James Sullivan

Many seniors are quietly going broke

Why CPAs should step in and how they can help.

April 9, 2012
by James Sullivan, CPA, PFS

Without telling their adult children, a couple in their late 70s dropped their Medicare Supplement policy because they were unable to afford the monthly premiums. A few months later the husband had a major heart surgery requiring a lengthy hospitalization and an even longer stay in a skilled nursing facility for rehabilitation. The deductibles and co-payments (which the supplement policy would have paid had it been kept in force) were over $15,000 — an amount the couple cannot afford.

An 85-year-old man needs full-time care in a skilled nursing facility due to his advanced dementia. His 83-year-old wife is in capable of taking care of him. While planning for his care, the adult children are shocked to find out that their parents have run through all their retirement accounts and have been living on borrowed money for several years. Their credit cards have been maxed out and they have borrowed against all their permanent life insurance policies for loans. In addition, their mortgage exceeds the estimated value of their home.

Unfortunately, these are not isolated incidents. Increasingly, adult children, guardians, and attorneys are asking CPAs to help organize their parents’ or clients’ finances and develop a plan to pay for needed health care.

Typically, it is the adult children who pay for the CPA’s services. In other cases a guardian or an attorney hires the CPA. Determining who the actual client is and, if it is not the person who needs the care, obtaining his or her permission to work with the adult children or a third party is important. In the case of a guardian, he or she may have to seek the permission of the court to hire the CPA and pay his or her fees.

In the case below it is the newly appointed guardian who hires a CPA to assist with care planning.

Case study

The cognitively impaired Jean is 90 years old and suffers from multiple sclerosis (MS). Her attorney seeks a court-ordered guardianship. In granting the request, the court appoints a local geriatric care manager (GCM) guardian.

Unfortunately, Jean’s bookkeeper was not overly concerned that her living and health-care expenses were rapidly depleting her assets. The total annual cost of Jean’s care was more than $100,000. When the GCM took over as guardian, her total assets were just over $200,000. Doctors told the GCM that Jean could live another five or more years. The GCM, with the court’s approval, fired the bookkeeper and hired a local CPA personal financial specialist (CPA/PFS) to help plan for Jean’s care.

Jean rents an apartment in the independent living wing of a continuing care retirement community (CCRC). The monthly rent is $2,500. Wheelchair bound, she needs care 24 hours a day costing $7,500 per month. The GCM determines Jean cannot live independently without the care giver. Her only other alternative is to move into the skilled nursing facility connected to the facility. But given the level of care needed, the actual monthly savings would be relatively small.

The GCM believes that Jean’s current living situation is the best alternative for her and the underlying goal is to keep Jean in her apartment for as long as possible and later move her to a skilled care facility only when absolutely necessary. As detailed below, Jean’s current liquid assets and monthly income will keep her in her current living situation for approximately 21 months.

Current Finances

Jean owns a variable annuity worth approximately $200,000. The GCM terminated her life insurance policy at the CPA’s recommendation with a cash value of $4,000 so that it could be used for her care. Jean has no living relatives and no desire to leave a legacy. Her total assets available to pay for her care are $204,000. The annuity is fully taxable upon withdrawal. After federal income taxes have been taken out of the annuity withdrawals, she is left with approximately $184,000 to pay for care. Additionally, she has:

  • Monthly income — Social Security and two small pensions provide $2,100 in monthly income.
  • Expenses — Jean’s approximate expenses, including her 24/7 caregiver are currently $11,000 per month not including extraordinary expenses such as guardianship, legal, and financial planning fees.
  • Draw on assets — If Jean’s care situation does not change, the $184,000 will only last approximately 21 months.

Planning for Future Care Needs — Tapping an Illiquid Asset

At the end of the 21 months, alternatives for Jean’s care and living situation would have to be reconsidered. The most likely alternative would be applying for Medicaid to pay for her long-term care. At that point, she would have to move into a Medicaid-licensed skilled nursing facility.

Jean, however, does own one other asset that, under normal circumstances would be illiquid. The CPA recommends that they attempt to gain immediate access to these funds.

When Jean and her late husband entered the CCRC they paid an entrance fee of $54,950. Under the contract terms, she is entitled to a refund of the entrance fee but only when she surrenders the apartment and its re-occupancy. In the current economic environment this can take over a year before another tenant is located (on average, it takes 18 months for a newly available unit to be reoccupied). Furthermore, in the state in which Jean lives, the $54,950 would be considered an asset that would have to be spent down before she can receive Medicaid. Jean would be caught between having to surrender her unit once her money ran out and not being eligible for Medicaid until she received and “spent down” the $54,950 deposit due her from the CCRC.

A formal request is submitted to the CCRC board of directors that Jean be given immediate access to the entrance fee waiving any future right to the money. Rather than approving payment of the $54,950 as a lump sum, the board approved applying the funds to pay for Jean’s monthly rent of $2,500 on her apartment. By granting the request, Jean’s assets would now last for 27 months rather than for 21 months. At the end of that period, the only alternative is to move Jean into a skilled nursing facility and apply for Medicaid.

The agreement was presented to the judge for final approval. While not the perfect answer, the judge was satisfied that everything that could be done for Jean financially was done and her living situation was settled for the next 27 months.

The CPA can, however, play an important role in:

  • Organizing the financial information so that all parties know what financial resources are available to pay for care. Even in the worse financial situations this information will be needed if the senior has to enroll in Medicaid or take advantage of other state and Federal programs for impoverished seniors.
  • Identifying assets that are available but not fully considered such as permanent life insurance policies with some cash value that can be surrendered. Typically, there is no longer a need for the insurance. The senior may be holding onto the policy in order to leave a legacy. But using the money for needed health care should be the priority.
  • Recommending ways to reduce spending. Working with the GCM, the CPA can recommend ways to reduce spending that may extend the life of assets for several months or years. In Jean’s case, her financial problems should have been brought to the attention of the GCM years ago — other, less expensive, care alternatives could have been considered.
  • Open up discussions with the senior’s living facility. There may be ways to work with the ownership to make it financially possible for the client to stay. This is especially true for facilities Management often complains that families wait until the last possible moment to tell them the resident is out of money. Begin the discussion early.
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James Sullivan, CPA, PFS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.

** PFP Section members, including PFS credential holders will benefit from additional Elder Planning information in the Resource section and  in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp.