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Handling Long-Term Care Needs Before They Arise
Some people are lucky to accumulate wealth because they are in the right place at the right time. Others are unfortunate and lose assets because they are in the wrong place at the wrong time. Doctors obviously don’t believe in relying on luck to build wealth. If they did, they wouldn’t spend so many years in training. Would it surprise you to learn that, after all that hard work to build careers in medicine, most Doctors ultimately leave their wealth accumulation and asset protection to chance?
We are not saying that Doctors don’t work hard after they get into practice. To the contrary, the opposite is true. Doctors work too hard when they need to be working smarter. This chapter explains how Doctors can efficiently protect themselves from long-term care risks, get a valuable tax deduction, and preserve their valuable retirement assets. This is a key to working less, as it allows a retiring Doctor to quit practice with a smaller, yet more effective, safety net!
Before we discuss long-term care insurance and how to most efficiently purchase the right policy for you, we need to first see how big a risk the expenses associated with long-term care really are.
Why Is Long-Term Care A Big Risk?
According to the AARP Research Report on Long-Term Care (Ari N. Houser, AARP Public Policy Institute, October 2007 (, on average, two-thirds (69%) of people over age 65 today will need some long-term care. The average duration of need, over a lifetime, is about three years. Women live longer and have higher rates of disability than men, so older women are more likely to need care (79% v. 58%), and, on average, need care for longer (3.7 years v. 2.2 years).
In the U.S., the average stay in a nursing home is between two to three years. In some areas of the country, the cost of nursing home care or quality around-the-clock in-home care may be $200-$300 per day. This means that the average home healthcare stay costs between $150,000 and $320,000. Additionally, the U.S. Health Care Administration reports that costs are increasing 5.8% per year and are expected to more than triple in the next 20 years. At these projected rates, the costs may be between $500,000 and $1,000,000 by the time you or your spouse need long-term care. Are you sure that you, your parents, and your in-laws all have hundreds of thousands of dollars in “extra” funds within your retirement and estate plans to cover this highly plausible expense?
In some parts of California, the cost of living is well above the national average, and so the cost of long-term care is also substantially higher than the national average. Within the state, there can be vast differences between urban and rural areas, with the urban areas being more costly. According to a Genworth Cost of Care study released in April 2008, long-term care costs in California increased as much as 44% over the past five years. The increases are, in part, due to a shortage in the health care workforce to care for the growing number of elderly people.
Costs of in-home care are significantly higher and can amount to $150,000 to $320,000 per year. These costs will continue to increase at disproportionate rates because of the growing number of baby boomers in need of care over the next 30 years.
Long-Term Care Insurance (LTCI) covers health insurance costs for those people who cannot take care of themselves. These costs may include nursing home care, in-home care, and many other expenses. This chapter will explain why and how the most financially astute Doctors make long-term care planning a high priority in their planning. More specifically, this chapter will discuss the need for LTCI, why is often overlooked, why the government won’t help you, what types of coverage exist, and how they can help you.

A photo by Anna Dziubinska. Need For Long-Term Care Insurance (LTCI)
There are two basic reasons why many Americans may need to obtain long-term care insurance. First, modern advancements in medicine, science, and technology have helped to increase the average life expectancy of people. Predictably, with this increased life expectancy, there is a greater chance that people may suffer a debilitating illness that will require them to seek significant long-term care. Even though medicine keeps people alive longer, there are still incurable diseases that don’t kill you, but will leave you requiring assistance. Neurological disorders like Alzheimer’s are perfect examples. An Alzheimer’s patient could need significant care for 15 or 20 years before dying. These advances in medicine can come with a hefty price tag for some people.
With the trends of increasing life expectancies, in conjunction with the increasing costs of medical expenses, long-term care will impact an increasing percentage of the population and can be very expensive. Doctors are aware of the increased life expectancies and rising medical costs, but need to be consciously aware that long-term care costs can easily wipe out retirement savings and eliminate any inheritance you would have otherwise left for children or grand-children (or would have received from your parents or in-laws). When armed with the right information, Doctors can make the decision to include LTCI in their comprehensive plans and work with their advisors to do so as cheaply and efficiently as possible.
In addition, having a plan for long-term care demonstrates a desire to have quality care in the event it is needed and represents a financial prioritization of that desire. Having a system in place will make it more likely that necessary care and assistance is provided earlier. Children of aging parents often delay getting help because they are concerned about how it will be afforded. According to the National Census Bureau (2006), the average national income is $48,201 and adult children may be ill-prepared to spend from their own income for supplemental care and reluctant to request spending from their parents’ funds to obtain the needed help.
An AARP Study, Valuing the More

Asset Protection

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Using Qualified & Non-Qualified Plans
This section discusses two topics which are related and can contribute to the practice being both a Fortress and an Engine. However, the article is unique in that almost every Doctor takes advantage of the first option—qualified plans—while almost none utilize non-qualified plans. We will discuss both popular qualified retirement plans and less common non-qualified plans here, so that you can be aware of options that are available to you and, hopefully, get more out of your hard work, build greater wealth and enjoy the fruits of your labor.

Use Qualified Retirement Plans
A “qualified” retirement plan describes retirement plans that comply with certain Department of Labor and Internal Revenue Service rules. You might know such plans by their specific type, including pension plans, profit sharing plans, money purchase plans, 401(k)s or 403(b)s. Properly structured plans offer a variety of real economic benefits, such as:
· The ability to fully deduct contributions to these plans.
· Funds within these plans grow tax-deferred.
· Funds within these plans are protected from creditors.
In fact, these benefits are likely the reasons why most medical practices sponsor such plans.
For this chapter, we will include IRAs as “qualified plans” even though, technically, they are not. We are doing this because IRAs have essentially the same tax rules as qualified plans and have the same attractions to Doctors who can use them.
As you will learn in Lesson #6 on asset protection, qualified plans and IRAs enjoy (+5) protection in bankruptcy—for asset protection purposes.
You can learn more about their tax benefits (and drawbacks) in Lesson #7. You will see that the obvious tax benefits may be outweighed by the less obvious tax drawbacks.
With qualified plans (not IRAs), they must be offered to all “qualified” employees (within certain restrictions). For a Doctor owner, there may be some economic costs to having a plan which you must offer to, and contribute for, everyone at the office or at related businesses. With these mixed benefits and drawbacks, it is surprising how many Doctors (nearly 100%) use qualified plans and ignore their cousins, non-qualified plans, which are far less restrictive. Review the following chart so you can better understand the pros and cons of qualified plans.

Benefits & Drawbacks of Qualified Plans
Tax deductible contributions
Highest level of asset protection (+5)
Tax-deferred growth Drawbacks
You must contribute to plan for all
eligible employees
All withdrawals subject to ordinary income tax rates
Penalties for access prior to age 59
Must take minimum distributions at age 70
May be taxed at 75% or more at death

post 10Your Qualified Plan “Bet” on Future Tax Rates
In other parts of the book, we cover most of the benefits and drawbacks of qualified plans in more detail. Here, we want to make sure you understand the bet you are making on future tax rates when you rely on qualified plans heavily for your retirement. Since all amounts that come out of qualified plans (and SEP and roll-over IRAs, of course) are 100% income taxable, there is no way to know how good (or bad) a financial deal such a plan could be for you until you know the tax rates when you withdraw funds.
In other words, if you contribute funds to a qualified plan today (when the top federal income tax rate is 35%) and withdraw funds when income tax rates are at the same or a lower level, the deduction today and tax-free growth over time is likely a “pretty good deal” for you. However, if you withdraw funds from your plan and the top federal tax rates are 40%-50% or higher, then the qualified plan/IRA may be a “bad deal” for you. Certainly, future federal income tax rates of 50% or more could make qualified plans a very negative long term investment proposition for you.
[Clarification Point: Some folks may argue that, in retirement, doctors are likely to have less income and thus the plan distributions will be taxed at lower rates. While this may be likely for 95% of taxpayers, many doctors will build enough wealth in retirement and non-retirement assets to be in the top marginal tax rates in retirement. The second highest marginal income tax rate (2% less than the highest rate) goes into effect when a married couple earns TOTAL income of only $200,300 in 2008. If you are single, divorced or widowed, that second highest rate applies to income above $164,550. Do you think that your total income will be less than $164k or $200k when you add in retirement distributions, Social Security, rental income, and any investment gains from non-pension assets? In many cases, doctors are going to retire only when their retirement assets will generate incomes equal to their last year’s salary. For most of our clients, this is the retirement game plan—retire only when they can maintain the lifestyle to which they have become accustomed]
With this is mind, review the history of US income tax rates chart below. Putting aside politics, you must understand that it is certainly a possibility that tax rates can return to the levels they were for most of the 20th century. If they do, qualified plans utilized today by most doctors may turn out to be “losing bets” in the long run. Since we cannot know what future tax rates will be, we need to at least acknowledge the bet we are making and ask how we can reduce our risk and perhaps hedge against such a losing bet.

A New Concept for Investing—Tax Treatment Diversification
Does the fact that our qualified plans today may turn out to be losing bets mean that we should abandon them? In most cases, the answer is “no.” These plans generally have the strongest asset protection available and provide significant incentives for employees. We would strongly recommend, however, that EVERY doctor make investments that offer a hedge against potential tax rate increases.
The concept here is that you should have various More