate potential insurance options, and estimate the impact of long-term care expenses on her assets and overall financial well-being. Together, you develop a comprehensive plan that balances her financial stability with the need for adequate long-term care coverage, ensuring her estate plan accurately reflects her financial situation.

How is Long-Term Care Planning Involved in Estate Planning?

As an estate planner, addressing long-term care needs is vital because it directly impacts clients' financial situations and the accuracy of their estate plans. Failure to consider long-term care needs may result in inaccurate estate plans that do not reflect clients' true financial capabilities or potential future expenses. In fact, aging individuals “risk significant estate shrinkage to cover the expensive cost of long-term care,” and not accounting for this ahead of time will lead to inaccuracy in their estate plan (Armada Senior Care). By incorporating long-term care planning into the estate planning process, advisors can ensure that the distribution of assets aligns with clients' intentions and accounts for potential long-term care costs.

Let's say you are assisting a client named Michael in his estate planning process. During the discussions, you address Michael's long-term care needs and the potential financial impact on his estate. You collaborate with him to select a trusted individual as his power of attorney, ensuring that his long-term care preferences and decisions are accurately represented in case he becomes unable to make decisions for himself. By incorporating long-term care planning into the estate planning process, you help Michael create an accurate and comprehensive plan that reflects his wishes and accounts for potential long-term care costs.

How Will Planning for Long-Term Care Improve Accuracy?

Discussing long-term care planning with your clients directly addresses the issue of inaccuracy in estate planning. By proactively working with them and conducting thorough research on long-term care services, you can provide clients with an accurate understanding of the care they may need in the future and the associated costs.

With this knowledge, you can sit down with your clients and help them assess their options. For instance, let's consider a client in California who wants to plan for home health aid for one year and assisted living for two years. Based on projected costs from Genworth’s 2021 Cost of Care survey, home health aide services in California cost approximately $6,101 per month, while assisted living is priced at around $5,250 per month.

Using these projected costs, the three years of care your client wishes to plan for will amount to approximately $199,212 in total. Now, if the client chooses to fund this care with a reverse mortgage, their home's value will be impacted as they use it to cover their care expenses. This scenario affects your estate planning because the home's value will be lower than its original worth, and the recipient of the house after your client's passing will not receive the full inheritance value.

By engaging in discussions about long-term care with your client, you can account for the potential change in their home value and adjust the estate plan accordingly. Similarly, if the client intends to use their assets to pay for care, it's crucial to consider the depletion of their wealth in the estate planning process. Failure to address these aspects can lead to discrepancies between the predicted transfer of wealth and the client's actual financial situation, resulting in an inaccurate estate plan.

Avoiding such inaccuracies is essential for maintaining the credibility and trust your clients have placed in you. By proactively planning for long-term care and incorporating it into the estate planning process, you ensure that the transfer of wealth and assets accurately reflects your clients' financial standing. This comprehensive approach increases the accuracy of your estate plans, instills confidence in your clients, and strengthens the overall effectiveness of your practice.

Power of Attorney

A large concept shared between long term care planning and estate planning is deciding on a power of attorney. Power of attorney makes it so that a “trusted agent can lawfully transfer and retitle assets to a spouse or family member,” so that they may make decisions that will determine long term care insurance eligibility and estate planning (Barclay Damon). This legal choice has the potential to impact the services your client receives, depending on who they give this power to and what this person has agreed to provide for your clients.

Power of Attorney plays a significant role in both long-term care planning and estate planning. Let's consider an example to understand its impact on accuracy:

Imagine you're working with a client who wants to plan for long-term care in the future. During the discussion, you help them select an individual to hold Power of Attorney, someone who will make decisions on their behalf when they are unable to do so. By involving the client and their chosen person in the decision-making process, you ensure that their long-term care wishes and plans are accurately reflected.

Suppose your client appoints their adult child, Sarah, as their Power of Attorney. Together, you have a comprehensive conversation about the client's care preferences, financial resources, and how they envision their future. They express their desire to receive in-home care for as long as possible and then transition to an assisted living facility if necessary.

By involving Sarah in the discussion, you establish a clear understanding of the client's wishes and ensure that Sarah is well-informed about their preferences. This proactive approach avoids confusion and disagreements later on when decisions need to be made. With a solid plan in place and a designated Power of Attorney who understands the client's desires, the accuracy of their long-term care plan is preserved.

As the estate planner, you can incorporate this information into the overall estate plan. By considering the client's care preferences and the financial resources allocated for long-term care, you ensure that the plan remains aligned with their intentions. This means that the accuracy of the estate plan is not compromised by the transfer of decision-making power to the designated Power of Attorney.

Conclusion

In summary, by working closely with your client to select an appropriate Power of Attorney, involving them in the decision-making process, and ensuring their chosen representative understands their wishes, you guarantee that the long-term care they receive reflects their plans. This approach safeguards the accuracy of the estate plan, as the transfer of decision-making authority does not diverge from the care costs and preferences accounted for in the plan.