Assisting Clients With Creating a Budget for Care
Accurate financial records are a key to financial planning for chronic illness.
August 8, 2011
Dora was diagnosed with Alzheimer’s Disease (AD) at age 82. At the time of diagnosis she was living with her son and daughter-in-law in Atlanta, Ga. As the disease progressed, her relationship with her daughter in law deteriorated. Personality changes made Dora argumentative and suspicious of her daughter-in-law.
Now age 85, the family made the decision to move Dora back to the Chicago area where she was born and had raised her own family. Her two sons still living in the area agreed to take responsibility for her. Before her move back, they arranged for her to stay in an assisted-living facility that specializes in caring for Alzheimer’s patients.
Once moved into the facility her sons and the facility medical director determined that Dora was functioning at a much higher level than most of the other residents. Dora also recognized this and did not want to remain in the facility. The concern was that Dora’s staying at the facility would lower Dora’s cognitive functioning. The facility recommended that the family move Dora to an assisted-living facility that had a wider range of residents.
The family moved Dora to the memory unit of a nearby assisted-living facility. Dora had full access to the facility and soon made friends with other residents.
Can Dora Afford to Stay?
None of Dora’s adult children could afford to contribute to the cost of her stay in the facility. The basic monthly cost of her apartment in the memory unit was $5,770. When she moved in, the medical director determined that she was still functioning at a relatively high level and would not need additional services.
When it came to her finances, Dora was very private but also very meticulous. She was careful to keep all of her financial documents and kept detailed records. Over the last two years she had become less careful in managing her finances and frequently failed to keep up with her bill payments. The sons hired a local personal financial specialist (CPA/PFS) asking him to put Dora’s financial records in order and determine how long she could stay in the facility given her income and assets.
After putting her financial records in order, the personal financial specialist determined her monthly income. Her two primary sources of income were from Social Security and a pension. Together her total monthly income was approximately $3,200. Fortunately, both the pension (Dora was an employee of a Chicago suburb for many years) and the Social Security payment are adjusted for cost of living.
Dora’s investable assets totaled approximately $200,000. She had purchased a variable annuity in 2004 for $80,000 now worth $94,000. She also held $106,000 in various CDs.
In the course of going through Dora’s financial records, the personal financial specialist found a long-term-care insurance policy that was still in force. Dora had purchased the policy in 1998. That was the good news. Unfortunately, the policy was purchased from an insurance company that had been placed into rehabilitation by a state department of insurance in 2009. A quick call to the state department of insurance confirmed that benefit payments were still being made in a timely manner.
The policy provided a maximum benefit of up to $100 per day for the cost of care in an assisted-living facility. It appeared from a review of the policy that Dora would qualify for that benefit. The personal financial specialist called her sons and encouraged them to apply for benefits quickly.
Closing the Gap
The policy benefit was triggered and paid $100 per day or $3,000 per month. The total pool of benefits was $150,000 meaning the daily benefit would be paid for a little over four years. The gap between Dora’s cost of staying at the facility ($5,770) and her monthly income ($3,200) was $2,570 — more than enough to make up the difference. While the long-term-care benefit was not indexed to inflation, both of Dora’s sources of income would help offset future cost increases at the facility.
The personal financial specialist estimated if left untouched for four years (once the long-term-care insurance benefit was exhausted) Dora’s investable assets of $200,000 would pay for approximately three years of care at the facility. This would provide Dora with a total of seven years of care at the assisted-living facility in which she now felt comfortable.
The family faced a dilemma — should they move Dora to a less expensive facility to maximize how long her assets would last or should they take the chance that at the end of seven years she would run out of assets. They were reluctant to move Dora, which would be her third move in as many months from her new friends and a facility she enjoyed.
The family decided to take the risk that Dora would live longer than seven more years and may have to move out of the facility. Another possibility would be that Dora’s condition could deteriorate to the point where the facility had to decide that it can no long provide the needed care (it did not have a skilled nursing license) and asked Dora to move.
Keeping these financial risks in mind, the family decided to leave Dora in the facility.
Dora’s Condition Worsens
Over the next few months, Dora’s condition deteriorated rapidly. She became incontinent and was embarrassed to tell anybody. She unsuccessfully tried to hide her soiled clothing in her bathroom. She became more disoriented.
The facility told the family that Dora could remain in the memory unit but the monthly charge would increase by $600 for incontinence management and another $600 for medication management. Suddenly her monthly stay cost increased to almost $7,000. As a result, the gap between her income and the cost of her stay increased to $3,770. In addition, the family knew that as her condition deteriorated other “a la carte” charges would be added as additional care was needed.
The personal financial specialist revised his figures based on the new information. Drawing down Dora’s assets at approximately $800 per month meant that at the end of four years, the remaining assets would support Dora at the facility for less than two and one-half years. At that point, Dora would have to leave the facility.
The family met once again and decided to take the risk that Dora would not need care for longer than six years and that if she lived longer than that, they would have to make alternative arrangements.
Limited Resources Mean Difficult Decisions
Unfortunately, these types of decisions are not unique. Given limited resources, families must decide how to provide their loved ones with the best care possible given limited financial resources. The issue is not whether Dora’s sons made the right or wrong decision. The important thing is that the family’s decision was made knowing the financial stakes with the help of their personal financial specialist.
James Sullivan, CPA, PFS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.
* PFP Section members, including PFS credential holders will benefit from additional Eldercare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. Non-members can click here to join the section.