The initial entrance fee is partially refundable, at least for a short time.
Types of refunds
- Declining refund. For the initial first few years of residence, most CCRCs offer a declining refund of the entrance fee, usually over about four years. For example, a refund of the fee minus a nonrefundable administrative fee and then minus 2% for each month of occupancy for a maximum of 50 months.
- No refund. After the declining refund period, no refund is offered. With the no refund option, you are pre-paying for health care you may never need. ALL the entrance fee is lost after 4 years, even if you die at 4.5 years.
- Partial refund. Some CCRCs offer a refund of a percentage of the entrance fee to a resident who leaves at any time or to the resident’s estate if the resident dies. These refunds usually range from 50% to 90% of the entrance fee, less any earnings the money received over the years (the CCRC keeps all earnings). When a percentage refund is offered, the entrance fee usually increases by a substantial amount, which makes this option difficult for some applicants to use.
With the partial refund option, you are guaranteed a refund of a portion of your entrance fee no matter how long you stay at the CCRC. For example, if you use the 90% refund option, you are effectively loaning the money (interest-free) to the CCRC for the length of your stay and in return, they will keep the earnings on the money and 10% of the principal.
Using the refund for healthcare
If you run out of money before you leave the CCRC or die, the money you are due to be refunded may be used to pay your monthly or daily fees until the money is used up. However, this is a very expensive form of long-term care insurance and it defeats the perceived advantage of using the refund to leave money to your heirs.
When you are using the refund to pay your fees during your later years it means you are paying the current prices with money that has a deflated value since the refund money has not earned anything over the years to overcome the effects of inflation and the CCRC's yearly price increases. It's like using money that you have kept in a 0% interest savings account over the years to pay for your healthcare.
How a refund is refunded
Check the contract for how and when the refund is paid. Some CCRCs require you to wait until a new resident pays an entrance fee that is equal to or greater than your refund. Some require you to wait until your empty unit is resold or under contract.
Refund contracts cost more
The entrance fees for refund contacts cost substantially more than the no-refund fees, often a few hundred thousand dollars more. Most contracts say the refund will be paid after your empty living unit is under contract again and the entrance fee has been paid in full. In a low-demand market, this could take a year or more. If a refund is important to you, you may be better served to buy life insurance to cover the entrance fee than to pay the upcharge for the refund contract.
Effect of a refund
All CCRCs offer a refund of the initial entrance fee (the CCRCs keep any earnings they may accrue from investing the fee) when you leave the CCRC or die. For the first 50 months, this refund decreases by 2% a month, so after about 4 four years you will receive no refund. Some CCRCs, for a much higher entrance fee, offer refunds that guarantee that the refund will never be less than a certain percentage, such as 50%, 70%, or 90%, regardless of how long you stay. Essentially, refunds mean that you are providing an interest-free loan to the CCRC during your stay at the CCRC.
The fact that a portion of the entrance fee amount might be refunded under certain circumstances does not prevent you from claiming the allowable percentage of the entry fee as a prepaid medical expense. However, when a refund occurs, the amount of the refund that was previously treated as a deductible prepaid medical expense must be reported as gross income in the year the refund is received and will be taxed accordingly.
Comparison of refund options
Let’s do a comparison of which type of entrance fee refund option is best.
One of the decisions you must make when moving into a CCRC is whether to choose a refund option or the no-refund option for paying the entrance fee. Some CCRCs only offer one of the options while others offer both options.
The refund option looks good at first. Choosing the refund option looks enticing since you or your heirs will get a portion of the entrance fee refunded when you leave the CCRC or die there. Choosing the no-refund option seems a waste of money since all the money goes to the CCRC and you never see it again.
However, the refund option entrance fee is substantially more than that of the no-refund option, so you must have more cash available when you sign the contract. If you don't have the funds to pay the increased fee and to keep paying the monthly maintenance fees for the time the CCRC expects you to live, then the CCRC probably will NOT offer you the refund option. However, they may offer you the no-refund option if you have enough funds to cover its requirements.
Is it true that the refund option is the better choice since you are getting back a large portion of your entrance fee? I'm a data nerd. I always analyze the cost-benefit of something before I choose to buy it, so let’s analyze the two options to see which one is the better financial choice.
Considerations
- Entrance fee. This analysis considers only the entrance fee's effect on the total cost of living in CCRC. The independent living monthly maintenance fee and any money paid for stays in assisted living, memory care, or skilled nursing ARE NOT considered.
- Inflation. The effects of inflation are not considered since they would affect both options equally.
- Declining refund. The no-refund option does have a refund. It uses the declining refund described above. This offers you at least some refund if you decide to leave the CCRC or die during the first 4 years of your stay.
- Percentage refund. Some CCRCs offer a percentage refund of the entrance fee option. The percentage of the refund offered varies, but the 90% refund option seems the most common. CCRCs that offer a refund option offer it based only on the original amount of the entrance fee. They DO NOT refund any earnings that the money may accrue over the years (it’s in their contracts). If you run out of money before you leave the CRCC or die, the refundable part of the fee may be used to pay your CCRC fees until it is exhausted. However, it is unlikely you will run out of funds since CCRCs verify you have enough funds for your stay before they allow you entry. Once all your funds are exhausted, most CCRCs have some type of benevolent fund that will pay your fees until you die.
Parameters
These calculations were made in 2016, but the conclusions will be applicable to subsequent years since the controlling factors (no refund, 50% refund, and 90% refund) never change.
For this analysis, the following parameters are used:
- Years living at the CCRC. You will live at the CCRC for 8 years (the average length of stay at a CCRC). This INCLUDES living in independent living and stays in assisted living, memory care, or skilled nursing.
- Rate of return. It is assumed your investments will earn a conservative average rate of return of 5% per year over the 8 years you live at the CCRC.
- The CCRC. The CCRC used this analysis is River Landing located in Colfax, NC. River Landing is a typical CCRC that offers no refund, a 50% refund, and a 90% refund of the entrance fee as options.
- The independent living unit. For this analysis, the fees used are for a 1 bedroom, 1 bath, apartment with 750 square feet of space. The following entrance fee options were offered for the housing unit, for the year 2016:
- For the no refund option, the entrance fee is $118,000.
- For the 50% refund option, the entrance fee is $177,400.
- For the 90% refund option, the entrance fee is $224,400
Costs
Entrance fees are considered costs:
- For the no refund option fee, this is a $118,000 cost.
- For the 50% refund option fee, this is a $177,400 cost.
- For the 90% refund option fee, this is a $224,400 cost.
The difference between the no-refund option entrance fee and a refund option entrance is an additional cost.
The no-refund option entrance fee ALWAYS costs less than any of the refund options. If you kept the additional money you would have to pay for a refund option entrance fee invested at a 5% annual rate of return over the 8 years you live at the CCRC, it would produce earnings. These earnings are an additional cost when choosing a refund option instead of the no-refund option.
Entrance fee costs:
- For the 50% refund option entrance fee, there is a $28,170 additional cost due to loss of earnings.
- For the 90% refund option entrance fee, there is a $50,706 additional cost due to loss of earnings.
Gains
Money refunded by the CCRC is considered a gain:
- For the no-refund option fee, there is a $0 gain.
- For the 50% refund option fee, there is an $88,500 gain.
- For the 90% refund option fee, there is a $201,780 gain
Total cost after 8 years
The total cost of the no-refund option is just the entrance fee itself. The total cost of a refund option is the entrance fee cost PLUS the lost earnings additional cost MINUS the refund gain.
- For the no-refund option fee, the total cost is $118,000.
- For the 50% refund option fee, the total cost is $116,670.
- For the 90% refund option fee, the total cost is $73,126.
This means
- The no-refund option costs $1,330 MORE than the 50% refund option.
- The no-refund option costs $44,874 MORE than the 90% refund option.
Comparison cost conclusions
- Using the listed parameters, for less than 9 years of stay, the 50% refund option costs LESS than the no-refund option. After 8 years, it costs MORE.
- Using the listed parameters, for less than 14 years of stay, the 90% refund option costs LESS than the no-refund option. After 13 years, it costs MORE.
- The greater the rate of return on investments the sooner the no-refund option becomes the better choice.
Since there are so many choices, variations, and differences between the various CCRCs, their amenities, services, fees, and contracts there is no way to say which one is best for any one person. Based on your wants and needs, you must choose one that best suits your situation. If you are happy with your choice, then it was the best choice for you.
I have heard of another option for receiving refunds. If a resident leaves his/her Independent Living apartment and goes to a higher level of care (memory, etc). AND their apartment is sold, then they would get the refund while in higher level of living. Comments?
ReplyDeleteJohn, thank you for your question.
ReplyDeleteWhen you move out of your independent housing unit at a CCRC for any reason, you will receive any remaining refund of the entrance fee, after all the terms of the residential contract are met. With a declining refund, after four years of living in the unit, you will receive no refund. Under a 90, 70, 50, etc. percent refund, you will receive that amount regardless of how many years you lived in the unit.
What you do with the refund money is then up to you. You may use it to pay for assisted living, memory care, or skilled nursing offered at the CCRC or you can use it to pay for the same services at any other facility. If you choose to stay at a facility offered by the CCRC, because you were a resident in an independent living unit at the CCRC, you usually will not be required to pay an entrance fee at the facility and you may be given a discount on the monthly fee.
California CCRC's are now required, by the state, to pay interest on the refundable amount of the entrance fee after 6 months, with the rate increasing later. I can't find any discussion of whether the interest is then taxable to the estate (in this case, a trust). The CCRC involved took well over a year to refund, owing to the pandemic, and then told me they had no practice of issuing 1099s for the interest (I asked for one, and don't mind paying a tax). Seems to be an open question...
ReplyDeleteI am not familiar with the California law Maybe others will know.
DeleteDo you know if an IRS form is issued for a ccrc refund due to resident passing? The estate got the refund but I can't find if the IRS considers this income to the estate or at what tax rate they would tax it
ReplyDeleteThat's a question for a tax expert. If it is a refund of the entrance fee and a medical tax deduction was taken based on the fee, then tax would be due on a portion of the refund.
ReplyDeleteThank you, she actually didn't take any tax breaks on the entrance fee. I didn't know she could and obviously didn't ask the right questions when doing/having her taxes done. She did take tax deductions on the assisted living and nursing home fees that she paid. But she paid a reduced fee on the assisted living expenses. I didn't use the higher fee schedule to reduce her taxes if that makes sense, just was she paid. At least your information has pointed me in the right direction. I have been looking for help on and off for better than four months.
Delete