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Serving the Community Since 1950
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Financial Review
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Financial Review from Paolino InsuranceWINTER 2000
Don't Let Nursing Costs become a Financial Fright You'll find life in a nursing home ranked near the top of any retiree's "What if?" list of financial disasters. Medicare's nursing home coverage is limited to a brief recuperation from a major illness or injury, which makes the possibility of a prolonged stay financially frightening. A study by the U.S. Department of Health and Human Services (HHS) indicates that people age 65 face at least a 40 percent lifetime risk of entering a nursing home. About 10 percent will stay there five years or longer. According to statistics from the Health Insurance Association of America (HIAA), the number of Americans over the age of 65 requiring long-term care will grow from approximately 7 million in 2000 to 12 million by 2020, with women facing a 50 percent greater likelihood than men. Should the odds work against you, the results can sting financially. According to the New England Journal of Medicine, of those who enter a home and stay two years or more, 90 percent will be bankrupt before they leave. One way to head off nursing home expense is to move into a continuing care retirement community. You can take an apartment, putting a significant amount down at the start of your stay, and that money is used to prepay some nursing home bills should you become ill. Another method is to give most of your money to your children or into an irrevocable trust, and let Medicaid cover your expenses. To qualify, you must generally make the financial changes at least 36 months before using the service. This can be tricky, as you must significantly reduce your spouse's assets as well. The amount varies according to state. Another option is long-term care insurance. Companies sell three kinds of long-term care policies: covering nursing home stays only; care at home only; and both. A long-term care policy may quell the fear of running out of money in one's old age, but you are advised to be a wise consumer when investigating policies. Watch for restrictions that make it difficult to collect, underwriters that quit the business and go bankrupt, policies that don't keep pace with inflation, and premiums that don't stay level. One final and very important point is that it is essential for you to seek the assistance of a qualified, legal professional who is experienced in elder care and elder law issues. Leverage Your Charitable Giving Do you regularly make substantial gifts to a favorite charity? Did you know that you can increase your generosity with a life insurance gift? Life insurance has long been recognized as an ideal estate planning tool. The key concept is that you pay fewer dollars today (in the form of premiums) and your heirs receive a potentially large death benefit upon your death. This same planning mechanism Medical and Dependent Care Expense Taxpayers who itemize deductions on their federal income tax returns cannot claim an itemized deduction for medical expenses less than 7.5 percent of adjusted gross income. For most individuals, you'd need to incur several thousand dollars in medical expenses before you could start taking a deduction, and it is generally unusual to have that much in medical bills not reimbursed by insurance. However, there may still be a way to reduce your taxes for medical expenses coming directly from your pocket. Your employer can take money out of your paycheck and put it into a "Medical Reimbursement Account." While it is tax free, it remains your money and you can use it to pay certain unreimbursed medical bills, including prescription drugs. Your contributions to the account are There is a similar reimbursement account arrangement for child or adult dependent care expenses. The employer withholds part of your pay—which again is not counted as taxable income—and puts it into a special account. The account can then be used to reimburse you, within certain limits, for dependent childcare. So that no double benefit is obtained, the expenses that are reimbursed from the dependent care account cannot be used in calculating the child and dependent care tax credit. These medical and dependent care reimbursement account arrangements have to be set up by your company, so you may have to convince your employer to take the necessary steps. Once the year begins, you generally cannot roll, increase, or discontinue contributions to the account unless there is a change in employment or family status, such as a marriage, divorce, or birth. Legal Restrictions That May Affect Your Will You have undoubtedly heard that it's important to have a will in order to control the disposition of your property after your death. Though it's true that you are generally free to dispose of your assets as you wish, you may be surprised to learn that there are some restrictions, which may vary from state to state, that may apply:
Preparing a will is a step in the right direction. However, to ensure your assets are disposed of as you wish, it is important to be aware of restrictions that may prevent this from occurring. These restrictions may vary by state. In order to ensure your will is properly prepared, it is best to consult a qualified, legal professional.
 For those individuals who work from home, the Taxpayer Relief Act of 1997 (TRA 97) provided several positive additions to the current laws pertaining to home office deductions. As a result of TRA 97, a home office is now considered a "principal place of business" if: 1) the home office is used to carry out managerial or administrative work of a business, or trade; and 2) there is no other fixed location at which the business or trade conducts a substantial amount of managerial or administrative work. (IRS Publication 587) Scholarship Dollars and Taxation Students who receive scholarships or grants need to be aware that some monies they are awarded may be taxable. The portion of a scholarship that is taxable is that which applies to room, board, travel, and other noneducational expenses. On the other hand, scholarship dollars used for tuition, fees, books, supplies, and course-required equipment are nontaxable. (IRS Publication 520)
Your Estate and Taxes As you evaluate the size of your estate, by necessity, you'll be thinking about taxes. The two are inextricably intertwined, sometimes very complexly so. Once an estate surpasses the per-person applicable exclusion amount of $675,000 (for 2000 and 2001), federal estate tax rates climb rapidly, up to as high as 55% for sums over $3 million. This is why you need to work out an effective strategy to minimize the estate tax burden for which your heirs will be liable. (IRS Publication 950)
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can be applied to charitable gifts, as well. For example, suppose an older couple, the Smiths, make an annual gift of $5,000 to a favorite charity. The Smiths leverage their gift by allowing the charity to use it to pay the premium on a survivorship life insurance policy. This insurance gifting program is arranged so the charity is the owner, beneficiary, and premium payer of the new survivorship policy (subject to state insurable interest laws). The Smiths receive an annual charitable deduction for their generous gift, and the charity will ultimately receive a potentially substantial life insurance death benefit.
made before federal income taxes or Social Security withholdings and, in most areas, before state and local taxes are deducted, as well. There is one catch, though: If, during the year, you do not spend all of your contributions for qualified expenses, you forfeit any remaining balance.
Spousal Rights. If you are married, your spouse is generally entitled to receive a minimum share of your estate. If your spouse does not receive the amount mandated by law, almost every state allows him or her to take an election against your will.