The new Washington State Long Term Care Trust Act and what it means for you

With the baby boomer generation now entering their 70s, the pure number of Americans that will need long-term care in the next 20 years is staggering.

To attempt to address this long-term care need Washington State passed a payroll tax, the proceeds of which will be set aside to provide long-term care benefits to beneficiaries.  While well-intentioned, this act both severely under addresses the true cost of long-term care, the scope and depth of people who will need benefits, and is sub-par on a cost-benefit comparison for many Washingtonians who may not know that they can have more benefit while becoming exempt from the tax.

According to a National Institute of Health study, 42% of people who live to age 70 will need some form of assistance with their activities of daily living in their life.  With the average stay in a nursing home or assisted living facility lasting over 2 years (with the probability of medical advances extending that number) and the cost increasing, the WaLTA will most likely be insufficient to cover the true cost of long-term care in Washington State.

According to a leading long-term care insurance provider, the average assisted living may (in 2020 dollars) be relatively affordable at around $3000 per month, but in the State of Washington, that number belies the actual cost.  An affordable adult family home, with no medical care, can be thousands of dollars more per month.  Full-time memory or other more intensive care can run over $10,000 per month and last for years.

While the intention may be noble, the WaLTA falls well short of being a viable solution for most of my clients’ long term care planning needs.  As with any legislation, the devil is in the details, but the basics are:

  • A 58 cents per $100 dollar payroll tax (taken out of the employee’s paycheck).
  • With a total benefit (adjusted for inflation) when a WA resident qualifies for long-term care of
    • $100 per day
    • $36,500 maximum benefit

Simply put, for every $100,000 dollars of W2 income a WA resident will pay $580 dollars per year for a $36,500 maximum benefit.

Here are some of the common questions I am helping my clients answer.

Do I pay the tax or does my employer?

                You pay the tax out of your paycheck.

Do I have to?

                Yes, unless you have another long-term care policy that qualifies you for an exemption.

What if I move out of state or don’t use the LTC benefit?

                Thank you for your contribution to the State of Washington.  You must live inside the State of Washington to use any of the benefit.  With the legislature enacting a capital gains tax, proposing massive hikes in the estate tax (WA already has the highest state estate tax in the nation) much of my financial planning currently involves tax shelters, legal tax reduction strategies, and helping my clients decide between Idaho for the mountains or Arizona for the golf.  If you pay into this program for your entire life and then move, you take no benefit with you.

If I do not use it do I get a refund of my premium?

                You do not.

How can I avoid the tax?

                As mentioned above, if you have a qualifying plan you can apply for a lifetime exemption.  As of this writing you must have the policy in force before July 2021, although the state is considering extending the exemption deadline to later in the year.

 

And the most salient question of all….

Is it a good deal?

The short answer is this.  The younger you are, and the more money you make, the worse this deal is for you.

Example:  A healthy 40-year-old making $150,000 per year will pay $870 per year for $36,000 of benefit.  A benefit they may never use if they move out of the state or die without using any long-term care.

This same 40-year-old could spend $750 per year for $100,000 of guaranteed LTC benefit that will pay for both LTC, or pay a death benefit to their survivors if the policyholder dies without using the LTC.  This policy is portable to all 50 states.

This hypothetical client would also be exempt from the tax, for a net savings of $120 per year.

 

The bigger questions in financial planning are how to really address my clients’ long term care needs through insurance or asset-based planning.  What it will take to keep their accumulated wealth from economic destruction and their family from the stress of taking care of them when they no longer can take care of themselves.  What different funding mechanisms are available, the most efficient use of assets and on and on.

If I can help my clients put in place a much more beneficial plan, at similar or less costs, while saving on taxation, so much the better