Tax-Free Exchanges Can Curb Long-Term Care Expenses

Many people fear long-term care expenses. The reality isthese expenses can add up and put a dent into funds set aside for retirement.According to the Genworth 2012 Cost of Care Survey, the median for a privatenursing room is $81,030 annually. One way to ease the long-term care costconcern is to secure a long-term care insurance policy.  

Premiums for long-term care insurance can be costly.However, for people thinking about purchasing long-term care insurance a tax-free exchange can help pay the premiums. A person considering this optionshould evaluate the different long-term care insurance options. Some otherfactors a person should reflect on include: costs, benefits, tax effects, andthe impact on the policy or annuity. The IRS permits the exchange of a lifeinsurance policy for an annuity contract without acknowledging taxable gain.Recently, legislators made it permissible to make tax-free exchanges of anannuity or life insurance policy for a long-term care insurance policy. Apartial tax–free exchange can use part of an annuity or a life insurancepolicies worth to fund a new annuity or policy. However, the exchange must be adirect transfer of funds from one provider to another to be tax-free. Theadvantage to the tax-free exchange is it supplies funds for the care policywhile simultaneously yielding tax benefits. Additionally, a tax-free exchangecan allow a taxable gain to be engrossed by long-term care premiums.

See Alder Pollock and Sheehan P.C., Insight on Estate Planning – April/May 2013: How to Fund Long-Term Care Insurance with a Tax-Free Exchange, JDSupra, Mar. 28, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.