How to use LTCI to reduce your taxable estate

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With a projected trillion dollar federal budget deficit in 2013, it is debatable whether the estate tax will return to previous levels or be Congress' fertile hunting ground for tax dollars. However,even though you may put estate planning aside for the time being, you cannot dispute the fact that long term care costs are rising. In addition, your chance of needing this type of care goes up each year as you age. Therefore, consider a strategy that can provide additional income if you need special care and move funds from your estate thereby creating some estate tax savings.

You are allowed to give $14,000 ($28,000 for a married couple and indexed for inflation) each year to as many people as you wish. For example, you could make that gift to your daughter who would then purchase a long-term care insurance policy with a "return of premium at death" option on you. The gifts would continue, and she would pay the annual premiums. When you die, your daughter should receive a portion of the premiums paid less any benefits you have used. And since you are not the policy owner, the death benefit should not be included in your taxable estate.

Suppose you want the same type of protection for your middle-aged child? Long-term care insurance premiums paid directly to an insurance company for a policy owned by a third party are treated as health insurance premiums. And health insurance premiums paid for a third party are considered a tax-free transfer. Therefore they are not regarded as a gift, they do not count towards the $13,000 annual gift exclusion, and the policy owners do not have to treat the premiums paid as income. And if you include the return of premium at death rider (not permitted in all states – check with an agent), the money could eventually pass to your child's heirs.

You would be surprised at some of the creative savings available when using long term care insurance so talk with a tax savvy insurance agent (one that holds the ChFC credential) or your financial advisor.

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