Continuing Care Retirement Communities (CCRCs) can address multiple needs in retirement. These facilities offer shelter, socialization, meal plans, physical activities and varying levels of long-term-care services if or when needed. While many CCRCs are established as non-profit entities, that does not mean they are within everyone’s grasp financially. There are meaningful costs associated with CCRCs that require examination. Understanding the process, costs and tax implications for clients contemplating such a move is a good tool for planners to have in their toolkit.
From “Just Looking” to “Move Me In”
Most CCRCs look to achieve and maintain high occupancy to drive financial health. That means having a robust list of individuals and couples who have expressed interest through visits and inquiries. The first step towards residency may include a modest deposit (say $1,000) to be put on a “priority list.” There may be hundreds of people on a community’s priority list and they are typically invited to the community’s educational and social events. They are also the first to be contacted if a specific unit within the community becomes available which aligns with their preferences.
It’s a relatively low dollar commitment to say, “I’m interested — and all my neighbors are doing it.” At this point in time, the community may also proceed with formal financial and medical underwriting to assure that the retiree is a good fit for the community.
The next financial step would be to move forward as a “depositor.” At this point, the retiree/future resident has committed a more meaningful amount of money to lock in the apartment or residence they intend on living in. This deposit is often 10%, so if an entry fee for a couple is $500,000, it can be assumed that a $50,000 deposit would be due with a signed agreement.
Once the deposit is paid, a retiree is normally given 60 days to a few months to pay the balance of the entry fee. During this time, the future resident may meet with staff to pick out certain design features of the unit (countertops, cabinets and other fixtures if due for replacement or if the unit is newly constructed.) Also, a retiree who signed a “lifecare” contract may receive some long-term-care coverage prior to moving to the community should health change.
Then finally, at the closing meeting, the resident must pay the balance of the entry fee. That’s also when their monthly community fees commence.
It’s important for financial advisors and accountants to advise the client on what tax benefits may be available to them regarding these costs. If a significant amount of the costs are tax deductible as an itemized medical expense, it may be advantageous to draw on pre-tax retirement assets or do corresponding ROTH conversions. Most residents utilize the proceeds from a primary residence sale to fund their entry fee, and it should also be determined what the tax consequences may be on the home sale relative to potential deductions.
Timing is Everything
During the early stages of COVID, many communities were on lockdown to keep residents safe. This unfortunately put a stop to tours and engagement with new and future residents. At the same time, we witnessed two forces that ultimately increased demand for senior housing: the “isolation impact” of being relegated to the home, and the significant increase in home values. Retirees in some cases accelerated the decision to downsize to a community to capture gains in their home sales.
Even with a hot residential real estate market, it’s often difficult to declutter, market and close on the sale of a home when a priority list member gets a call from the community indicating that their preferred home is ready for occupancy.
This is where creative planners can look at a client’s portfolio and determine if a pledged asset loan or a margin loan makes sense. This liquidity creation can allow for retirees to fund their deposits or entry fees by borrowing against after-tax assets for a short-term need, and then repaying those loans with the net home proceeds when the home is ultimately sold. Having an established home equity line of credit may be another source of liquidity if entry fees are required prior to the home sale.
We now, however, find ourselves in a volatile market cycle which will amplify gains or losses when leverage like margin is used. Clients should understand the risks associated with leverage and understand the tax impact of a margin call should one arise. Additionally, we are in a rising interest rate environment. That will not only have potential impact on variable borrowing costs in the short term, but can also have an impact on the home’s value as mortgage rates continue to rise.
Welcome To the Home You Don’t Own
The CCRC concept is tough for some folks to wrap their head around. Entry fees at high-end communities can be significant to the point that the retiree assumes they own title to the property. This is not the case, as entry fees and monthly fees are typically allocated to provide some level of care in the community if needed. Communities do offer “refundable” contracts, which will command a higher price but provide some assurances that a portion of entry fees (typically 50-90%) will be paid to a named beneficiary when the resident dies or decides to leave.
What happens if a new resident elects a non-refundable (or “traditional”) contract and passes away shortly after assuming occupancy? Is that entry fee completely lost? Not necessarily.
Most non-refundable contracts have provisions that allow for a partial refund if a resident passes within the first four to five years after they’ve paid their entry fee. The amount of that refund may start at 100% and then decline by 2% or so per month until it reaches zero. Tax benefits differ between refundable and non-refundable contracts, so it is important to work with a client’s accountant to make sure deductions are applied correctly.
Budgeting and Summing It All Up
It may take some time to determine how much of a retiree’s spending is offset by the comprehensive services provided by a CCRC contract. Utilities and home-related expenses go away, dining plans replace what may have been spent on restaurants or groceries, and social actives like gym memberships and theater tickets may no longer be in the budget. Practically speaking, the portion of the budget that remains may be limited to auto-related expenses (if one is still driving and maintaining a car), activities outside of the community such as travel, and charitable and family gifting. The first year of residency may be an adjustment period to determine forward-looking projections on spending.
The CCRC is not for every retiree. But for those placing value on social engagement, freedom from the burden of home ownership and access to quality long-term care, it does provide an appealing alternative to aging in place. Financial planners would benefit themselves, their clients and their clients’ adult children by becoming familiar with how CCRC contracts work. Planners should also get to know contacts within their local senior housing communities to help guide their clients with important financial decisions around housing and healthcare.
Jim Ciprich, CFP, is a partner and wealth advisor with RegentAtlantic, a fee-only registered investment advisor headquartered in Morristown, N.J. He is a former adjunct professor at Fairleigh Dickinson University’s CFP professional studies program. He founded and co-chairs the “Senior Solutions” practice specialty group at his firm that serves the needs of high-net-worth seniors and their families. Jim is often asked to speak at continuing care communities throughout the country on financial planning topics for seniors in transition. He also serves on an advisory council to the MIT AgeLab and is frequently quoted in national media on financial planning topics.