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From the Wall Street Journal this morning: More than 1,000 families have lost a total of at least $190 million in 16 bankruptcies at continuing-care retirement communities since March 2020, according to a Wall Street Journal analysis. Chapter 11 filings rose during the pandemic period primarily because these facilities didn’t have enough new move-ins. And because of the way bankruptcy proceedings work, secured creditors get paid before residents.
I ended my online subscription to the WSJ a few months ago, so if a subscriber among HD readers could supply a gift-article link, it would be appreciated.
As a career-long newspaper journalist, I offer the information without taking a position on continuing care retirement communities. But both my wife and I have/had a parent with dementia resulting in years-long stays in assisted living and memory care, so I pay close attention to the debates about long-term care and long-term care insurance. One parent had LTC insurance; one does not. Thankfully, both had more than enough savings to cover their costs.
The National Law Review in 2012 issued a long white paper titled –
Continuing Care Retirement Communities (CCRCs) Fees – A Primer on the Tax Treatment of Entrance and Monthly Fees
The paper concludes in part –
CCRCs provide valuable lifestyle and medical options for the elderly in a tax-efficient manner. For residents, portions of entrance and membership fees paid to these facilities may be deductible under IRC § 213 to the extent they are attributable to medical expenses.
I laughed when I read the footnote stating –
It is said in some circles that, if you have seen one CCRC, you have seen one CCRC
meaning each CCRC is unique. I would expect that the written annual estimate of deductible medical expenses provided by the CCRC to the resident is currently sufficient evidence to support a itemized medical expense on the resident’s federal tax return.
I am not an accountant, but doubt that all of a nonrefundable entry fee is deductible as a medical expense since it presumably is for other things only or in part. Assume the same is true for the monthly fee. Also remember that itemizing deductions only starts after 7.5% of taxable income, and you lose the standard deduction when itemize. Finally, I believe that it would be impossible for normal citizens to understand and evaluate the financial statement of a CCRC because it would require knowing future costs as well as related income, details of all financing, etc. Certainly know that the more the debt, the more the risk as well as probable interest expense being passed on to residents. At a minimum, consider that for-profit facilities have a profit incentive (duh!), whereas nonprofits do not. However, also look at the experience and credibility of sponsoring entity behind the single purpose entity that owns the facility.
I’m 76 and live alone. My only close relatives are my brother and sister. My brother is already in assisted living, and I would not expect my 66-year-old sister to care for me. They both live within 15 miles of me, and I don’t wish to move to a different area. Despite the generally excellent health facilities locally, there are no true CCRCs.
I am considering moving to an independent living community which is almost across the street from me. They are on the campus of a hospital but are separately managed. The independent living community has associated assisted living and memory units but no nursing home. They post their rents on their website, and they are quite reasonable. The non-profit which owns the hospital does have a nursing home on the same campus. That nursing home is named for the family which owns the independent living community, I don’t know what the connection is. The assisted living place where my brother lives is owned by the same family but is managed by a different company.
Luckily, I’m in a financial position where, barring several years in a nursing home, I’m unlikely to outlive my money.
As always Buyer Beware, no matter what your are purchasing. Since we are discussing major amounts of money, you need to review the Financials of the CCRC. You need to be convinced they are a long time going concern. We visited 10 different CCRC’s and found the best were ones with a religious connection, generally in business for 20 years or more, look for stability. In fact, if you run out of money at our CCRC you will NOT be turned away. It is very rare, but of course can happen depending on all the circumstances.
After living in a CCRC for over 3 years, you learn a lot about TAX deductions. The largest is on your Entrance Fee, because it is generally $300K to $900K and more. There are many types of plans, most common is 90% return of the Entrance Fee. Some accountants and CPA’s are unfamiliar with these Medical Tax deductions. Yes, I have seen comments the deductions are limited to that 10% not returnable. FALSE, the most common deduction is the Percentage Method and is used most often by all the CCRC’s in the US and is generally twice as much, but must be calculated. Check out the Special Issue Brief by Paul Gordon Medical Tax Expense Deductions. You have to do some work to make sure your Accountant or CPA is familiar, as this is a major tax deduction to your benefit. Your monthly fee is also a Tax Deduction due to a percentage determined by your CCRC, and can be 30% to 50%. These deductions are dependent on your Plan with the CCRC, the key here is to ask questions, as these deductions will save you on your taxes. We all need help to attain the proper deductions, do not be afraid to ask a lot of questions.
On a perhaps-related note, Morningstar’s Christine Benz has another column out this week as part of her years-long examination of long-term care issues: The Hidden Crisis in Long-Term Care | Morningstar
In the article Christine mentions financial planner and medical doctor Carolyn McClanahan. I have listened to several interviews, and talks that Dr. McClanahan and she provides very well thought out ideas on this subject. Here is a link to an interview with Christine Benz:
https://share.google/kqz4hjVod4cRuB60a
Dr. McClanahan is now my go to person on this subject.
Maybe I’m missing something at the link given in the comment, but I didn’t find the actual podcast, only notes.
I did find the podcast at this Morningstar link.
Avoiding the need for (frequently unpaid) family caregivers is why people refer to their move to a CCRC as the best gift they can give to their kids. If you’re single, or don’t have kids or siblings, it’s the best gift you can give yourself. Caregiving has to be one of the hardest jobs around. As Christine writes, people who expect that family members will provide care need to have a detailed conversation about it well ahead of time.
To be honest, my husband and I are not attracted to CCRC living. But, if we were, where would the community be? Our daughter lives a little over 2 hours drive from our house. BUT right now, she is being recruited to move half way across the country. I never thought our son would relocate, but within the last two months he did— also for a much better career opportunity. My husband and I would prefer to age in place, but are not against assisted living or nursing care, but at a
place close to one of our children— wherever that is at the time. We believe we should accommodate their needs; they shouldn’t have to work around our decision to live in a particular location.
That issue applies whether you are in a house, a 55+ community or a CCRC. And if you move to a CCRC you have a lot of community right there.
i don’t see the equvilance. The house could be left for stepped up value when we both die. I have no idea of how the tax implications of90% refund of our $1M entry fee. More important, we’re very close to both of our kids. The CCRC friends would never substitute for them.
I don’t understand your reply. You were writing about proximity to your children and your desire for community. What does that have to do with taxes? Even if you move close to one of your children there is no guarantee they won’t move again.
Since my entry fee was not refundable I got a whopping medical deduction the year I moved in, and I deduct enough of my monthly fee I no longer take the standard deduction.
Maybe I should have used 2 paragraphs
for 2 separate issues.
The first, but less important, is financial. We’ve lived in the house we paid $45,700 for since 1977. We’ve done a huge number of upgrades since then, but many were done decades ago so relatively low cost in today’s dollars. Zillow now claims the house could bring more than a $1M, so we’d have a high tax liability if we sold the house to pay the CCRC entry fee. We do have LTC insurance. That would pay for even extremely high assisted living and nursing care. We wouldn’t enter into a facility until we needed that level of care. At that point, we’d select a location close to one of our children.
The second, and more important issue, is friends vs family. Here, we come down hard in favor of family. In my final days, I don’t want to be a burden on my children, but I would like to see one relatively frequently and without great inconvenience to that child. I think the child who might live at some distance would also be able to visit if staying with a sibling was an option.
This all presumes we don’t have speedy demises. Both my parents and husband’s died after short illnesses.
The refund of the entry fee isn’t taxable if you leave before you die since it doesn’t earn interest. It also isn’t taxable if it is inherited by your heirs unless your assets exceed the inheritance tax threshold.
If the entry fee was claimed as a medical expense on your tax return the year you paid it and that deduction resulted in a reduced taxable income in that year, then any portion of that expense that is later recovered may be considered as income and taxable to either you or your estate. It is a bit convoluted to figure out the amounts so either do some deep research or higher a tax pro.
My understanding is that refundable entry fees can’t be deducted as medical expenses, at least not at the federal level.
It’s only the non-refundable portion that’s deductible. Mine was 100% non-refundable. So, no problem.
There are a few different ways that the entrance fees may be structured. Some are never refundable. Some are amortizing entrance fees, specify a period during which the entrance fee can be refundable to the resident or the resident’s estate on a declining basis. Some are always refundable. And finally, some are a blend of the above.
You are correct that only the non-refundable portion of an entrance fee may be considered for an itemized deduction. And to be more specific, only that portion of the non-refundable entrance fee that is a prepaid medical expense and exceeds 7.5% of your Adjusted Gross income in the year that you paid it is tax deductible. But it might not even be worth it to claim this deduction.
As an example, let’s say that you pay a $200k total non-refundable entrance fee of which your CCRC tells you 50% of that is prepaid medical expenses and your AGI for that year was $100k. In that case only
$42,500$92,500 (200k*0.5-100k*.075) is deductible and then only if you itemize instead of taking the standard deduction. For a couple, both over 65, in 2025 the standard deduction is 31,500 + 3,200 +12,000 = $46,700 and thus there isnoan advantage to itemizing for this example.*edited 7/11 to fix math error!
On the other hand, many people have large AGIs the year they enter a CCRC because of capital gains from the sale of their homes that greatly exceed the personal residence deduction. They may have an additional reason to itemize because of the increase in the SALT deduction and because their AGI exceeds the cap on the new $12,000 deduction for seniors. Many facilities also have entrance fees that are considerably greater than $200k.
The larger your AGI the SMALLER the amount of your entrance fee that you can deduct.
Reworking my original example, let’s say your AGI is $500k instead of $100k. Instead of $92.5k of the $200k entrance fee being deducted now (200k*0.5-500k*.075) $62.5k instead of $92.5k is deductible.
All of this just points back to what I said in my original post. It is convoluted and depends on many different variables of each individual considering CCRA. To make the best decision for you, you will have to look deeply at the details particular to your situation and not depend on any sort of generalizations. In summary, details matter. If you aren’t wiling/able to do the detailed analysis of your particular deal, hire a professional.
In my case the combination of the deductible portion of the entry fee and the deductible portion of two months of monthly fees meant I (single) paid no taxes that year. No need to do complicated calculations.
Apparently, you did do “complicated” calculations!
I did my mother’s taxes when she was alive and itemized until the 2017 tax law no longer made it beneficial for her to do so. The financial manager at her CCRC provided her with a statement that told her what her medical expense deduction was each year. I simply added this to her other medical expenses and subtracted 7.5% of her AGI from that amount on Schedule A.
Her annual summary stated that based on IRS Publication 502, a percentage of residents’ annual apartment services and annual LifeCare payments that were attributable to health services was deductible and 100% of the one-time entrance was deductible because entrance fee payments were fully allocated to health services. The annual percentage was the same for each resident and was simply the percent of the CCRC’s total expenses that were attributable to providing health care.
Just a note that 100% of entry fees are not necessarily attributed to medical expenses. It depends on the type of CCRC, and probably on whether you start in Independent or Assisted Living.
My mother lived in independent living for 13 of her 15 years there. The IRS statement on deducting CCRC medical expenses is only a short paragraph and our CPA said that there have been a couple of court cases where the IRS unusuccessfully challenged the deduction. (We use a CPA because we own rental properties and our taxes are much more complicated than my mother’s were.) I was surprised that her CCRC considered all of her entry fee to be a medical expense. Her usual annual medical deduction was ~20% of her annual fees. I assume this amount would have been somewhat larger if her facility wasn’t allocating 100% of each year’s total entry fees to medical expenses.
This is all that the IRS has to say about the CCRC medical expenses deduction its publication on medical expenses.
You can include in medical expenses a part of a life-care
fee or “founder’s fee” you pay either monthly or as a lump
sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care. The agreement must require that you pay a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care. The statement must be based either on the home’s prior experience or on information from a comparable home.
My CCRC told new residents the amount of the entry fee deduction (same for everyone who moved in that year) and the amount of the monthly fee deduction. I simply gave the numbers to my tax accountant.
For giggles I looked into the two CCRCs here in Boulder, CO, USA. One doesn’t post its entrance fees online. The other has 3 locations around town, the most desirable of which has an entrance fee of $1.6 million (75% refundable). Monthly fees run $15000 and up.
If you move to Denver what US News calls the top rated CCRC has entry fees starting at $286,300.
Pretty sure this topic has been raised by the media before (might have been NYT previously) and the HD Forum, maybe even the same facility. As I commented before there are steps potential residents can take to minimize the risks of this occurring including focusing on well-established non-profit CCRCs, looking in a state with solid regulations and researching the facilities financials. As I also mentioned before the NACCRA publishes a lot of useful information for evaluating CCRCs including a 57-page Consumer Guide to CCRC Financials. Document Library – National Continuing Care Residents Association, Inc
I notice that the WSJ article says: “Harborside required a $945,000 entrance fee, a standard in the industry.” I suppose that might be standard in NY, I doubt it is elsewhere. Certainly not where I live. It is high enough it could explain why the facility had difficulty attracting residents. The other article I have seen on Harborside quoted an entry fee $100,000 lower.
The article also says that 623,000 people lived in CCRCs in 2023, but only 1,000 people have been affected by bankruptcies in the last five years, which included the Covid pandemic. That’s a tiny percentage.
I would be interested to know more about the 16 facilities that went bankrupt. Which states? How old? Non-profit or for-profit? Type A, B, or rental?
The article would have been better without this questionable statement. However, the article didn’t state the size of the apartment that required a $945,000 entrace fee, so it may have been a “standard” price for a large 2-3 bedroom apartment in the upscale CCRC industry. The article also noted that initial entry fees ranged from $425,000-$1.7 million in what was clearly billed as a luxury CCRC.
Here are some links to help answer your questions:
https://www.newsbreak.com/clever-dude-288519147/4089560265369-8-retirement-communities-facing-financial-trouble-is-yours-on-the-list
This article explains how CCRC’s are funded and potential risks
This article advises to look for potential troubling signs. One, of course, is occupancy rates below 90%.
https://www.investopedia.com/community-care-retirement-communities-8775623
That told me four of the bankruptcies were in Texas. Still missing ten. Also, the funding description is incomplete. It covers Type A but not Type B.
I wonder how many of the 623,000 people living in CCRC’s would have faced similar economic challenges meeting their care needs without the CCRC safety net? I certainly don’t know, but I bet it would have been more than 1,000.
In NJ the entry fee is between $700,000 and $900,000 with 90% refundable without interest.
I am sure some NJ CCRCs have fees that high, but how many have you surveyed? NJ CCRCs are required to provide financial disclosure statements, but I can’t find any online. Also, entry fees may be 0%, 50% or 90% refundable with much higher rates for refundable fees. At my CCRC non-refundable entry fees for two bedroom apartments started at $232,000 in 2023, although in the new building where I live they started at $442,000.
Kathy-The disclosure statements are on the NCDOI website. One can search on specific facilities or scroll through the entire list alphabetically. It looks like what’s available on line is the last 4-5 years of statements. CCRC Disclosure Statements | NC DOI
It was the New Jersey disclosure statements I couldn’t find online…
Ah sorry
But you ain’t in the Northeast. I bet property taxes are a lot lower there too.
The article said “standard in the industry “, not standard in the northeast.
I don’t live in the Northeast, but the only two in Madison Wi that I’d consider have entry fees around $1M. Also monthly charges of around $11,000 for a couple in independent living. And they haven’t been without “issues.” The independent living residents got the manager at one fired because they believed he spent too much on a new skilled nursing facility and short-changed their amenities. At the other, a number of skilled nursing rooms are being converted to independent living; the residents aren’t happy. Both CCRCs have operated for decades and both are nonprofit.
Thanks for bringing up this. I had visited several CCRCs in the last year and was quite impressed with how they are being run. This WSJ article points out 16 out of 2000 filed for bankruptcy. This is a tiny fraction. Nevertheless, doing thorough due diligence before signing any contract is a must.
Many of these entrance-fee-based businesses use the upfront cash to service debts or fund operations, while maintaining modest reserves. A key problem is new residents, though on a waiting list for a long time, will not move in if they cannot sell their home to pay for entrance fees. This happened in 2009. Could this happen again with the current slow down in home sales?
We discussed this issue here. It appears the woman highlighted in the WSJ article moved to Harborside after two preceding bankruptcies, why do that?The sixteen bankruptcies cited in the article for the whole country are sixteen too many, but over five years that’s less than four a year, and Covid was a black swan event.
It matters which state you live in: North Carolina is generally thought to have the best regulations, but we still had one CCRC that had to be rescued recently by the Department of Insurance as it headed for bankruptcy. But it was rescued. As a result, an updated version of the controlling statute is currently before the legislature. Residents have been reminded that they need to stay current with the operation of their facility. I have confidence in the members of my CCRC’s residents’ finance committee and our representative on the board.
I recommend only considering non-profits and taking a careful look at financials. In NC CCRCs are required to provide prospective residents with a detailed Disclosure Statement in a defined format. They are also posted online.
I think the WSJ published this article because the contentious bankruptcies proceedings involving Harborside were just recently finalized, which wasn’t the case when the NYT article was published.
If it wasn’t for this single case involving an upscale CCRC where many residents lost large amounts of money, I can’t help but wonder if either the NYT or the WSJ would have published an article about CCRC bankruptcies.
I have followed your postings on CCRCs for some time – I applaud your diligence and thoroughness in the evaluation of CCRCs, as well as your candid and well-thought responses to questions raised in this forum.
However, while I realize this is off-topic, I must disagree with your assessment of the Covid pandemic as a “black swan event”. Based on the incredibly tightly woven systems regarding world trade and personal travel that have increased perhaps exponentially in the last 20-30 years, many epidemiologists had been expecting a pandemic such as that for quite some time – I had been reading about the potential for it for perhaps 10 years prior to Covid. And, unfortunately, as these pandemic events have no real statistical correlation with each other (since not too much in prevention has changed), I believe it is just as likely the world will experience another. The apparent recent dismantling of the US side of epidemiological research activities and data tracking can only increase those odds, albeit all the while obscuring what might be happening in real time.
This comment does in no way negate your overall point – with the numbers cited in the WSJ article, it is a failure rate of <1% over several years. Not bad by most accounts – unless of course if one is in that 1%.
Buyer beware applies, yet, it is hard for many folks who are at an advanced age and who also may not be as financially sophisticated to even know what questions to ask. So, generally, in any situation like that, they can (and likely will) become prey.
It does seem safer to buy into a CCRC some years after it’s built, when it is already full and has some years of operating history in its financials. Harborside, a non-profit, was impacted both by the subprime meltdown, which froze local market home sales (to pay entrance fee), and by the pandemic which hurt unit replacements.
The three things I took away from that good WSJ piece:
I’m sure Kathy Wilhelm will have something interesting to add here.
No, Florida is not the only state with CCRC regulations, see my comment above. There are others besides Florida and NC, including NY. A CCRC planning a new building in NC is required to get 10% deposits on 75% of the units before breaking ground, and a further 40% at 50% completion. A lengthy wait list is probably one criteria to look for when choosing a facility, although that requires signing up well ahead of time.
Yes, thanks, I knew you’d have interesting things to add to this. Your post crossed mine. Good to know other states are taking steps to help avoid tragic outcomes like Harborside’s.
This WSJ article points out that even though Florida had good laws to regulate CCRC’s as a special insurance product, it was not enough to prevent roughly 100 seniors from losing their homes and life savings when a Senior Living facility filed for bankruptcy last year and shut down the facility.
The problem appears to be the complexity of CCRC business model, under which fees are collected for future services. Many states have struggled to regulate these businesses.
I am quoting a summary of the requirement in NC. I have no idea whether it is good, bad or indifferent.
“All licensed continuing care providers are required, pursuant to N.C.G.S. § 58-64-33, to maintain, after the opening of a facility, an operating reserve equal to fifty percent ( 50%) of the total operating costs forecasted for the twelve month period following the period covered by the most recent disclosure statement filed with the North Carolina Department of Insurance. However, if a facility maintains an occupancy level (independent and assisted living) in excess of ninety percent (90%), then the provider shall only be required to maintain a twenty-five percent (25%) operating reserve upon the approval of the Commissioner.
Operating reserves may be funded by cash, by invested cash, or by investment grade securities, including bonds, stocks, U.S. Treasury obligations, or obligations of U.S. government agencies.
Operating reserves can only be released upon the approval of the Commissioner.”
Try this. https://www.wsj.com/finance/she-paid-1-million-to-join-a-senior-facility-its-bankruptcy-wiped-her-out-1732159d?st=2Y6qAT&reflink=article_copyURL_share