Planning Tips for Clients with Chronic Illness
Yesterday I attended a presentation by attorney Martin Shenkman, whose wife has multiple sclerosis – he regularly speaks on planning for those with chronic illness. He offered the use of his materials to the attendees, and this is one of his memos:
1. Important. 120 million Americans are living with chronic illness. Don’t underestimate or ignore the tremendous impact on a large portion of your client base. Every legal document, plan, etc. has to be tailored to address chronic illness. Standard documents and planning will often not protect the person living with chronic illness.
2. Income Tax Issues.
a. Can the client claim a parent or other loved one confined to a nursing home as a dependent?
b. Are the costs the client is incurring for qualified long-term care, including nursing home care that is deductible as medical expenses? What planning can be done to maximize the deductions?
c. What affirmative steps can a client take to enhance the likelihood that certain expenditures will qualify as deductible medical expenses for tax purposes? How can the client corroborate that an otherwise personal expense is for medical care? What is the taxpayer’s motive or purpose for incurring the expense? Has a physician recommended the item or expense to treat a diagnosed medical condition? Has this been confirmed in writing? Can the taxpayer establish that the item would not have been bought but for the disease or illness? IRC Sec. 213(d); INFO 2009-0209.
d. Payroll taxes for in home aides can be a nuisance. Proposed regulations may permit home care service recipients to designate an agent to report, file, and pay all employment taxes, including FUTA. See Prop. Reg. 31.3504-1; REG-137036-08.
e. Standard deduction for taxpayers who are legally blind may be higher.
f. Gross Income may exclude certain disability-related payments such as Veterans Administration disability benefits, and Supplemental Security income.
g. Impairment related work expenses of an employee who has a physical or mental disability limiting their employment, may be deductible business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.
h. A credit for the elderly or disabled may be available. This credit is generally available to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.
i. Earned income tax credit EITC is available to disabled taxpayers as well as to the parents of a child with a disability.
j. Dependent care credit taxpayers who pay someone to come to their home and care for their dependent or spouse may be entitled to claim this credit. There is no age limit if the taxpayer’s spouse or dependent is unable to care for themselves.
3. Insurance. Evaluate existing life insurance policies. Identify and evaluate all planning opportunities which may include: accelerated death benefit options; borrowing against cash value to fund needed expenditures; viatical settlements; possible sale into the secondary market versus cash surrender value (CSV).
4. Disability. Identify and address all aspects of disability planning which is often more diverse and complex then clients realize. Advise the client as to the tax status of insurance paid for personally versus insurance paid for from a business. For private disability insurance does the client have a residual versus total disability? Have the calculations been made correctly? There are often a myriad of assumptions in the calculations that integrate policy terms, accounting concepts and tax definitions. These will often require an analysis of earnings and business expenses realized by the client over a base period that may not conform with annual tax returns. Check insurance company calculations. The definitions of “disability” and “income”, etc. will often be different under disability income replacement policies, business overhead interruption insurance, disability buyout insurance and employment or shareholder agreements. Review all contractual arrangements that apply to the client and endeavor to develop a consistent, yet accurate set of calculations for each.
5. Expenditures. Clients with chronic illnesses or with loved ones with chronic illnesses may face unique budgeting issues that other clients don’t. Standard rules of thumb, which many investment advisers use, might not be reasonable. Assist the client in preparing reasonable projections that might address their unique situation. Then review with the client and the client’s attorney the revocable living trusts (clients facing significant health issues, especially progressive illnesses should have trusts) and durable powers of attorney to address these expenses to assure that the fiduciaries have both the authority and guidance to address them. This will also require that the fiduciaries have authority to access medical records that may be necessary to evaluate the appropriateness of certain bills. HIPAA is the affectionate acronym for the Health Insurance
Portability and Accountability Act of 1996 (Pub. L. No. 104-191, 110
Stat. 1936 (1966)); 45 C.F.R. Sec. 164 (2002).
Special expenses may include:
a. Shortened work expectancy.
b. Costly improvements to make their home accessible.
c. Costs of having an independent Social Worker periodically meet with the client in his or her home and interview them and issuing a report. This can be invaluable in assuring proper care.
d. Using an institutional trustee and paying the fees involved.
e. Paying for experimental medical treatments which insurance won’t cover.
f. Paying for desired accommodations and living arrangements.
6. Settlement Suit. Income taxation of settlements is important to address pro-actively, preferably prior to settlement. Suits against an employer or partners for
discrimination, damages, back wages, are common and the amounts must be allocated to each tax category as the tax impact can be significant. Legal fees may be deductibility and the AMT trap that would otherwise eliminate a deduction avoided. IRC Sec. 62(a)(20) may permit deduction against adjusted gross income (AGI).
7. Investment Planning. Tailor an investment plan in light of the client’s specific circumstances, not generalizations or assumptions. Each chronic illness differs from other chronic illnesses. Each client’s experience is unique to that client. Client’s can have varying experiences over time. Risk profile and time horizon is not the same as for “other” clients. Risk may be affected by fear, medical costs, or need to retire early. The time horizon can vary – new drug therapies can change the course of the disease.