Why High-Net-Worth Clients Should Not Self-Fund Their Long-Term Care

High-Net-Worth Clients Shouldn’t Self-Fund Long-Term Care
Posted by: Marc L Lowell Category: Blitz, Think Ahead

It’s not uncommon for many high-net-worth clients to assume they will self-fund their long-term care if and when the need arises. After all, they probably have the assets to cover it. But, as many financial planners, accountants, and attorneys know, affordability is not the only issue. From timing to taxes, there are many other things to consider. This article looks at the reasons behind recommending long-term care insurance—even for your high-net-worth clients.

Timing challenges

Also known as sequence of returns risk, this relates to when the long-term care event might occur, which is something no one can predict. If it happens during a downturn in the market, for instance, withdrawing assets to self-fund will adversely affect the client’s portfolio. It’s possible that the portfolio may never fully recover, and that future retirement income could be compromised, leaving the client and family members with less money to live on.  

It’s also worth noting that high-net-worth individuals may have a portion of their assets invested in real estate or personal property that could be difficult to liquidate in a timely fashion. Because a long-term care event could occur with little or no warning, the client would likely need to liquidate assets quickly, which could result in a substantial loss and potential tax consequences. 

Tax implications

In addition to having less money to live on, the client who self-funds could face potential tax consequences, particularly when reallocating assets. When a client takes distributions from qualified money, it increases ordinary income, potentially placing the client in a higher marginal income tax bracket. This occurs when the client is most likely retired and in a lower tax bracket.  

When taxable income goes up, it increases the client’s exposure to tax on capital gains. This could lead to a situation where the client owes net investment income tax and alternative minimum tax payments. On the other hand, it’s important to note that money received from a long-term care policy is often non-taxable.

Loss of stepped-up basis

Also referred to as a step-up in basis, this occurs when a person inherits an asset after the benefactor dies. In this case, the asset receives a stepped-up basis, which is its market value at the time of death rather than when the prior owner purchased it. The stepped-up basis can reduce the amount of capital gains taxes owed by the person who inherits the assets.  

When a client liquidates assets from their portfolio to pay for long-term care expenses, it could negatively affect the stepped-up basis, which in turn diminishes the net after-tax wealth passed on to heirs.

In other words, under a stepped-up basis, the person who inherits the assets only pays capital gains taxes on the gains that occur between the time of inheritance and the sale of the assets. However, without a stepped-up basis, the insured would pay capital gains taxes on any gains that occur between when the asset was initially purchased and the sale of the assets. 

Wealth transfer and estate preservation

The need to liquidate assets for long-term care expenses could significantly deplete any savings the client intended to pass on to the next generation. From investable assets to real estate or personal family heirlooms, it’s possible that any or all of this might be needed to self-fund long-term care.  

Business succession is another important consideration. If the client owns a business, it may need to be sold to create cash for long-term care expenses. When all or some of the business is sold, the next generation may not receive the business, or at the very least, may lose majority control of the business.  

If the client plans to leave a financial gift to a charity or organization, these assets could easily be depleted. When self-funding is avoided, those assets can remain in place, ready to be passed on after the client’s death.

Opportunities to maintain relationships

No advisor wants to risk losing contact with the family and heirs once their client passes. When the money is still available to pass on, it provides an opportunity to continue a professional relationship with the spouse and other family members. If the client has a long-term care policy, the assets in management are protected. This should be an important consideration for financial professionals, accountants, and attorneys working with clients. 

Additional considerations

Keep in mind that the need for long-term care does not discriminate based on net worth. Although many active baby boomers assume they will stay healthy throughout retirement, that’s not always the case. Someone turning 65 years old today has almost a 70% chance of needing some type of long-term care services and support in their remaining years.¹ 

If a client of average wealth decides not to purchase long-term care insurance, a long-term care event could greatly diminish the family’s assets, and the invested assets they rely on for income could be significantly reduced. But individuals and families with large or significant wealth who decide to forego long-term care insurance are also at risk. Self-funding long-term care puts their assets at risk, much like it would if they self-insured their cars, real estate, boats, and jewelry—which is not something they would ever do. It’s important to make high-net-worth clients aware of these implications. 

This is yet another reason high-net-worth clients should have their insurance policies reviewed on an annual basis. Life is constantly changing, and it’s important to ensure the client’s insurance policies stay abreast of the change, whether it’s a divorce, grandchildren, changes in health or a host of other dynamics.            

¹ “How Much Care Will You Need?” LongTermCare.gov, https://acl.gov/ltc/basic-needs/how-much-care-will-you-need (accessed Jan. 18, 2023).   

About the Author


Marc L Lowell

After graduating from The University of Florida with a degree in Finance, Marc entered the financial services industry and began the two-year process of becoming both a Chartered Life Underwriter and Chartered Financial Consultant.